Trends & Tactics

Trends & Tactics

PayPal Eyes Payments from Couch Potatoes

Might PayPal Inc.’s next advertising theme be, “As Seen on TV”?
Having recently struck deals that will bring it to the physical point of sale, the payments unit of eBay Inc. is working with a Texas television-technology specialist to handle anticipated growing volumes of transactions from consumers who buy things with their remotes as they watch TV.
While it’s not live yet, the so-called TV buy button will let PayPal account holders buy products displayed on-screen by using their remote and special programming in their TV set-top box. Potential markets include specialized programs that present the eBay auction marketplace and Yellow Pages listings, as well as tie-ins with merchandise displayed during regular TV programming, such as a sweater worn by a character in a sitcom.
Meanwhile, PayPal also has 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.
PayPal’s moves come in the early days of a new payments market some have dubbed TV-commerce, or t-commerce for short. The buy button is the brainchild of FourthWall Media, Plano, Texas.
FourthWall, which builds marketing and commerce applications for cable companies and TV networks, developed the product on PayPal X, the payments platform PayPal opened to outside developers just over a year ago, and announced it with PayPal at the end of September. Now, it says, 2011 could be a big year for the technology.
“We’re looking quickly to find interested cable companies, and there already are some,” says Dan Levinson, FourthWall’s head of marketing and public relations. “It’s too new, we’re just out explaining what it is. But there’s a great deal of interest.”
San Jose, Calif.-based PayPal makes no bones about the potential for t-commerce. “TV is really what we see as the next big opportunity,” says Mark Wenger, group product manager. While he says “it’s challenging to put numbers” to that potential, he adds “we see it as on par potentially with e-commerce or mobile.” PayPal expects to sign deals with more companies developing TV-related services, Wenger says.
Helping to advance TV transaction technology is a joint venture among the cable operators, Canoe Ventures LLC, with which several companies, including PayPal and FourthWall, are working on various interactive services. At the same time, an important TV delivery platform called enhanced binary interchange format (EBIF) is rolling out across the country.
Necessary for interactive technologies like the buy button, EBIF was set to be active in 20 million TV households by the end of last month, according to Levinson, or about 20% of all homes receiving cable, satellite, or phone-company TV service. One of FourthWall’s businesses is selling EBIF platforms to cable companies.
Levinson projects that TV companies will roll out EBIF to between 40 million and 50 million additional homes this year, though he says it’s impossible to say how many of these might activate the buy button. “This is a cool, huge opportunity,” he says. “We’ll just have to roll it out.”
Levinson says FourthWall developed the buy button after finding through research that consumers “would like their remotes to do more,” including functions such as voting on shows like “American Idol” and looking up listings in the Yellow Pages, besides payments. “There was overwhelming evidence people want to interact with their television sets,” says Levinson.
The company began working with PayPal in part because of its “eBay on TV” application, which it had developed with eBay.
There is no physical buy button, so TV remotes don’t have to be replaced. A TV show will display a message instructing the user which key to push on the remote to start a purchase. Once a user presses the key, another message will ask for confirmation, which the user gives by pressing the key again.
With PayPal credentials stored, the seller can process payment and ship the goods. First-time users will be asked to enter their PayPal user name and password, and will receive a four-digit PIN they will use on each subsequent transaction.
PayPal says its deal isn’t exclusive, so FourthWall could contract with other payment processors if it chose to. That opens the possibility of direct credit and credit card payments as well as automated clearing house debits against users’ checking accounts.
Levinson won’t discuss specifics of FourthWall’s deal with PayPal, beyond saying both companies foresee a substantial revenue opportunity in processing TV transactions. Wenger says multiple pricing scenarios are likely to evolve.

