PayPal
Content
PayPal: A Marketing Strategy for the Future
Marketing for High Tech Entrepreneurs UC Berkeley Fall 2008
Chris Anderson, Vera Dadok, Aby Galsky, Samuel Lin, Camilo Mendez, Bonnie Zhu 12/8/2008
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Table of Contents
Executive Summary ........................................................................................................................ 1 Introduction ..................................................................................................................................... 2 Background ..................................................................................................................................... 2 PayPal and eBay ......................................................................................................................... 2 Value Propositions .......................................................................................................................... 3 Buyers ......................................................................................................................................... 3 Sellers.......................................................................................................................................... 3 Operations ....................................................................................................................................... 4 Product and Services ................................................................................................................... 4 Revenue Sources ......................................................................................................................... 4 Performance ................................................................................................................................ 5 Current growth strategy .................................................................................................................. 5 Growth in Established Markets................................................................................................... 5 Expanding to Emerging Markets ................................................................................................ 6 Failure in China and Lessons Learned ........................................................................................ 6 New Product Development ......................................................................................................... 7 Critique of growth strategy ............................................................................................................. 7 New opportunities / strategies for growth....................................................................................... 8 Non-Retail Payments Opportunities ........................................................................................... 8 Incentives for New Contracting Payment Solutions ................................................................... 9 Incentives for New Attorney Payment Solutions.................................................................... 9 Incentives for new rental payment solutions .......................................................................... 9 1
Recommendations for new payment solutions ..................................................................... 10 A new revenue model ........................................................................................................... 10 Targeted marketing ............................................................................................................... 11 Remittances ............................................................................................................................... 11 Matches Core Competencies and Goals ............................................................................... 11 Factors that Facilitate Entry into Market .............................................................................. 12 Market Size ........................................................................................................................... 12 Recommendation to PayPal Regarding Remittance ............................................................. 13 Mobile Payment in Emerging Markets ..................................................................................... 14 Conclusions ................................................................................................................................... 17 Appendix ....................................................................................................................................... 19 Non-retail Payment Calculations .............................................................................................. 19 Contractor payments US market ........................................................................................... 19 Attorney payments US market .............................................................................................. 19 Tax preparation payments US market................................................................................... 20 PayPal’s Potential Revenue Sensitivity to Market Conditions in the Remittance Market ....... 20 Exhibits ......................................................................................................................................... 22
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Executive Summary
As a dominant player in online payment business, PayPal, a subsidiary of eBay, processes 8.3% of $600B global e-commerce market. PayPal has presence in 190 markets and accepts 19 currencies with 44% of its revenue from outside of US. In addition to its simple, quick and secure online payment services, PayPal has begun developing additional payment services via mobile phones, browser add-ons and more. Through new partnerships and its tie with eBay, PayPal’s revenue has been growing steadily at over 30% for the past three years. PayPal often relies on brand recognition and word of mouth advertising to promote its new products. While this has worked very well for traditional products, it has made it difficult for several of its newest offerings to gain traction. In the future as PayPal saturates its established markets and encounters competition in emerging markets, PayPal will face difficulties if additional expansion is not pursued. We have identified three new opportunities for PayPal: non-retail payments in US and remittance and mobile payments in emerging markets. Non-retail payments including rent, attorney fees, and contractor payments are an untapped market where millions of transactions take place. Due to the unique payment structure in these segments, PayPal can offer a very compelling value proposition in this payment space. For example, PayPal can set up a system tailored for renters that uses a larger flat fee and requires funding by debiting bank or PayPal accounts (for highest PayPal profit margins). Similarly, PayPal could address lawyers and contractors by developing payment solutions that enable incremental payments and up front advancements in a single invoice, thereby matching the needs of these industries payment methods. Remittances services are currently expensive and PayPal is in a unique position to leverage their existing online fund transfer infrastructure to offer a lower cost to customers. The Dominican Republic, Jamaica and Guyana have been identified as penetrable markets due to their large volume of both remittance fees and banking populations. In order to break cultural and consumer behavioral barriers, PayPal will need to conduct extensive marketing research and test acceptance levels in addition to building partnership with local institutions. Mobile payment platforms are leapfrogging traditional payment methods in emerging markets with a high proportion of unbanked population. India has been identified as a compelling mobile payment market due to the regulatory environment and high acceptance potential. The mobile payments industry has a substantial first mover advantage; we believe PayPal should move quickly to align mobile operators and banks in this region. In addition, PayPal should conduct extensive market research to be sure they understand the culture and buying behavior in India. All opportunities we’ve identified leverage PayPal’s existing infrastructure, core competencies, and current value offerings. Due to PayPal’s history of new product offerings not gaining traction as a result of ineffective promotion, we believe PayPal should devote more resources into advertising the sophistication and novelty of these new services. These recommendations will help PayPal to achieve its goal of being the global standard for online payment solutions.
