By Ron Osborne
Salus-Novus Inc.
Editor's Note: Editor's note: This article was published by RemoteDeposit Capture.com Sept. 30, 2010; reprinted with permission. © 2010 RemoteDepositCapture.com. All rights reserved.
There is no question that PayPal is a strong company, and growing. As a pioneer in viral marketing and payment processing, PayPal has been influential in many areas and has served as the go-to model for many a startup wanting to tap into the company's successful model.
PayPal's operations center in Omaha, Neb., has grown tremendously over the years. As an employer, PayPal has been great to the city, and it offers fair wages and benefits to its employees. In the Omaha metropolitan area of nearly 1 million people, you'd be hard pressed to meet someone who didn't have a friend, family member or acquaintance who worked at PayPal.
PayPal's newest offering, tapping into remote deposit capture (RDC) via smart phones, can be seen as a natural and neat extension to its core product line, but it can also be seen as a colossal failure. How can that be?
In 2005 and 2006, when the groaning, sputtering, oil leaking, smoking, rusty, snail-paced machine that is the world of core processor-based RDC software began being adopted by banks, I approached PayPal about adopting RDC as a full-fledged product to its core line.
The stakes were high. Not only could the company have taken its tens of millions of active U.S.-based merchants by storm, it could have completely shut out many banks and the entire ISO market as well.
After a few weeks of conference calls and conceptual discussions, I was able to secure an in-person meeting with the top engineers dedicated to virtual terminal solutions there to discuss RDC and its implications for PayPal.
Although the engineers expressed genuine interest in augmenting PayPal's product line, the conversations turned more toward the remotely created check (RCC) solution. Unlike RDC, where actual checks are scanned, in RCC the magnetic ink character recognition (MICR) line, payee info, payor info, date and amount are entered via web-form and passed into an image-creation engine; then, using the MICR font, a check image is created.
This image is then used as a source document in an X9.37 file and deposited with a pre-formatted signature, stating a standing authorization is on file with the merchant. Having seen some RCC solutions live, I offer you this advice: avoid it like the plague; actually, some people survived the plague, so avoid it like you'd avoid licking public door handles.
I felt it was clear that the issue for PayPal was primarily hardware related. I can imagine the conversations that took place in company headquarters about RDC.
At the time, great hardware providers like DCC, Panini and Canon hadn't reached economies of scale and advancements that led to today's fair pricing. I think the perception was that RDC would have been too expensive to offer to the normal PayPal merchant. Issues like support and implementation were also daunting, considering PayPal's experience was minimal at the time.
It's no secret that most ISOs do not like PayPal. The company's brand is strong with consumers (through the smart sale to eBay Inc.), and PayPal has achieved good penetration using its virtual terminals and other product lines.
PayPal's pricing, however, is much higher than what mid- to super-sized ISOs can offer, and most consumers or businesses have no idea about things like BIN fees, interchange rates, qualified versus mid-qualified versus nonqualified rates, and how to actually cut processing costs substantially.
The "simplicity" of the PayPal rate structure can be attractive to some. The failure is that during the six years since RDC's inception and the announcement of PayPal's smart-phone-based RDC product, ISOs and financial institutions (FIs) have gained significant ground in technologies available and have become very competent and knowledgeable in RDC sales and implementation. Most ISOs now know what an X9.37 file is and what qualifies as an item eligible for ACH conversion and what does not.
At RDC's inception, PayPal could have used its extensive and trusted brand to capture a huge portion of the U.S. merchant base, nearly at will. Long before ISOs really knew the product, PayPal had already been an established and large third-party service provider (TPSP) capable of including X9.37 file settlement into its product line.
PayPal could have even taken the lead and marketed its product to ISOs since many FIs at the time refused RDC, and TPSPs hadn't incorporated it yet.
The competition is much more fierce than it might have been had PayPal become an early adopter, rather than waiting for a cell phone to serve as the hardware. Leasing was available at the time; even per-item charges and clicks could have been used to offset the hardware charges. ISOs have been masters at that for years. Why didn't PayPal implement that strategy? Only those in San Jose know for sure.
Not a day goes by where I don't scratch my head and wonder why PayPal has been allowed to be the pre-eminent TPSP for consumer-to-consumer (C2C) payments.ACH credits, pre-authorizations, multifactor authentication and identity validations are not new, not by anyone's definitions.
Why hasn't a Citi, Wells, BofA, Fifth Third, US Bank or other major U.S. FI created a competitive product offering to PayPal's? Their brands are far more powerful, and the viral nature of C2C payments would lead to a large influx of new accounts. It's coming. I can assure you.
This failure is by far the most depressing. When the preeminent C2C TPSP spends millions in salaries, research, development and implementation of a service to cater to merchants that still receive paper checks, it's a sign that paper isn't going away anytime soon. I see it as PayPal "throwing in the towel" and giving in to the power of the check and the pen.
PayPal is a great company with great products and a strong market share, but now that it is lurking in the shadows of the RDC world, preparing to take market share from traditional providers, what will your company do?
Will you get creative, uncover new and exciting technologies to license and push the boundaries of how you work with your customers to ensure they do not switch to PayPal? Or will I be writing an article like this about your company next year?
Ron Osborne is President of Salus-Novus Inc. You can reach him at ron.osborne@salusnovus.com.
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