Trends & Tactics: Guess What TV Could Do for PayPal?

When PayPal Inc. announced last month that it plans soon to process transactions for people as they watch TV, it looked like just the latest foray by the c-commerce processor into yet another new market. After all, the San Jose, Calif.-based eBay Inc. unit has been pretty aggressive lately about signing up merchants and terminal companies to let its 110 million account holders pay with PayPal inside stores.

But, as you might have guessed, there’s more to it than that. Yes, processing payments for TV advertisers just when their audience is in front of the tube and ready to buy is a tempting prospect. As it turns out, though, the effort to enter the nascent business of so-called T-commerce could also help recruit more merchants for that point-of-sale payment service.

Here’s how it will work: Merchants that agree to accept PayPal at their cash registers and also run TV commercials for which PayPal is processing payments will be able to download coupons to the digital wallets of PayPal users who are watching those commercials and agree to receive the offers, says Scott Dunlap, vice president of emerging opportunities at PayPal.

The digital coupons will then be applied automatically the next time the consumer shops at the participating store. “It’s still the case that television is the number-one point of [product] discovery,” Dunlap says.

So far, cable operator Comcast Corp. and TV services provider TiVo Inc. have agreed to introduce a T-Commerce service with PayPal. Through the service, consumers watching commercials specially designed for interactivity will be able to order the merchandise being advertised and pay for it with their PayPal accounts, using either a mobile device or TV remote control.

PayPal’s goal is to bring the service live by the end of the year, Dunlap says. Transaction pricing to the merchant will be the same as PayPal’s e-commerce rates, which range from 2.2% plus 30 cents up to 2.9% plus 30 cents, depending on volume.

Meanwhile, PayPal recently announced that some 15 retail chains have agreed to accept PayPal in their stores, including such prominent national names as Abercrombie & Fitch, Barnes & Noble, JCPenney, Office Depot, and Toys ‘R’ Us.

At least five more chains are expected to agree to take PayPal before the end of the year, PayPal officials have said. Early this year, The Home Depot Inc. began accepting PayPal at all of its 2,000 U.S. stores.

Consumers use PayPal in these stores either by entering their mobile number and PIN at the POS terminal or by swiping a special PayPal card and entering a PIN.

If PayPal meets its year-end goal for having T-commerce up and running, it will soon have what could be a powerful inducement for more retailers to open their stores to the processor’s payment service. “We have a plan to get it done by the end of the year, but it’s not a hard commitment,” Dunlap says. “We have figured out the technology, and now coordinating with advertisers will determine when.”

This coordination, he adds, is largely out of PayPal’s hands and rests with its partners, Philadelphia-based Comcast and Alviso, Calif.-based TiVo. He says he expects TiVo to go live sooner than Comcast, since it began building out application programming interfaces for the service a year ago. “TiVo is just much more ready,” he says.

TiVo agrees. “End of the year is very realistic,” says Tara Maitra, who, as general manager for content and media sales at the company, is responsible for signing up advertisers to use the new service. Apparently, interest has been building. “Advertisers have been saying, ‘When will we have a link-to-purchase [capability]?’” she says.

PayPal started to explore the potential for processing TV-based transactions when it realized that consumers were, in a rudimentary way, already doing T-commerce. PayPal noticed that its users were doing more transactions on tablets and mobile phones linked to broadband connections in the home, yet at the same time TV watching was not dropping.

“We felt a gravitational pull into the living room,” says Dunlap. “We realized the discovery of products is happening on television, so it made sense to bridge [commerce and TV].”

This is not PayPal’s first foray in T-commerce. In late 2010, it said it was working with a Plano, Texas-based TV-technology provider called FourthWall Media to create a so-called buy button that would activate purchases from users’ TV remotes.

And earlier, PayPal had struck a deal with San Francisco-based Related Content Database Inc. (RCDb) to process payments for its users. RCDb’s technology synchronizes merchandise shown on TV with relevant eBay auctions on a mobile device, allowing interested consumers to bid on the items. Earlier this year, eBay introduced “Watch with eBay,” an iPad app that allows users to view lists of products related to programs they’re watching.

Now, though, PayPal says the time may be ripe for T-commerce. In an October 2011 PayPal survey, some 49% of TV subscribers expressed interest in buying goods and services related to TV programming, using either a remote or a mobile device. Almost 30% of these subscribers were willing to use PayPal.

The new service PayPal is working on with Comcast and TiVo may have some static. TiVo, in particular, is noted as a pioneer of digital video recorder (DVR) technology, which allows TV viewers to zip through commercials to continue watching programs.

Dunlap says TiVo will feature an interactive ad for those who skip commercials, which viewers can watch at their discretion. “I’ve been very impressed with the interactivity they’ve had with that,” he says. “They’ve really thought this through.”