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Introduction
PayPal Inc., a subsidiary of eBay Inc., is in the business of online payment solutions, acting as a secure middleman for transactions in ecommerce between online merchants or sellers and customers or buyers. It is an international company, supporting transactions in 19 currencies and with 44% of revenue from outside of the US 1 . In addition to basic online payment services it has begun developing additional payment services via mobile phones, browser add-ons, and more.
PayPal is aiming to become the “online payment network of choice around the world” 2 . PayPal currently has an 8.3% share of global ecommerce and plans to gain an increasing share of global ecommerce payments in the next decade by increasing the frequency of use of current services, developing new offerings, and expanding existing services to new markets.
Background
The merger of two companies, Confinity and X.com, created PayPal in 2000. PayPal grew rapidly, prompting eBay to acquire PayPal for $1.5B in 2002, when more than 50% of the eBay users preferred PayPal as a payment method 3 .
PayPal and eBay
PayPal has achieved a significant amount of its success due to its relationship with eBay. eBay provides PayPal with a large, protected market that plays a key role in building PayPal’s huge user base. eBay also increases the power of PayPal’s brand, offers a free avenue for advertising PayPal, and access to eBay’s adjacent Marketplaces 4 . However PayPal has expanded beyond eBay and provides services for many other online merchants, pulling in 49% of their Total Payment Volume (TPV) from non-eBay sources in Q2 2007 5 . Growth for PayPal depends on
1 2
www.paypal-media.com/documentdisplay.cfm?DocumentID=2260 eBay Annual Report, 2007 3 http://news.cnet.com/2100-1017-941964.html 4 eBay Annual Report, 2007 5 https://www.paypal-media.com/documentdisplay.cfm?DocumentID=2260
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increased growth in ecommerce outside of eBay, but eBay’s exclusive use of PayPal continues to provide an important barrier against PayPal competitors.
Today PayPal has over 63M active accounts, accepts 19 currencies in 190 markets, processes over $64B per year and has revenues of over $600M per quarter. PayPal’s TPV was approximately 9% of global e-commerce in 2007 6 .
Value Propositions
Buyers
For buyers who want to make payments online, the PayPal platform is a financial gateway that allows simple, private, and secure payments on a large number of websites. Unlike paying directly with credit cards online, paying with PayPal does not require sharing sensitive information such as credit card numbers on merchants’ websites and simplifies payment information entry to only an email address and password.
Sellers
For vendors who want to sell products online and collect payments electronically, the PayPal platform is a payment processing solution that allows them to accept secure online payments from customers in over 190 markets and in 19 currencies. Unlike online solutions provided by traditional merchant accounts, PayPal’s product can be set up quickly and easily and has a low cost transaction fee structure 7 .
6 7
https://www.paypal-media.com/documentdisplay.cfm?DocumentID=2260
eBay Annual Report, 2007
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Operations
Product and Services
PayPal’s principal product is their online global payments platform. The company offers an online payment platform for eBay and off-eBay accounts and merchants. Many companies carry PayPal as a payment option, including Barnes & Noble, Toys R’ Us, Southwest Airlines, Delta Air Lines, Blockbuster, among others.
PayPal offers other services to facilitate payments and money transfers. For example, PayPal Mobile is a way to check your PayPal balance, send request money and buy products online by using a mobile phone. PayPal Plug-In is another product that allows the user to use PayPal on the Internet anywhere that MasterCard is accepted.
