How PayPal Here could lay the hurt on Square and others

PayPal confirmed what we first reported earlier this week with Thursday’s introduction of a Square-like mobile card reader called PayPal Here. My colleague Ryan Lawler has a good write up after attending the press event in person. I’ve been formulating my thoughts, and I think that PayPal has a pretty solid competitor right now, but one that still has plenty of question marks. I don’t think Square has to worry, at least for now.
What we’re seeing from PayPal(s EBAY) is not just an attempt to dislodge Square. The new dongle and accompanying app for merchants reveals the company’s larger ambitions to take payments to the physical world. That road runs through Square territory in the small business market, but PayPal wants it all, whether it’s Home Depot-sized (s hd) national retailers or individual mom-and-pop stores. And it’s seeing that larger vision that makes me think that PayPal could be on to something big that will affect Square, Isis, Google Wallet(s GOOG) and many other mobile payment plays. It will take a lot of focused execution, which is no given, but the company continues to line up the pieces to be a big real-world payment player.
First, here’s what I think PayPal Here has going for it:

  • It seems like a pretty straightforward competitor to Square with a simple process for both consumers and merchants. I think PayPal did their homework and also cribbed a lot from Square’s notes. This is still significant because people have complained about the transaction process with PayPal in the past. The extra entry methods are nice including card capture scanning using’s camera technology. But what is more interesting is the fact that users will be able to pay from a new PayPal app. PayPal says that 17 million PayPal mobile apps have been downloaded and that provides a very big user base to offer mobile payment services. Square’s Card Case app is also very slick, but I doubt it’s been downloaded anywhere near that amount.
  • PayPal has also built in some of the same geo-fencing technology as Card Case, so users can notify a business they’re on their way or inside a store and check out without having to go to the counter. They can pre-authorize payments for a merchant and then pay with their face. This is very similar to Square’s hands-free payments with Card Case, but it’s a nice feature because it removes some friction for transactions and brings customers and merchants closer.
  • On the merchant side, shaving a little off the transaction fee is always nice. PayPal will charge 2.7 percent on transactions, just under the 2.75 percent Square charges. PayPal is really trying to push hard on the fact that merchants can also get 1 percent off on transactions using a PayPal debit card that pulls money from a PayPal account. And leaving their money there gives them instant access to it. But that assumes that merchants want to keep their money inside a PayPal account instead of moving it to a bank account, a process which can take one to three days. Square deposits directly into a merchant’s bank account. I doubt a .05 percent fee reduction will convince a lot of merchants, and I’ll have to see how many are enticed by the extra 1 percent off debit purchases. My sense is some will be, but to assume that all of the money brought in will then be used by debit purchases, effectively bringing the 2.7 percent down to a touted 1.7 percent, is a real stretch.

Here are the questions I have about PayPal Here:

  • The system lacks a number of important features including offers and rewards, which is something that PayPal’s Sam Shrauger, vice president of global product and experience, said is on the way. That’s an important component in helping establish a better relationship with users. That could be a differentiator for PayPal but it’s a non-factor at this point. PayPal has said that location-based offers will be delivered through its mobile wallet, thanks to its purchase of WHERE so this could be turned around soon. Also PayPal lacks good inventory and analytics data for businesses.
  • PayPal also has to convince some skeptical merchants that it’s in their best interest to partner up. Some merchants have complained in the past about PayPal’s practices, including the holds it places on merchants funds in cases of disputes or possible refunds. Shrauger said that PayPal will place holds on funds only when a merchant keys in or visually captures card transactions worth more than $1,000 in a week. Some portion of the money over the $1,000 could be held for up to 30 days. This is meant to ensure trust in the system for both merchants and customers, but it may again raise questions from merchants who don’t like the practice at all or don’t trust PayPal.
  • The fine print for PayPal Here actually says the transactions fees are valid until April 15, 2012. Schrauger said they have no intention of changing the fees, but it’s unclear why the date was set there.

A lot of what PayPal has described is still not a knock-out blow against Square by any means. Most people praise the ease of use and simplicity of Square and just matching that won’t change the game automatically. But I think PayPal is just going to keep cranking and if it executes in a smart way, that’s when things get interesting. This is how they can take PayPal Here and make it a powerful payment option:

  • If PayPal can get tied into X.commerce, eBay’s multi-channel commerce platform for businesses, then you start providing businesses with a lot of intelligence and tools to manage inventory and generate traffic. And businesses can start to coordinate their online and mobile sales with their in-store efforts. If PayPal can be that one-stop shop for them, it can be a more appealing resource than just Square. Square is trying to go that route and introduce more inventory features in its new Square Register iPad app. And Intuit has been trying to leverage its business software to help propel its GoPayments system. But PayPal has a lot of assets to bring to bear and by building a platform in X.commerce, it can offer a broader set of tools and applications that businesses need.
  • And if PayPal can start gaining momentum on its in-store payment efforts with larger retailers, it can have a snowball effect, helping consumers think of it as a primary way to pay in all physical stores. Right now, that’s a challenge for many of the mobile wallet and payment acceptance systems. They work largely on the low end or in much bigger retail chains. PayPal’s digital wallet could work in all kinds of stores, making it more of an everyday tool.
  • PayPal has a global operation customer service agents and sales people. That can help the company move forward and win over customers and merchants in 190 markets where it operates. It has more than 100 million users and 9 million merchants, some of whom have physical locations — this is a great starting point for PayPal. Square and many other services are still ramping up in the U.S. and don’t have a clear path to go international.

But, again, it all comes down to execution. PayPal hasn’t been known for providing that elegant experience or beautiful user interface that endears it to many people. Square COO Keith Rabois, who used to work at PayPal, said the company has let its brand fade and will be overtaken by Square. PayPal has to put it all together and show that all of this experience and all their assets actually mean something. This is no small task and the fact that it took so long to even get to this point suggests that execution hasn’t been great in the past.
But the pieces are there and the will seems to be there too. EBay CEO John Donohoe, who is leading PayPal for the time being, seems fired up about payments and the modern realities of commerce. The company seems to get just how big the opportunity is here. PayPal Here is just one piece of a much bigger puzzle, but it looks like a good step. But the fight is going to be long and there’s still plenty of opportunity for rivals big and small to rise to the top.