Is the competitive pressure from alternative payment rivals getting to Visa Inc. execs?

While Google Inc. has been on the hot seat in recent weeks from the exposure of potential security flaws in its mobile wallet, a Visa exec on Feb. 14 fanned the flames at an analyst conference with pointed comments about potential security flaws in PayPal Inc.’s mobile-payment technology.

Jim McCarthy, Visa’s global head of product, told analysts at a Goldman Sachs conference in San Francisco he fears “there are real issues around security” with a mobile-payment technology PayPal is testing at certain Home Depot Inc. stores.

Dan Schulman, American Express Co. group president of enterprise growth, also criticized PayPal at the conference, saying Amex is better suited to handle customer data. "We already have the funds and fraud-and-risk engines," he said.

PayPal in January launched its test at Home Depot, enabling customers to make in-store payments from PayPal accounts with a PayPal card or via their mobile phones by entering their mobile phone number and a PIN (see story).

McCarthy said he is waiting to read a newspaper report about fraud resulting from the test “where someone is standing behind somebody with a phone” and gains access to another customer’s PayPal account by intercepting their mobile phone number and PIN.

“I think there are real issues around security (with PayPal’s Home Depot test),” he said, also underscoring general economic “flaws in the model” that include higher overall costs and fraud risks Home Depot must likely be assuming to support the style of card-not-present transactions used in the PayPal test.

PayPal also may face challenges in processing in-store and mobile-payment volumes for retailers on a mass scale, McCarthy ventured.

Visa can process 20,000 transactions per second, and “I don’t think PayPal is capable of doing what we do with scale relative to just transaction processing capability,” he said.

But Home Depot brushes off McCarthy’s concerns about security and costs.

“We would never venture into something we didn’t believe is secure for our customers,” Stephen Holmes, a Home Depot spokesperson, tells PaymentsSource. “In many respects, PayPal offers security enhancements.” For example, after a customer makes an in-store purchase with a mobile phone using PayPal, he immediately receives an electronic receipt confirming the transaction.

“If a fraudulent purchase were made, the customer would know almost immediately,” Holmes says.

Moreover, Home Depot is satisfied with its financial arrangement with PayPal and plans to expand the mobile payment program from 51 stores to all of its stores nationwide beginning next month.

“We partnered with PayPal to implement this [service] because it’s fast, secure and convenient for our customers, all at a lower transaction cost for us,” Holmes says.

PayPal also defends the security, economics and capacity of its Home Depot test and other emerging mobile-payment efforts.

The San Jose, Calif.-based eBay Inc. unit offers new options for “frustrated merchants and consumers limited by legacy systems and approaches,” Anuj Nayar, PayPal’s spokesperson, told PaymentsSource via e-mail.

Consumers’ financial information is “safer in the PayPal digital cloud than in your pocket,” Nayar said, noting that PayPal has “the lowest loss rate in the online payment industry.”

PayPal also is confident it can “scale PayPal innovation to meet the potentially exponential growth in transactions we may see from offline retail,” he said.

Besides PayPal’s moves, Visa is closely monitoring and balancing its investments in diverse emerging mobile payment technologies, McCarthy noted.

While Visa has staked out Near Field Communication payment technology as a primary channel for emerging mobile payments, “these interfaces are all evolving very quickly, (and) it’s not all NFC,” McCarthy said.

Many promising new mobile-payment technologies are cloud-based, and Starbucks Corp. has made major strides with two-dimensional bar-code technology for mobile payments, he noted.

Visa is hoping to embrace the broad range of evolving mobile-payments technologies with its new mobile wallet, McCarthy said. Visa plans to roll out later this year, Visa’s CEO Joe Saunders told analysts on Feb. 8 when announcing the company’s quarterly earnings.

Mobile payments and digital wallets are a fiercely competitive arena at the moment, and debate about cloud-based mobile payments versus chip-based or NFC-based mobile payments will continue to be lively, Julie Conroy McNelley of Boston-based Aite Consulting tells PaymentsSource.

“”Everyone is watching to see which models will be successful,” McNelley says. “There is a fundamental difference between cloud-based wallets and NFC in that the cloud approach is easier to deploy. But there is some value in multifactor authorization inherent in chip-based [options] like those Visa supports.”

Noting that Visa and MasterCard Worldwide have invested heavily in chip-based mobile payments, McNelley says cloud-based mobile payment is also evolving quickly and can be made more secure with “a layered security strategy.”

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