PayPal also has other financial products such as the PayPal ATM/Debit Card, PayPal Plus Credit Card, PayPal Pay Later, PayPal Money Market Fund, among others.
Revenue Sources
The overwhelming majority of PayPal’s revenue is from transaction fees paid by online merchants. Typically, transaction fees are a $0.30 flat rate on top of 1.9 to 2.9 percent of the payment amount.
PayPal’s profit varies depending on the base source a customer chooses to fund the payment. When transactions are processed with a credit card, the majority of the transaction fee received by PayPal goes straight to the credit card company. However, when customers use money directly from PayPal accounts or bank accounts 8 , the transaction fee is nominally profit. Approximately 60% of transactions are processed with credit cards.
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eBay Annual Report, 2007
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Performance
PayPal’s revenue is almost directly related to the dollar amount of payments or TPV. PayPal’s revenue has been growing steadily at over 30% for the past three years to $1.8 billion in 2007 (see Exhibit 1). In addition, the percentage of off eBay revenue has improved from 35% to 42% in the past two years, indicating that PayPal is successfully improving revenue from merchant services and other off eBay offerings. PayPal also has a substantial international offering: over 44% of its revenues are from non-US sources 9 .
Current growth strategy
PayPal’s growth strategies can be divided into three categories—strategies within established markets, expansion to new geographies, and development of new services.
Growth in Established Markets
In established markets, such as the U.S. and Australia, PayPal enjoys excellent brand recognition and a large user-account base. In these markets, PayPal’s goal is to increase customer usage. To achieve this, PayPal is partnering with large corporations and exploring strategies to increase PayPal’s share of eBay transactions. Last year, PayPal partnered with Barnes and Noble, Toys R’ Us, and several other large retailers in the US. Little advertising effort is put into attracting small online merchants 10 , but PayPal’s brand and simple solutions for integrating one-click payments and shopping carts on these websites continues to draw new businesses.
PayPal’s general strategy is to keep operating costs low by spending very few resources on advertising. Instead PayPal relies on word-of-mouth, eBay, and merchant customers 11 (with the PayPal button on websites) to maintain and increase awareness of PayPal’s primary product. By
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eBay Source Interview with Jeff Lowman, PayPal Strategy Group conducted by the group, Nov.2008 11 Add more stuff: web developers, online news, tech blogs, etc.
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targeting big merchant customers like Barnes and Noble, PayPal further increases visibility, market penetration, and user accounts.
Expanding to Emerging Markets
Expanding to new geographical territories is one of PayPal’s core focuses 12 . Its transactional revenue growth rate within US dropped from 36% in FY2006 to 22% in FY2007 while that of international maintained 46%. Yet despite significant effort, not all of PayPal’s endeavors to enter foreign markets have been successful.
Failure in China and Lessons Learned
In attempts to capture some of the 220 million potential online shoppers in the China’s ecommerce market, PayPal rolled out PayPal.cn in 2005. However, by mid-2007, PayPal’s share of China’s third payment market was only 1.6%. The setback was largely attributed to nuances and challenges of online payments in China market. These include ambiguous governmental regulations, consumers’ continued preference for cash payments, low credit card usage, and online payment restrictions for debit card users. In the end, PayPal’s failure in China boiled down to their inability to understand the local market and culture 13 .
The experience in China harshly reminded PayPal that a successful rollout requires two things: the technical infrastructure and an understanding of users’ buying behavior in that local market. If and when PayPal expands into Asia, South America, and southern Africa, the lessons from China will likely prompt extensive market research so that a platform tailored to the unique needs of the market can be implemented.
Interview with Jeff Lowman Taobao has a layout that is similar to a Chinese department store with separate sections for women’s and men’s department. In contrast to Taobao, eBay Eachnet provided no phone support and discouraged buyer-seller contact that could lead to haggling.