It’s Official: Debit Cards Have Dethroned Checks
This has been expected for years, but now there are numbers to show it’s finally happened: Debit cards have caught up to and surpassed checks as the most-used form of non-cash payment. The numbers come from a massive, triennial study of U.S. payments released last month by the Federal Reserve.
The new primacy of debit, though, comes just as the Fed is proposing big interchange cuts and new rules governing routing practices for debit card transactions, as directed by the Dodd-Frank Act passed by Congress last summer (“Rewriting the Transaction Routing Rules,” page 30). How those rules will affect debit’s future growth is a subject of considerable debate.
Still, the Fed’s latest study leaves little doubt about the rapid decline of checks and the equally rapid rise of electronic payments (table).
Checks written and paid as checks (that is, not converted to electronic transactions through the automated clearing house network), dropped to 24.4 billion in 2009 from 30.5 billion in 2006, according to the latest study. Debit card payments, by contrast, shot up 14.8% annually over the three-year period, to 37.9 billion from 25 billion.
Based on transactions, debit cards are by far the most popular form of payment measured by the Fed, accounting for 35% of non-cash payments in 2009. Checks paid comes in a distant second at 22%, closely followed by credit cards (20%) and the ACH (18%).
For the study, the Fed treats prepaid cards as a separate category. These cards add another 5% share to the transaction volume claimed by debit cards of all types. Prepaid transactions totaled 6 billion last year, nearly double the 3.3 billion processed in 2006, the Fed report says, making prepaid cards the fastest-growing form of payment measured.
Especially fast-growing are general-purpose prepaid cards, which saw their transaction volume soar from 300 million to 1.3 billion, or 22% of all prepaid volume. Private-label cards accounted for 2.7 billion transactions last year, while electronic-benefits transfer cards added another 2 billion.
While the matter remains somewhat unclear, it is generally thought that most prepaid cards are exempt from Dodd-Frank, which also exempts cards issued by all institutions under $10 billion in assets.
Overall, more than 75% of all non-cash payments were performed on instruments other than checks in 2009, up from about two-thirds in 2006, according to the report. Electronic payments via cards and the ACH grew 9.3% per year, to 84.5 billion in 2009. “It seems clear the increasing adoption of electronic options, such as debit cards, online bill payments, and prepaid cards is a driving factor,” a summary of the report notes.
Even checks have moved dramatically into the electronic age. The Fed estimates that some 96% of checks paid are now cleared through image exchange, either on images or, in fewer and fewer cases, on substitute checks (printouts of images). That’s up from an estimated 43% in only three years.
The latest triennial study, the fourth in a series the Fed has conducted, is based on three research efforts. Data on checks and ATM transactions are based on the results of the 2010 Depository Institutions Payments Study. Estimates for electronic payments were drawn from the 2010 Electronic Payment Instruments Study as well as the Depository Institutions Payments Study. Some check data were also derived from the 2010 Check Sample Study. McKinsey & Co. worked with the Fed to compile the final report.

