PayPal is confirming reports that it is test-running a new app-based checkout system in McDonald’s restaurants, a pilot program that could push the online payment broker - and the notion of phone-based payments - much further into the consumer shopping experience. It could also add confusing choices and tools to manage in an increasinly fragmented payment landscape. The trial is actually taking place as far away from the general US population as possible: it’s being conducted in 30 McDonald’s outlets in France. This is a different system than PayPal’s two existing in-store payment systems. The French trial features a smartphone app or a website from which customers can order and pay for the food with their PayPal account. The customer can then pick up the food in a separate line, bypassing the normal ordering process. You might think there’s some delicious irony in testing this new payment method in McDonald’s located in a nation where good food is nearly the state religion - but it turns out that McDonald’s is very popular in France. And there is nothing funny about the payoff for PayPal if the McDonald’s trial works out: a cut of the transactions at some 30,000 McDonald’s restaurants around the world. That’s a lot of special sauce.
PayPal’s Third Try
PayPal’s already has two existing in-store systems, including a point-of-sale system at the cash register and a credit-card swipe system for smartphones. The still-unnamed payment system on trial in France will be a third in-store system, when it’s eventually launched. The existing point-of-sale system enables PayPal users who have activated the in-store payment system on their PayPal accounts to enter their mobile phone number and a special PIN at the register. All of the information about the transaction is sent as a receipt to the PayPal account and the phone itself. Consumers can also use a PayPal card that will directly debit funds from their PayPal account at participating merchants. Home Depot is one of the larger participants in this system, connecting its nearly 2,000 US stores on the system this Spring. Other merchants include Hollister and Abercrombie & Fitch. The card-swiping PayPal Here system is more or less a clone of the rapidly growing Square payment system. Square and PayPal Here use a small card reader that plugs into the headphone jack of a compatible smart phone. Credit and debit cards can be entered through a swipe on the reader, or keyed in directly for an extra fee to the merchant. PayPal is feeling the pressure from Square in the small business space, which is also where PayPal Here is aimed. And last week Square and Starbucks partnered on Square’s Pay with Square app that enables Starbucks users to pay for their java with any debit or credit card in 7,000 Starbucks stores.
Competing With Square and Others
PayPal’s pay-with-an-app payment system trial in France will directly complete with the Pay with Square system. Little wonder, then, why PayPal - a company that tends to hold its plans very close to the vest - let news about the small trial in France leak to the press; PayPal wants the marketplace to be aware that it is working in this area, too. Square, PayPal, Google Wallet, and Isis - a joint mobile payment venture from AT&T Mobility, T-Mobile USA and Verizon Wireless - are all fighting to insert themselves between the customer and the merchant. The big selling point? Lower transaction fees for the merchant, who are naturally keen to avoid paying the big-bank credit-card transaction fees that can take anywhere from 1% to 12% of a customer sale, depending on the bank. PayPal Here and Square’s card-swipe service, in comparison, take a flat 2.7% and 2.75% percent off a transaction, respectively. Transactions made with PayPal credit cards only cost merchants 1.7%, which gives merchants a nice incentive to push the PayPal connection.
Will Merchants Play Along?
But merchants are now looking at all of this positioning and wondering why should they be giving up any of this potential revenue to these new payment middlemen. The Merchant Customer Exchange (MCX) was launched last week, which will enable participating businesses like 7-Eleven, Best Buy, Target and Wal-mart to use a mobile payment system that goes straight to participating retailers. MCX doesn’t have anything in place yet, but it’s presence may force PayPal and Square to adjust their strategies. The big-whale businesses like Starbucks and McDonald’s may be harder to get if consortiums like MCX start forming around the giant retailers. Instead, they may have to concentrate on gathering lots of smaller fish. For consumers, it will be a lot easier to make payments with mobile devices, but the landscape is becoming increasingly fragmented. If every other store uses a different payment system, customers will switch between payment apps - multiplying the security risks of linked accounts. Merchants may get a lot of choices for online payment systems, but customers could get the raw end of the deal.
August 22, 2012