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New Product Development
PayPal is currently acquiring and developing several new products and services. Some of their recent offerings have been PayPal Mobile in 2006 14 , PayPal Plug-In (November 2007) 15 Bill Me Later 16 , and they even have plans to add a credit product to their offerings. This December PayPal is beta testing PayPal Student Account, a service that is similar to an online allowance 17 . Finally, an iPhone application has recently been produced 18 and continues to be under development 19 .
Although many of their new products sound promising, their track record for promoting many of their previous products has been poor.
Critique of growth strategy
PayPal relies too heavily on brand recognition and word of mouth advertising to market and sell its new product offerings. PayPal’s association with eBay and strong brand recognition were effective marketing tools for their well-known online payment platform, however this company image and branding does not extend to new services that are significantly different from PayPal’s typical offerings.
The president of PayPal recently admitted that the mobile platform has not succeeded in the US 20 even as mobile financial transactions are attracting new competitors and expanding as a market in the US and abroad 21 . While new products and services are continually being bought and developed, it seems that these products are developed and then left unused by the majority of PayPal users. PayPal needs to put more effort into marketing and promoting their new products or stop wasting resources developing them.
14 15
http://www.techcrunch.com/2006/03/22/paypal-mobile-launches-and-its-awesome/ http://www.reuters.com/article/technologyNews/idUSN1840572920071119 16 http://premium.hoovers.com/subscribe/co/overview.xhtml?ID=ffffjrytrrxyjcrhxy 17 http://bits.blogs.nytimes.com/2008/12/01/paypal-brings-the-weekly-allowance-into-the-21st-century/ 18 http://www.finextra.com/fullpr.asp?id=22340 19 Interview with Jeff Lowman 20 http://www.americanbanker.com/article.html?id=20080324AZ23ATWO 21 http://www.multicellphone.com/obopay-mastercard-partnership-for-mobile-payment-service/
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New opportunities / strategies for growth
Three areas have been identified as large markets that will integrate well into PayPal’s existing infrastructure, core competence, and value offering. These areas include:
Non-retail payments As PayPal expands to more financial services, specific solutions and fee rates should be considered to draw in new types of transactions such as rent, professional service fees (i.e., contractors, lawyers), and more.
Remittances As PayPal is globally available, they have the opportunity to simplify remittances for users.
Mobile payments in emerging markets PayPal can use its mobile payment technology to become established in new geographies where mobile phone penetration is high and non-cash financial solutions are needed.
NonRetail Payments Opportunities
The identified non-retail opportunity for PayPal is the creation of payment platforms tailored for rental payments, independent contracting payments, professional services paymentscharity payments, etcetera. The total payment volume for contractor and attorney payments is $300B and $240B respectively (see Exhibit 2) 22 .
Independent contractors and lawyers share a similar and unique payment structure that is based off of an advancement of initial start up funds and incremental payments throughout the clientcustomer relationship. Due to the uniqueness of this payment structure, we believe PayPal can offer a very compelling value proposition in the contractor and lawyer payment space. Similarly, tenants typically pay rent on a monthly basis after an initial larger security deposit.
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See Appendix-Non-retail Payment Calculation for details of market sizing.
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Incentives for New Contracting Payment Solutions 23 Today, contracting payments are predominantly made by check, however, there are many incentives to switch to instant electronic payments: eliminate the need to place liens on property while waiting for checks to clear, eliminate weekly bank runs to finance operations, eliminate carrying large sums of cash for materials purchases, enabling electronic payment of employees and subcontractors, and increasing accountability and documentation of contractor operations.
Incentives for New Attorney Payment Solutions Today, we estimate that over 40% of lawyer payments and money transfers are via check. For smaller firms and independent lawyers that only accept check, waiting for checks to clear - or even worse, dealing with bounced checks - hampers business. In addition, the nature of the attorney-client interaction lends itself to a payment structure where clients are forced to make small payments throughout the interaction, creating many opportunities for checks to bounce. Obviously credit card payment solutions would mitigate most of this hassle, however many small firms have not adopted this payment method due to infrequency of use. A professional payment / billing solution (that accepts credit card), would alleviating hassles with checks and in addition would likely increase the perceived level of sophistication and image that the client has for the attorney.
