The clogged roads of San Jose teem with Priuses, which merely serve as earnest slalom gates for David Marcus to blow through in his black Porsche Panamera Turbo on a January afternoon. The 40-year-old president of PayPal has been in a rush since taking the top job 21 months ago. He’s overseen a sweeping overhaul of the payment company’s technology. He’s rolled out a passel of new products to let his 143 million users pay with their phones. And he’s seen his parent company, eBay, become a public target—Carl Icahn has quietly amassed a 2 percent stake, ahead of a just-promised proxy fight—as the division he runs increasingly appears more valuable than the core business that purchased it.
Eager to show off some of the magic, we’re racing to Birk’s, a bustling Silicon Valley chophouse that accepts PayPal from diners. Marcus fires up the PayPal iPhone app, which locates him in the restaurant and allows him to scan a bar code before the meal and watch the cheque update on his phone in real time. The idea is to bring the speed and simplicity of internet shopping into the physical store. “I like to think of it as The Matrix,” grins Marcus, a slight accent revealing his French and Swiss upbringing.
But there’s a glitch in this matrix. The restaurant is not running the latest program. There’s no bar code to scan before the meal and none on the cheque. Instead, Marcus must type in a seven-digit code attached to the bottom of the cheque. When the cheque arrives the code is missing. “The challenge,” Marcus says, trying hard to mask his frustration, “is not only scaling the technology but having people understand it on the merchant side.” Ten minutes later, the waiter returns, code in hand. Marcus enters a tip, pays the bill via iPhone and sighs: “When it actually works, you don’t have to wait.”
Marcus and PayPal have neither the luxury of glitches nor of waiting. Money is going mobile, and the race is on to control the flow of bits and cash across a billion smartphones and at millions of online and physical locations. Research firm Gartner estimates that mobile payments will top $720 billion a year by 2017, up from $235 billion last year. The upside remains enormous: Humans made $15 trillion worth of retail transactions in 2013. Whoever ends up with controlling interests in this new digital ecosystem will reap billions in transaction fees, collect massive amounts of consumer data and control the type of targeted advertising that makes marketers drool. Giants such as Apple, Amazon, Google, Visa and MasterCard all want to be your mobile digital wallet, as do several well-financed startups, including Square, founded by Twitter billionaire Jack Dorsey.
Right in the middle of it all: PayPal, the precocious child of the last dotcom boom, which is now inflicting as much disruption on its parent company as it hopes to on global banking. It moved $180 billion in 26 currencies across 193 countries last year, and its revenue grew 20 percent to $6.6 billion—41 percent of eBay’s total revenue and 36 percent of its profits. It’s no longer fair to call eBay an online auction company. PayPal, purchased in 2002 for what everyone thought was an outrageous price of $1.5 billion, is now worth at least half of eBay’s $70 billion market capitalisation.
“If you just went out and took it public you’d get a huge premium because of growth,” says Icahn, who is demanding a sale or spinoff. Elon Musk, the billionaire polymath behind Tesla and SpaceX who made his first fortune co-founding PayPal, is even more direct: “It doesn’t make sense that a global payment system is a subsidiary of an auction website. It’s as if Target owned Visa or something.” PayPal, he adds, “will get cut to pieces by Amazon Payments, or by others like Apple and by startups if it continues to be part of eBay.” Such sentiments add another layer to this gold rush. The winner of the brewing mobile-payment showdown will first be predicated on who wins the battle to control PayPal.
That eBay, one of the most innovative startups of all time, now finds itself positioned as a lumbering giant has some historical basis. PayPal has a legitimate claim, based on future successes, to the most entrepreneurial founding team ever. Musk (Tesla, SpaceX) was originally joined by Peter Thiel (Facebook, Palantir) and Max Levchin (Yelp, Slide), with an initial mission similar to what Bitcoin is trying to do 15 years later: Create an electronic currency independent from governments and central banks. Soon to join: Reid Hoffman (LinkedIn), David Sacks (Yammer), Jeremy Stoppelman (Yelp) and Chad Hurley and Steve Chen (YouTube). It’s almost impossible to find a major startup in Silicon Valley untouched by the PayPal “mafia”.
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(This story appears in the 21 March, 2014 issue of Forbes India. To visit our Archives, click here.)
