Can These Startups Beat Paypal?

Despite the acceptance of credit cards and services like PayPal, the issue of getting money from one person to another online still offers opportunities for innovation. Venture firms are continuing to fund startups that hope to offer better ways to pay online, while the growth of Software as a Service in the enterprise has led to a need for new tools in corporate billing management. Further out, buying items over a mobile phone presents a multibillion-dollar opportunity — if someone can make it easy.

Despite the early-mover advantage PayPal has, and the presence of rival offerings from Internet giant Google, there are plenty of retailers who only accept credit cards for online purchases. That eliminates their ability to sell to those without credit and those concerned with security online. There are a few ways rival online payment services can find success against PayPal, wrote Jim Friedland, an analyst at Cowan & Co. earlier this week, citing a few examples: providing a neutral independent platform (PayPal is owned by web retailer eBay), extending credit to shoppers, and offering lower transaction fees.

And startups are still searching for other opportunities online. Just last week online bill pay startup eBillMe raised $12 million from Canaan Partners and New Celtic Ventures. The company offers vendors an alternative to credit cards by allowing shoppers to receive a bill at their online banking portal. This allows shoppers to avoid putting their personal information on the merchant’s site and allows for a cash, rather than credit, transaction.

But online sales are no longer limited to the PC. U.S. consumers are starting to use their mobile phones to make purchases, and this could be a growing market in the years to come. But there are challenges ahead. Bigger players such as PayPal and credit card companies already offer mobile-payment products, and the current U.S. market for mobile-pay services is still small.

Only 1.5 percent of U.S. consumers have ever used their mobile phones to make a payment, but almost 50 percent are aware that they can do so, according to a survey released this week. The research, commissioned by financial firm Mercatus, predicts that with better services and customer education the percentage of people who will make payments from their mobile phones is likely to grow in five years to 15 percent among those ages 18-30.

The growing use of smartphones and shopping sites optimized for mobiles require payment options that are easier than keying in a 16-digit credit card number. Startups such as angel-backed Billing Revolution and Zong, which launched earlier this month after raising more than $12 million in venture capital, are tackling the problem of buying on your mobile phone. Zong sends purchase information to carriers, who then bill the subscriber for their purchases, and Billing Revolution offers a mobile credit card processing platform. In April, Obopay scored $20 million for its money-transfer-via-mobile efforts.

While the opportunity in mobile is still just cresting the horizon, enterprise customers provide an immediate opportunity for startups seeking to streamline transactions. In March, two startups offering an online billing platform for companies delivering Software-as-a-Service (SaaS) products raised money. Zuora brought in $6.5 million in first round funding led by Benchmark Capital for its platform. Rival Vindicia announced a $5.6 million round led by DCM and Leader Ventures.

These companies aim to make it easier for SaaS vendors to track and bill all of their customers. They also help customers track and manage multiple software services they might be buying — a task akin to managing household bills from tens or even hundreds of service providers. Tim McAdam, a general partner with Trinity Ventures, says these sorts of billing platforms and ways to track payments still represent a big category and no one has mastered it yet.

With everyone searching for ways to make money online that don’t revolve around advertising, offering seamless but secure online payments will go a long way in enabling alternative business models.

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