Incentives for new rental payment solutions Rent is most frequently paid by check, cash, or money order, although some landlords now offer credit card payments in person each month or automatic debiting of the tenant’s bank account 24 . Most of these methods either involve the tenant mailing the payment to the landlord or walking to the rental office, both inconvenient for the tenant. The automatic debiting requires the tenant to give out sensitive bank account information to the landlord or other party conducting the
We define independent contractor payments as fees paid whenever someone comes to a residence or business to make repairs (i.e., plumbing, electrical) or modifications (i.e., remodeling, painting). 24 Stewart, Marcia. “Every Tenant’s Legal Guide.” Nolo, 2007.
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transactions. For tenants with Internet access or home or work, paying the rent via the Internet in a secure and optionally automatic way would simplify life.
In March 2008, 82% of households had Internet access 25 . Of the 116 million households in the US in 2007, 69% households were owned and 31% rented (see Exhibit 3) 26 . Therefore, approximately 35 million households pay rent.
Recommendations for new payment solutions Because contractors and lawyers share a similar payment structure, several payment solution characteristics will be compelling to both customers. For example, both lawyers and contractors would value a payment architecture with an invoice that could grow throughout the interaction and be paid off intermittently as various fees are addressed. For the lawyer, this may be retainer fees, billing for services, filing fees, et-cetera; for the contractor this may be advancing payments for materials purchases, start-up costs, or weekly payments. Additionally, lawyers and contractors might both value a platform that can store detailed records of accomplishments at each payment step so the customer can view them in an online invoice and for record keeping. Partnerships with shopping cart providers should ease PayPal’s burden of developing these solutions.
A new revenue model These offerings would be different enough from their current products that they may require a new revenue model tailored to suit the needs of the new customers. For example, when dealing with large payments of over $500 per month 27 as in a typical rent or lawyer payment (see Exhibit 4 for rental costs breakdown by amount), PayPal’s current fee structure of taking a percentage of the transaction may not be feasible. However, PayPal could set up a system that uses a larger flat fee and required funding by debiting bank or PayPal accounts (for highest PayPal profit
25 26
http://www.webpronews.com/topnews/2008/05/14/18-of-us-households-have-no-internet-access http://www.census.gov/population/socdemo/hh-fam/cps2007/tabH1-all.xls 27 http://factfinder.census.gov/servlet/DTTable
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margins). This would be easy to implement with PayPal’s current infrastructure, and the added convenience for both parties would be well worth a few dollars to customers.
Targeted marketing For contractors, marketing would probably be most effective in Home Depot catalogs and other places where contractors are likely to look. Likewise, for lawyers or renters, the service could be marketed in lawyer magazines, traditional lawyer channels and home owner magazines, respectively. Following the early adopter phase, reference-based vertical marketing should be used for each identified market segment. For example, in the contractor industry, the payment solution will work for electricians, contractors, plumbers, architects, builders, etc.
Remittances
PayPal should enter the remittance services market from the U.S. to Latin America and Caribbean countries (LAC). Remittances from the U.S. to LAC were approximately $50 Billion in 2007 28 and experienced a positive growth rate of 6% from 2006 to 2007 29 (see Exhibit 5). Also, PayPal can use remittances to enter new global markets without additional product development.
Matches Core Competencies and Goals Providing remittance service to LAC opens the door for PayPal to provide other services (such as e-commerce) to LAC. This is a straightforward way to be a first-mover in these markets.
Additionally, PayPal already has extensive knowledge and technical skills needed to deal with currency exchanges and money transfers across different countries. With these abilities, handling remittance to LAC should pose no trouble for PayPal.
28 29
International Fund for Agricultural Development (IFAD) and the World Bank Paulina Ibarra. US Slowdown Affects Remittances in LAC. The World Bank: April 8, 2008.
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Factors that Facilitate Entry into Market
30 The remittance market is highly fragmented. There are no mature markets in LAC . Besides
Mexico, the major MTOs (such as Western Union, MoneyGram, Vigo, and etc.) have less than 20% of the market. Remittances play an increasingly large role in the economies of LAC, contributing to economic growth. Remittances receivers help increase banking, reduce poverty
31 and social inequality . Due to these benefits, many governments promote the sending of
remittance through banks.