Notwithstanding that I am otherwise a vociferous critic of eBay, this time I have to agree with Johnny Ho that eBay should not let go of “PreyPal”. Without its existing integrated relationship with the eBay marketplace, the value of the clunky “PreyPal” would be reduced greatly (eBay actually generates ~30% of PayPal new users with no customer acquisition costs for PayPal and half of PayPal\'s profits come from transactions on eBay where “PreyPal” is well integrated and virtually mandated); and, worse still, without “PreyPal”, the value of the eBay marketplace would be reduced by some 40% (“PreyPal” currently contributes ~42% of eBay’s profits) … I hate to admit it, but for once Johnny Ho has got it right; Carl Icahn undoubtedly is correct in many of his other criticisms of eBay but with respect to “PreyPal” he clearly has no understanding of the value of the inextricable and mutually supporting nature of the incestuous relationship between these two clunky, disingenuous, unscrupulous, commercial entities, and in particular, the precariousness of PayPal’s clunky business model … And, notwithstanding the amount of disingenuous nonsense that constantly emanates from the eBay Dept of Spin, “PreyPal” is a clunky middleman, in the main riding precariously, at the pleasure of the retail banks, on the backs of those retail banks existing payments systems, and “PreyPal” has little more than one percent (~1.1%) of the world’s total payments business (and even then much of its payers’ funds are sourced via MasterCard/Visa); the “bankcards”, MasterCard and Visa, have ~90% of this market between them and Amex has another ~8%, and both MasterCard and Visa have recently launched their own professional mobile/plastic POS/online digital wallets … Hello \"MasterPass\"; goodbye clunky \"PreyPal\"—it has not been nice knowing you … The reality is that the clunky PreyPal’s “best before” date is fast approaching; as a “stand-alone” operation that “best before” date would simply arrive even sooner … “Never ever hire an MBA; they will ruin your company.”—PayPal founder, Peter Thielon Mar 9, 2014
Can PayPal Win the Wallet Wars? In a word, no! Amazon/Apple/Braintree/Dwolla/Google/Square/Stripe/Whoever Payments … Online or at physical point-of-sale, via plastic or mobile phone—from the merchant payee’s point of view—all of these non-financial institution providers suffer the same serious handicap that eBay’s clunky PayPal suffers: none have interactive access to buyers’ funds held in retail banking debit accounts, nor to retail banking credit accounts (as do have the “bankcards” MasterCard and Visa); their only reliable access to payers’ funds is as retail bank Credit Card Merchant Account operators (which is what “PreyPal” claims to be when it wants to appear not to be operating its unlicensed “pretend” bank) via their own retail banker. Even if any of these middlemen make use of direct debits via the ACH system (as “PreyPal” prefers to do to more cheaply access payers’ funds), the access is not interactive: there is no immediate acceptance of the debit by the bank nor any guarantee that, the following day, the bank won’t reverse the debit due to an insufficiency of funds; direct debit via ACH certainly is not a suitable medium for physical point-of-sale transaction payments; the only safe route for a merchant for point-of-sale transactions (credit or debit) is via a retail bank Credit Card Merchant Account with its interactive linking to the retail banking system … These “pretenders” are all parasitic middlemen, a superfluous additional layer that, in the main, rides—precariously—on the backs of the retail banks’ existing systems; they make their money out of the difference between what the banks/MasterCard/Visa charge them and what they then charge their merchant-payee customers; therefore, their services, invariably, are going to be dearer, or are unlikely to be cheaper; anyone that thinks otherwise has been drinking too liberally of all the disingenuous nonsense that continually flows from the eBay Dept of Spin … “PreyPal”, however, is different in that it will hold onto payees’ funds: “PreyPal” operates an unlicensed “pretend” bank—the “bank” they have to unlawfully hold onto merchant-payees’ receipts, and the “bank” they don’t have when the banking regulator comes sniffing around. That “PreyPal” manages to skirt wholly around U.S. banking regulations while operating this clunky, unlicensed, unregulated, non-FDIC-insured, “pretend” bank, frankly, defies belief; possibly it’s due to the same bureaucratic laziness/corruption that allows eBay to knowingly and calculatedly facilitate, massive, blatant, auction fraud on the consumers of the world … http://bit.ly/11F2eas Regardless, if any of these middlemen pretenders think that they are going to take other than micro-fractions, if any, of the payments market away from the “bankcards”, MasterCard and Visa, I think that they are pathologically delusional (like eBay’s Johnny Ho), and possibly they have accompanied Johnny Ho on one too many his many trips with Alice down the rabbit hole to Wonderland, from whence he undoubtedly developed his obviously flawed approach to commerce … “Off with his head!\" many eBay merchants shout, but Johnny Ho is unmoved, calling them out as just “noise” … Only time will tell; or, who knows, maybe the sleeping eBay BoD will one day awaken to reality before the damage the Ho is doing becomes irreversible … For buyers, “digital wallets” undoubtedly are the way of the future, particularly for online payments, and with the recent arrival of the professional mobile/plastic POS/online digital wallets from MasterCard (“MasterPass”) and Visa (“V.me”), all these pretenders—with the exception of where they are mandated/integrated into an online marketplace—are now effectively redundant … And, with respect to physical point-of-sale transactions by such pretenders (Square excepted, as Square offers unique hardware solutions to particular merchant problems), can I simply invite readers to, next time they visit The Home Depot, ask a cashier how “Pay Here With PayPal” is going—LOL … http://bit.ly/UVXx53 Hello \"MasterPass\"; goodbye clunky \"PreyPal\"—it has not been nice knowing you ... eBay / PayPal / Donahoe: Dead Men Walking ... http://bit.ly/12xvzyAon Mar 9, 2014