That may be where those coupons and other incentives could prove handy. TiVo has been running an ad platform for several years now that rewards viewers with inducements like free samples and discounts. “We’ve shown our subscribers that if you engage with the advertisers, you won’t be wasting your time,” says Maitra.

The benefits for PayPal, meanwhile, are pretty tangible, starting at the point of sale. The T-commerce transaction potential alone could prove huge if enough advertisers are also PayPal-accepting merchants. Has Dunlap checked on this? Of course, but, as he says, “it depends on which MBA you ask.”

Apple’s Shiny New Wallet: More Than Meets the Eye?

Computer icon Apple Inc. last month managed to end months of speculation about some of its intentions in mobile payments and promotions, while at the same time igniting yet more guesswork about it could be up to.

The notoriously tightlipped company, famous for its sleek iPhones, iPads, and iMacs, entered the increasingly crowded market for digital wallets with an application it calls Passbook. But what was perhaps more intriguing, it also announced it now has card credentials for some 400 million users on its rapidly growing App Store, creating what some experts see as the potential to move its wallet into physical stores with its own payment accounts.

The new Passbook feature will come in the fall as part of iOS 6, the latest version of Apple’s mobile operating system. It appears for now to be aimed chiefly at storing electronic tickets and coupons. But it will also be used to keep proprietary card details for specific merchants, and observers say it’s only a matter of time before the wallet begins holding major-brand card details. “Absolutely I think they’ll be in there,” says Aaron McPherson, director of the financial services practice at IDC Financial Insights.

The complete roster of merchants already signed up for Passbook isn’t clear, but at the time of the announcement eight retail, lodging, and transportation companies were known to have integrated with the application, according to the online technology news service TechCrunch. These include Amtrak, Fandango, MLB.com (the site for major-league baseball), Starbucks, Target, United Airlines, and W Hotels, in addition to Apple’s own physical stores.

But don’t look for near-field communication (NFC). For point-of-sale transactions, Passbook relies on quick-response (QR) barcode scanning. Data for items such as tickets, coupons, or boarding passes will appear as barcodes on users’ iPhone screens to be scanned.

Relying on geolocation technology, Apple engineers have designed the codes to pop up on the phone’s so-called lockscreen as the user approaches a store or a boarding line. The user just enters a passcode and scans.

But while Apple has clarified its position relative to digital wallets, other longstanding questions remain about its intentions in mobile commerce. For example, will Apple at last adopt NFC in the next version of its iPhone, expected later this year?

Now that its wallet features are known, NFC seems likely, say some Apple watchers. “Almost every QR code scheme I’ve seen has NFC on the road map,” says Nick Holland, senior analyst at The Yankee Group. “NFC trumps QR codes in terms of how easy it is to just tap and you’re done.”

Still, the company may be biding its time as wallet projects linked to NFC launch. For example, Isis, a joint venture of the country’s three largest mobile carriers, is expected to start an NFC-based mobile-payments service in two U.S. cities this month. “If I were [Apple], I’d wait and see how Isis does with it,” says McPherson.

Google Inc.’s NFC-based product, Google Wallet, has struggled since its commercial launch in September. And Visa Inc. and MasterCard Inc. have also announced digital-wallet projects that will work with NFC.

With or without NFC, Apple may have an advantage over wallet providers such as Google. “Apple may be perceived more positively by retailers than Google” says Cherian Abraham, principal analyst with Richmond, Va.-based DropLabs, in an e-mail message. “With Apple, there is platform dominance and ubiquity, and so far they have just been happy in selling more hardware.”

Apple did not respond to a request for comment, nor did Isis or Google.

While the Passbook wallet may well include general-purpose payment cards in the near future, Apple’s 400-million-strong user base for its App Store positions the company to make a powerful run at the physical point of sale in the same manner PayPal Inc. has, notes Holland, relying on its own accounts rather than major-brand accounts stored in the wallet.

He adds Apple could have a huge advantage in that it has four times as many accounts with card information as does PayPal. “The planets are aligning here that sooner or later Apple is going to be moving into the physical payment space,” he says.

Given Apple’s advantages, the biggest implication of the company’s announcement, at least for now, may well be for rival wallet providers. “Some of the other wallets should be nervous about now,” notes Holland.

Check 21 Savings: $3 Billion Plus

Check 21 saved the U.S. payments system more than $3 billion in 2010 as paper check clearing gave way almost entirely to image clearing, according to a paper released recently by the Federal Reserve Bank of Philadelphia.

The paper sets out what is believed to be the first effort at computing, from the vantage point of the technology’s maturity, the cost savings from U.S. banks’ massive conversion to electronic check clearing.

Short for the Check Clearing Act for the 21st Century, Check 21 became law in October 2004 and allowed paying banks to treat so-called substitute checks, or printouts of check images, as the legal equivalent of the original item. Over the ensuing six years, as banks became more and more capable of handling images, substitute checks virtually disappeared, and now nearly all checks paid are cleared as images.

