Inside PayPal’s Play for Banks’ Customers

shutterstock_66768562Leverage is the ultimate arbiter in a negotiation, the determinant of what can and cannot be done, who should and should not be compensated, and by how much.

It is also, however, much like beauty: all in the eyes of the beholder. One party’s sense of leverage is another’s sense of disadvantage.

Leverage was the key factor that came to mind as I considered PayPal‘s new payments strategy, which has PayPal providing banks with online international payments infrastructure. The product, called P2P for Financial Institutions, deserves a closer reading to discern the perceptions (or lack thereof) of leverage – and to better understand banks’ priorities in payments today.

PayPal looked at the payments world and understood two realities:

  1. Lots of payments are being funneled overseas. These are payments largely repatriated by immigrants and they represent a major opportunity for financial services providers.
  2. These payments are largely controlled by specialty payments providers like MoneyGram and Western Union and — this is important — not by banks. Additionally, the MoneyGrams and Western Unions of the world charge high prices, especially considering that a branch-centric network is largely unnecessary today.

PayPal understood that international payments were ripe for old-fashioned internet disintermediation, where the internet provider offers better service at a price so low that it is only profitable to an internet company.

But PayPal didn’t stop there. Officials at the eBay unit realized they could exert PayPal’s leverage — perceived or otherwise — over banks, even though PayPal needs the banks to gain access to their customer base to widen the PayPal global network. PayPal knows banks want to grab a share of international remittances, so why not have banks run the transactions on their banking sites, leveraging PayPal’s network (117 million users, y’all!)? And, oh, by the way, any user that wants to use the international payments service but is not in PayPal’s network is welcome (read: required) to join the PayPal system.

Of course, banks have a choice, albeit a difficult one. Do they take the payments revenue and give PayPal their network of customers or keep the network, but lose the payments revenue? Put another way, do they take revenue today while empowering PayPal for greater success tomorrow or forgo revenue today in favor of checking PayPal’s future leverage? Make no mistake, this P2P for Financial Institutions empowers PayPal. At some point, what is to stop PayPal from making the same argument to consumers that it is making to banks today: let us provide all your financial services and allow you to benefit from our network and technology? The correct answer, class, is nothing.

While PayPal won’t share details of its wins, some financial institutions are biting, most notably Discover Financial Services, purveyor of the Discover Card. PayPal is currently in the midst of making a push to close additional sales of its P2P for Financial Institutions product.

Can banks truly defend themselves against PayPal? Not really. This is a battle of the divided vs. the single-minded, a scattering of disharmonious banks vs. a singular, well-positioned competitor. This battle was lost long, long ago, and, truth be told, I’m not sure it was ever winnable by the banking community. The idea of organizing the thousands of banks into a symbiotic whole to create a P2P payments network on par with PayPal’s – well, it’s just preposterous.

In the end, PayPal’s 117 million users today might turn into 175 million or even 275 million as a result of P2P for Financial Institutions, especially considering the product targets international remittances, not US domestic payments, of which PayPal already owns a solid marketshare. An enhanced network will give PayPal even more leverage, in my opinion, and we can only imagine what that implies.

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One Comment

  1. Interesting that 275 million users is your guestimate of what P2P for FI’s could do for PayPal when I think I recently read that Apple could have over 500 million credit cards.

    If so, I think we’re missing the point talking about PayPal and FI’s and should be looking at what could be next.

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