PayPal signed many new retail partnerships this year, while also building a digital wallet and a handful of plastic cards to complement its online payment system.
PayPal's year began with the departure of its president, Scott Thompson, who left to run Yahoo, sparking speculation that PayPal would soon have to contend with Yahoo as a new rival in online payments. This speculation ended as abruptly as did Thompson's tenure as Yahoo's CEO — he left after it emerged that he misrepresented his academic credentials.
By the end of March, PayPal put a new plan into action: it promoted David Marcus, founder of the mobile-pay company Zong, to be its President. Marcus joined the company when PayPal bought Zong in August, at which time he became PayPal's vice president of mobile. In that role, he helped develop PayPal Here, a mobile card reader that serves as PayPal's answer to Square.
"PayPal has had a strong vision for the future of payments for over a decade," says Anuj Nayar, senior director of corporate communications at PayPal. "The company's new president David Marcus has been a great leader, helping to make this vision a reality."
Marcus brings a focus on mobile to PayPal, which is a unit of the online auction giant eBay. While PayPal cut a number of jobs this year, in eBay's third-quarter earnings call the company said it was streamlining its operations to focus more on mobile commerce.
Some of its initiatives fared better than others. For example, consumers largely ignored the physical card PayPal offers with its digital wallet for point of sale payments — 70% of digital wallet payments take place without the card.
"2012 was a 'test and learn' year for us where we rolled out many innovative new products," Nayar says.
PayPal is taking a unique approach to mobile payments at the point of sale. Whereas rivals such as Google, Isis and Starbucks tie payments to specific phone hardware and software, PayPal ties its payment system to the user's phone number instead. In this way, users can make payments at the point of sale without a phone or a card present.
PayPal first tested this system in Home Depot stores. By May, PayPal announced 15 additional partners it planned to have live by the end of the year. In October it updated that number to 20. A deal with Discover, announced in August, will allow Discover merchants to accept PayPal payments next year.
"PayPal's primary focus in 2012 was on getting PayPal accepted at the point of sale," says Dave Kaminsky, an analyst with Mercator Advisory Group.
Kaminsky gives three ways the company has successfully merged with the point of sale: First by connecting user's accounts with their mobile phone numbers; second with the launch of its mobile card reader PayPal Here, which allows merchants to accept electronic payments; and third, its partnership with Discover.
Another way PayPal has progressed is by partnering with NetSpend Holdings Inc. to launch a prepaid MasterCard, which will be available on shelves at 7 Eleven. The card allows users an easy transition into digital payments, especially since most merchants aren't equipped for mobile or contactless payments.
In mid-December, PayPal also created a stored-value card to help load cash to its accounts. The PayPal My Cash Card functions like a Green Dot MoneyPak, which can also be used to fund a PayPal account. Consumers buy the card in stores for the amount of cash they wish to load. They next link the card online to their PayPal account, thus adding to their PayPal balance.
While some industry experts say PayPal will disintermediate banks, others argue that the company is more of a threat to independent sales organizations and networks, reducing transactions and residuals.
In October, during the Western States' Acquirers Association 2012 Conference, PayPal senior manager Matt Watts said PayPal wants to work alongside ISOs, not push them out of the space.
Payment networks are PayPal's biggest competition, Kaminsky says.
"Traditionally, PayPal was only able to compete over online purchases, allowing consumers to purchase goods and services or transfer funds online using a PayPal account rather than a credit or debit card," Kaminsky says. "But PayPal is actively looking to remove that limitation."
Next year PayPal could continue to expand their presence at the point of sale or shift its focus to enabling mobile payments, says Kaminsky. "Focusing on this mobile payments service would ultimately accomplish both goals, enabling consumers to use PayPal at brick-and-mortar retailers and enabling consumers to use their mobile device as a payments token," he adds.
"We're seeing tremendous growth potential for [PayPal]," says Madeline Aufseeser, senior analyst at the Aite Group. "When it's all said and done it's beholdeth on all networks to look at the interchange model and where it's going in the future. PayPal has an advantage because they don't have the legacy infrastructure and banking relationships that they have to support."
Correction: An earlier version of this story incorrectly said that PayPal planned to work with ISOs on its prepaid card. The prepaid card is not part of that planned work.