PayPal continues to expand its payments capabilities, with a pair of announcements aimed at linking debit cards and reaching out to the unbanked. The deals – an agreement with First Data’s STAR network and another with the prepaid issuer Green Dot – each target markets PayPal views as ripe for expansion.
The First Data announcement allows STAR cardholders to easily link their debit cards to a PayPal account online through the STAR Online Partner service.
Cardholders can enrol for a PayPal account through their financial institution’s internet banking site and, once registered, immediately use their debit card to fund their PayPal account to make online purchases without having to enter debit card account information or expose their debit card number to merchants for each purchase.
Member financial institutions provide authentication for the cardholder, adding an extra layer of security to the account. The service also connects online banking sites to PayPal, enabling consumers to create PayPal accounts through their banks’ sites.
Sanjev Kriplani, senior director of PayPal’s payments portfolio, told EPI the idea reflects a broader strategy at PayPal of reaching out to underserved demographics.
“We are trying to address a consumer problem – using a debit card online – in a way that opens online shopping up to a whole new set of customers for PayPal, and that is what the merchants want,” Kriplani said.
“It is creating a PayPal account directly from the bank’s online banking site, and that is a huge opportunity for us.”
First ATM network
Star is the first ATM network to enrol in what PayPal calls its Debit Access service, which the company plans to market to other networks. Julie Saville, vice-president for the STAR network, said the deal was PayPal’s brainchild but STAR quickly jumped on board when approached.
“It took us about five minutes to see the value here,” Saville said.
“It just made perfect sense, and we quickly formed project teams on each side and developed the product.”
Saville said that response from STAR’s financial institution members has been enthusiastic.
“We worked with a number of our financial institutions right from the start in advisory groups, and they saw the benefits of the product right away,” she said.
“For STAR, it brings financial institutions a new tool for their best customers – electronic banking customers. It allows those cardholders to shop online while keeping their debit card number offline. Online merchants also like it, and the banks really prefer it as well.”
PayPal said the two agreements are aimed at helping online merchants increase sales to underserved segments of the consumer market. The deals underscore the increasing role that alternative payments are playing in online payments, where the dominance of traditional credit cards are challenged by a host of competitors, some of whom have come and gone.
Online shoppers already use alternative payments for about 15 percent of the $170 billion of goods and services purchased online, according to a report by consultancy Celent.
Celent estimated that the major card brands and their issuers stand to see some $345 million in volume lost to the non-card players in 2010 and a whopping $1.7 billion in 2015. First Data and PayPal are willing to bet that banks would rather their consumers use an option like the Debit Access service than lose the transaction to automated clearing house-driven alternative payments.
Through the STAR channel, banks still get some revenue, albeit miniscule compared to credit card interchange, and also get brand placement on PayPal’s checkout page.
The Debit Access programme also addresses consumer unease with using debit cards online. In their 2008 Study of Consumer Payment Preferences, Hitachi Consulting and the Bank Administration Institute found that consumers are not as comfortable using a debit card for online shopping versus other payment methods such as credit cards and prepaid cards.
The study, of which First Data was a sponsor, also showed that while credit cards have the highest penetration of all payment methods on the internet, both debit cards and internet payment services such as PayPal, have the second highest penetration levels among online shoppers.
“Using money that you control online is what consumers really want, but the reality is that the consumer much prefers using the credit option merely because of the fraud issue,” Saville said.
“The Debit Access product allows the consumer to use cash on hand online without exposing their debit card.”
JM Associates Federal Credit Union, a member of the STAR Network, participated in a pilot test of the programme earlier this year.
“We want to be able to offer our members security and peace of mind when making online purchases,” said Jim Ryan, president and CEO of JM Associates. “The STAR Online Partner programme allows us to provide that service, while at the same time building member relationships through promotion of our brand with every transaction.”
The PayPal-STAR deal illustrates just how quickly the walls between banks and non-bank competitors are being torn down. Saville said such a deal would have been unthinkable a few years ago.
“You have to leverage the strengths of products out there and think about customer benefits,” Saville said.
The Green Dot partnership allows consumers with Green Dot’s prepaid MoneyPak cards to fund their PayPal accounts, opening the online payments market to people without bank accounts.
MoneyPak can be purchased with cash at a retail store, and then the money can be loaded directly into a PayPal account and used to shop online anywhere PayPal is accepted. MoneyPak has been fully integrated into PayPal’s site, allowing money to be added directly, without needing to link to any personal financial accounts.
MoneyPak is available at more than 40,000 stores nationwide, including WalMart, CVS pharmacy, Kmart, Rite Aid and Walgreens and, of course, eBay.
“The idea is to get all of those cash lovers an easy way to shop online,” PayPal’s Kriplani said. “It allows cash-only consumers to go to 50,000-plus locations and exchange cash for a card, jump online and load a PayPal account.
“Then there is absolutely no difference between them and any other PayPal customer. This is all about bringing added value to our merchants by bring new customers online.”