Market Size PayPal’s potential market size in remittances from the U.S. to LAC is approximately $2.4 billion after filtering out the red herring information (Exhibit 6) 32 . Estimating that PayPal will gain a 15% market share and charge a 3% fee (lower than the lowest average fee on remittances at 3.9% in El Salvador 33 ) 34 , the revenue to PayPal would be $10.6M, (1% of PayPal’s profits now).
Additionally, the market for remittance to LAC is growing in three fronts: amount, channel, and banks. Remittance market, even after being affected by the U.S. economic downturn, still shows positive growth of 6% between 2006 and 2007. Second, the switch form informal channel to formal is increasing in many of the LAC countries. Countries such as Mexico and the Dominican Republic have remittance through formal channels at a rate of 85% and above . Lastly, there is a rise in the number of remittances performed through banks, which corresponds to increasing
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Manuel Orozco. The Remittance Marketplace: Prices, Policy and Financial Institutions. Georgetown University: June 2004. 31 Conference Report: Research on Remittances to Latin America and the Caribbean. Inter-American Dialogue: March 14, 2007 32 Of the $50 billion in remittance, approximately 43% is actually performed through formal channels32. Within this 43%, the average number of transactions remitted through banks is about 11% 33 USD 2.4B in remittance, the average cost of remittance ranges from as low as 3.9% in El Salvador to about 11.66% in Barbados (with an average of 8.25%, see Exhibit 9) 34 Manuel Orozco. The Local Economy and Local Governments’ Responses to Remittances in Latin America ad the Caribbean. Inter-America Dialogue: June 2008. 35 Lenora Suki. Competition and Remittances in Latin America: Lower Prices and More Efficient Markets. Columbia University: February 2007.
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number of receivers who own bank accounts. As shown in exhibit 9, in countries such as Dominican Republic, Guyana, and Haiti, more than 60% of recipients of remittances have bank accounts.
We have analyzed the sensitivity of PayPal’s potential revenues to factors such as changing in overall remittance market size, formal channels usage, bank usage, PayPal’s market penetration and fees is shown in Appendix . It is surprising to see that PayPal’s potential revenue is most sensitive to changes in number of remittance through banks. A 1% increase in bank usage will result in a 9% increase in revenue or $6.7M for PayPal. This is very good for PayPal because many governments of LAC countries are working together with the U.S. to educate, facilitate, and improve remittance channels, especially banking channels. Programs such as the New Alliance Task Force (NATF) have been created in the US to increase the amount of immigrants with bank accounts and promote financial education among these communities.
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Moreover, to
solve the problem faced by the migrant workers related to inaccessible to formal channels due to the lack of accepted identification documents, new identification cards have issued by the LAC countries. All these programs work to both encourage the migrant workers to send money through formal channels and increase their enrollment in bank accounts. These help expand the part of remittance market that PayPal can enter.
Recommendation to PayPal Regarding Remittance In order for PayPal to successfully enter this market, we have two recommendations. First, enter countries with high remittance fees and a high percentage of population with bank accounts (mainly because PayPal will only consider markets where the financial institutions are already in place 37 ). Table below is a list of countries that PayPal should consider based on these two criteria.
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United States Government Accountability Office. International Remittances: Information on Products, Costs, and
Consumer Disclosures. Report to the Committee on Banking, Housing, and Urban Affairs, U.S. Senate: November 2005.
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Interview with Jeff Loman, a global strategist working at PayPal Nov 2008
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Dominican Republic Jamaica Guyana Haiti
Remittance Fees (%) 6.4 8.2 10.14 6.7
Average Transfer (USD) 176.00 209.00 179.00 123.00
Annual Volume (USD in M) 2,410 1,651 270 985
Recipients with Bank Account (%) 66 65 62 68.4
Moreover PayPal needs to develop relationships with banks and credit unions in the developing countries through revenue sharing, technology transfer, and/or partnership. 86% of the remittances that are distributed in LAC region are cash payment picked up at office, branch, or other distribution points (see Exhibit 11). Only 4% is direct credit to an account. Therefore, in order to succeed in these developing countries, PayPal would require the financial institution to serve as a distribution channel.