In 2010, Check 21 cut processing costs for commercial banks by $560 million, argue the authors of the Fed paper, “Getting Rid of Paper: Savings from Check 21.” The Federal Reserve banks saved an additional $600 million, the paper estimates. The authors, David B. Humphrey and Robert Hunt, calculated the processing savings for the Fed banks by comparing the per-item cost to process 8.8 billion paper checks in 2006 (9.6 cents) with the per-item cost to process nearly as many Check 21 items in 2010 (2.5 cents). They then multiplied the difference, 7.1 cents, by the 2010 volume. For commercial banks, they estimated a similar cost difference and multiplied by a 2010 Check 21 volume of 7.9 billion items.

Further savings accrued to businesses that received funds sooner as Check 21 shaved clearing times dramatically compared to paper processing. Faster clearing allowed these businesses to cut the cost of working capital by $1.37 billion in 2010, the authors estimate. On top of this, consumers also saved about $640 million in interest costs on revolving debt by receiving check payments sooner, according to Hunt and Humphrey.

Adding it all up, the savings came to $3.17 billion in 2010, the authors say. By then, just six years after Check 21 took effect, virtually all check volume had been converted to image clearing, “a remarkably short period for such a major technological change,” the paper says.

Indeed, Check 21 may have proved to be “one of those rare examples where government can facilitate a transition from one network or standard to another one,” Hunt tells Digital Transactions.

The paper concedes that one-time costs related to Check 21 were incurred, for example, when the Fed shut down some 46 check-processing centers as paper volume dwindled. But for most years studied, these costs had little effect on the per-item processing cost calculation, the authors say.

Also, float savings for businesses receiving payments sooner are offset by lost interest income for payors who don’t hold on to their funds as long, the authors admit. Still, they say, the payment system realized a “net social benefit,” as faster clearing times allowed payors and payees to expend less effort to either shorten or lengthen float times.

For the near future, the authors say processing costs could be further reduced by adopting technologies such as image-on-demand, which eliminates the need to send images with each transaction, and end-to-end digital checks, which does away entirely with the paper original by allowing the payor to create a digital equivalent, such as an image, on a PC or mobile device.

A ‘New Normal’ for the ACH?

Even as the paper that once provided the raw material for much of its transaction volume disappears, the automated clearing house network is posting overall increases in volume that more than compensate for the loss.

The latest data from ACH governing body NACHA—The Electronic Payments Association show that total volume increased 4.4% in the first quarter to 4.19 billion transactions from 4.02 billion a year earlier, the network’s highest quarterly increase since 2008’s fourth quarter.

Michael Herd, managing director of network rules at Herndon, Va.-based NACHA, says it’s too soon to draw conclusions about the increase, but he notes that many of the transaction categories for electronic checks and so-called native payments that don’t originate with a paper check rank among the fastest-growing in the network.

“It’s a great result for one quarter,” Herd says. “We’ll just have to see if that’s the new normal.”

Four payment codes that originate with paper checks saw total transaction volume decline 6.5% while everything else, the all-electronic codes, grew 6.6%, according to Herd.

Almost half of total ACH volume is direct deposit of payroll checks and government benefits, and related transactions. Among the e-check transaction types, the WEB code that covers many online-banking bill payments grew 8.7% year-over-year to 722.3 million transactions.

While WEB is rising, the code for checks mailed to lockboxes, ARC, for accounts-receivable conversion, is shrinking with consumers writing fewer checks to pay bills. ARC is still big, but its volume fell 7.4% to 483.5 million transactions in the first quarter from 522.2 million a year earlier.

Two e-check codes for checks written at the point of sale had varying fortunes in the first quarter. POP, for point of purchase, slipped 8.8% to 108.6 million transactions. Herd attributes the slippage to the overall decline in consumer check writing.

The newer back-office conversion (BOC) code, in which retailers or their processors convert paper checks to electronic form at a central facility, apparently is still benefiting from new business despite the drop in check writing, having increased 11.7% year-over-year to 48 million transactions from 43 million. BOC’s volume did fall 13% from 55.1 million transactions in 2011’s fourth quarter, but Herd attributes that to normal seasonal patterns.

NACHA’s IAT code for international ACH transactions, which went live in September 2009, may have completed its initial boom even though transactions increased 368% to 10.5 million from only 2.25 million in last year’s first quarter. Volumes grew only 1.1% from 10.4 million in the fourth quarter. PayPal Inc., which has millions of customers abroad, adopted IAT in late 2010 and 2011, according to Herd.

“My feeling is that they’ve completed that adoption,” he says, adding that some of IAT’s volume also comes from federal benefits sent electronically to beneficiaries living abroad.

Telephone-based ACH payments using the TEL code dropped 6.1% to 87.5 million transactions.

CIE, an ACH credit code for online bill payments and person-to-person payments, grew 12.2% to 41.7 million transactions. CIE includes transactions from the NACHA-sponsored EBIDS bill-pay program.