PayPal's Sacrifices Broaden Its Point of Sale Reach

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How consumers conduct PayPal transactions across the Discover Network demonstrates a shift in how the eBay unit approaches its transition to becoming an in-store payments option.

The companies set a target of reaching acceptance in 2 million merchant outlets by the end of 2013. But rapid expansion of PayPal acceptance has jumped ahead of perhaps the most unique feature of PayPal's previous in-store payment experience — using a phone number and PIN to authorize payments without a card.

"Currently, the merchants connecting via Discover, the only way a consumer can transact with those merchants today is with the card, whereas some of our direct merchants have the mobile phone number plus PIN enabled, like Home Depot and Foot Locker," says Josh Goines, a PayPal senior director.

Leveraging the Discover Network, PayPal has quickly expanded its reach in physical stores, integrating with 50 merchant acquirers and more than 250,000 merchant locations; though the companies declined to name any of the retailers involved or specify the number of merchants that have activated PayPal acceptance via the Discover integration since it went live on April 19.

"We believe in ubiquity and we believe ubiquity will drive awareness, and that will drive adoption of PayPal across more channels than we're enabled in today. That's really important and when you think about that, you understand that you actually have to be able to give the consumers a way to transact that works everywhere," Goines says.

Making purchases without a card is popular among consumers who shop at merchants that have direct connections to PayPal. During parent company eBay's third quarter 2012 earnings call, CEO John Donahoe told analysts that 70% of in-store PayPal transactions are made with a mobile number and PIN.

But only about 25% of U.S. merchants on the Discover Network are PIN-enabled, making the mag-stripe PayPal card a necessity for expanding in-store acceptance.

"The card is seamless and it works everywhere, whereas phone number and PIN is a beautiful experience, but it really is contained to those merchants that have the right type of infrastructure in place," says Goines.

At most of the 23 merchants that accept PayPal through a direct connection, consumers can use their phone number and a PIN to authorize transactions. In cases like Jamba Juice, which does not have PIN pads in its stores, consumers use the PayPal mobile app to order ahead and pay for purchases.

A plastic, magnetic-stripe card has always been a component of the PayPal in-store experience, but as a supplement to phone-and-PIN and other types of authorizations. It will have a more prominent role as PayPal expands its in-store presence.

When PayPal began its push into physical retail locations, it issued plastic cards that used its own Issuer Identification Number that could be used only at merchants that directly connect to PayPal. Now, it licenses a range of the Discover IIN for a new card that will be issued to both new and existing PayPal in-store consumers. All PayPal in-store merchants, regardless of whether they connect directly to PayPal or through the Discover Network, will accept the new card.

"The card is going to be the primary form factor to which consumers can transact at merchants that accept PayPal," Goines says. "It really will be the primary way in which people use PayPal offline for a while."

Deemphasizing the phone-and-PIN authorization reflects a short-term sacrifice that allows PayPal to take advantage of the scope of Discover's reach with merchants and acquirers.

"Do we want to build in more capabilities that differentiate a PayPal payment going forward? Yes. But it's a process; it's really a technology process that we can only do through partnerships," Goines says.

He adds that eventually, both the card and phone number authorizations may be eclipsed by new consumer experiences that incorporate loyalty programs and digital coupons.

"We wouldn't be as focused on phone and PIN as much as other ways for consumers to initiate a transaction that can leverage the Discover infrastructure throughout that payment," Goines says.

PayPal is also taking steps to ensure that the shifting emphasis toward the card won't alienate or confuse the early adopters who have grown accustomed to using PayPal with a phone number and PIN, Goines says.

"We are certainly aware of the need to make it crystal clear to our consumers what form factor will work where, and what you will expect to see from us are different ways that we are going to be able to communicate that proactively to consumers," he says.

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