Google’s NFC Phone: Questions Abound
As with other recent moves toward contactless payments via mobile phones, Google Inc.’s introduction last month of a smart phone equipped with near-field communication (NFC) technology comes shrouded with question marks.
Google’s move, which it announced in conjunction with the rollout of a new, NFC-supporting version of its Android operating software for handsets, gives promise of accelerating NFC development in the U.S., but experts point out that the new products don’t immediately solve a host of longstanding issues.
“It’s a necessary but not sufficient condition for NFC,” says Conrad Sheehan, president and chief executive of Chicago-based mobile-payments provider mPayy Inc.
One of the biggest problems Google’s move may address is a dearth of mobile devices on the market with embedded NFC chips. The new Google smart phone, which is called the Nexus S and was developed with Samsung Electronics Co., was set to arrive 10 days before Christmas equipped with an NFC chip that can securely store a consumer’s digital wallet.
Up to now, handset makers have been reluctant to roll out NFC phones in large numbers, uncertain of the technology’s business case. “This at least puts out a hardware prerequisite [for NFC],” says Sheehan. Google did not respond to e-mail questions from Digital Transactions News, this magazine’s sister publication.
Other handset makers may soon follow suit. Nokia has already introduced an NFC-capable smart phone, and Research in Motion has indicated it is eyeing NFC for its BlackBerry line of smart phones. With a flurry of NFC-related patent filings, Apple Inc. has provoked much speculation that NFC could be coming to the iPhone, as well.
The new Nexus S is being sold exclusively by Best Buy Co. at its stores and on its Web site, carrying a price of $199 with a service plan from T-Mobile USA ($529 without a contract). As Google had informally indicated several weeks ago, the device will feature Gingerbread, the code name for an updated version of Google’s increasingly popular Android software for smart phones.
The new phone replaces the Nexus One, a non-NFC handset Google launched a year ago and discontinued after a few months, having sold more than 100,000 units.
Observers say the new device fills a void and could spark competitors to speed up plans to launch NFC phones. But the fact remains that there are no implementations in the U.S., beyond scattered pilots, in which consumers could use the phone to conduct NFC transactions (page 10).
That’s because payment networks and mobile operators remain far apart on key business issues, including revenue sharing. Indeed, the gulf is so wide a consortium of carriers, including T-Mobile as well as AT&T Mobility and Verizon Wireless, launched an NFC joint venture last month called Isis that will bypass Visa Inc. and MasterCard Inc., the two biggest card networks.
Carriers are looking to get paid for rendering key services in support of NFC traffic. Issuers, meanwhile, are accustomed to pocketing the bulk of card-related transaction revenue. Charging higher fees to merchants to support more revenue share isn’t likely to fly, given merchant sensitivity to card fees.
“It’s a payment value-chain problem,” Sheehan says, cautioning that the new Google phone and Android OS will do little to solve these issues. “It’s a start,” he says. “Is it a guaranteed finish? No. A lot of questions are open.”
Google, meanwhile, could benefit if NFC capability helps further establish Android on the nation’s smart phones. Already, 61 million people, or one in four U.S. mobile users, are wielding smart phones, according to comScore Inc.
Android deployment is growing at a torrid pace, with 23.5% of smart-phone subscribers using it in October, up markedly from 17% in July, comScore says (chart, page 9).

NFC’s Coming Boom Could Exclude the U.S.
Speaking of smart phones with near-field communication technology, they’re poised to boom worldwide beginning this year. But other countries are much more likely than the U.S. to lead the way into the NFC payments future, according to Mercator Advisory Group Inc.
In a December report, Maynard, Mass.-based Mercator forecasts that barring a major setback a total of 116 million smart phones equipped with NFC will be shipped globally in 2011, with shipments surpassing 510 million by 2015. At the same time, the unit costs of adding NFC will plunge (chart, page 11).
The U.S. market has seen some major developments in NFC mobile phones, including the Isis joint venture (see the previous story). But no major banks or mobile network operators have announced any plans or timelines for rollout of NFC services, the research firm says.
The market for NFC is in danger of being limited to solutions run by specific operational systems, device manufacturers, mobile networks and the joint venture, says George Peabody, director of the emerging technologies unit at Mercator.
“As we’ve seen over and over again with new technology, the more open the platform, the more usage,” Peabody says via e-mail. “The NFC ecosystem will succeed if it offers low-cost, flexible access for all participants including merchants, third-party developers, and competing payment systems. Open access to the capability means consumers will find more and more uses for ‘tapping their phones.’”
The U.S. also lacks several factors that characterize countries with more advanced markets in NFC mobile payments, such as Japan, South Korea, and China, Terry X. Xie, director of Mercator’s international advisory group and author of the report, says in an e-mail from China.
In those countries, there do exist user bases of contactless payment cards such as the Visa payWave and MasterCard PayPass, and a commitment from banks to offer mobile payments, Xie says.
Also, those countries enjoy “strong interest from the mobile industry in terms of making mobile payments and other NFC-based services part of their core competition strategy,” Xie says. In addition, the three countries have relatively friendly regulatory environments and government support for mobile payments.