Mobile Payment in Emerging Markets
The slow adoption of PayPal Mobile in the US market does not imply that the mobile payments business is not promising. According to a study made by Gartner there is still huge growth expected – Mobile payment is a service at an early stage with an expected 32.9 million users worldwide in 2008, growing to 103.9 million users in 2011 38 . In this same study, Gartner also notes that:
"The service [mobile payments] is easier to justify in emerging markets, where many people are unbanked or underbanked, and there are few payment options...In developed markets banks should be aware of alternative services from nonbanking institutions, such as PayPal and Obopay, that can compete on lower fees and faster transactions and that are more proactive on the mobile front”
Therefore, we believe that PayPal should consider launching its mobile payment proposal in a market that embraces this technology and that has a higher need for this service than the US.
38
Gartner, "Dataquest Insight: Mobile Payment, 2006-2011"
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Asia/pacific accounts for 85% of the total mobile payment users in the world and will be the highest growing region in the next years.
Every participant that wants to be a relevant player in mobile payments should be in Asia that is why we recommend that PayPal focus in this market.
There are basically two different technologies to make mobile payments 39 , Near Field Communications (NFC) and SMS. NFC is a technology based in RFID that requires implants in the handset and the merchant’s POS to make the transaction and it is usually used for retail and transportation payments. The technology is advanced but its business model is relatively complex to implement because it requires the alignment of different players. An SMS-based service is simpler to deploy because it does not require a special handset it only requires the negotiation of usage of mobile operator’s network. SMS PayPal’s technology is SMS based which is also the leading technology for P2P payments, buying entertainment content and some mobile banking services. To determine which market to enter is important to consider the technology they use and the need of a P2P service.
There are 4 different segments of countries in the Asia/Pacific region 40 : The leaders: Japan and Korea The mobile tigers: Hong Kong, Singapore and Taiwan The mid-market: Thailand and Malaysia The giants: China, India, Philippines and Indonesia Japan and Korea were early adopters of mobile technology and similarly of mobile payments. These are mature markets where there are strong established players and where NFC is highly
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http://takemetoyourleader.com.Present and Future of Mobile Payments, August 29, 2008, Rob Gonda KPMG, Mobile Payments in Asia Pacific, 2007
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implemented and dominated by a few operators. There is little room for PayPal in this market because the incumbents are very strong, the market adopts cutting edge technologies and P2P transactions don’t have much traction.
The mobile tigers are the most highly mobile penetrated countries in the world but have little adoption of mobile payments, just NFC for transportation services and for some retail stores. These are also mature markets that have demonstrated little interest in mobile payments and where users are not looking for new payment methods besides the traditional ones.
The mid markets are starting to adopt NFC technology and are focusing more on bill payments and mobile banking. There is a growing opportunity for Person-to-Person payments and content distribution but these markets are small and there would not be much scale to put some effort in developing the mobile payments business.
India and China have a large number of mobile subscribers and therefore a large potential for mobile payments, Philippines and Indonesia have a large number of users of SMS. In this segment is where the opportunity for PayPal resides, specifically in China and India.
Philippines is already doing a lot of use of SMS payments but it has rooted players in the business and therefore is difficult for a new entrant to gain market share. Indonesia represents a large opportunity because there is interest in moving further in mobile payments adoption but this country is highly risky because it has the largest number of fraudulent electronic transactions in the world.
Both China and India represent the most attractive markets. First, their size represents a huge opportunity – China has around 600 million mobile users while India accounts for 315 million. Second, there is a real need for person to person mobile services because both countries have low banking adoption, most of the transactions are cash-based and there is huge commerce activity between people in far away regions – China has 73 ATMs per million people, India has 25 16
compared with the US that has 1,353 – China has 457 Point of Sale Systems per million people, India has 270 and the US has 8,647.
However, given the failure that PayPal already had in China with its online payments attempt, the strong positioning of the local players and the difficult regulatory environment of the country, we would recommend that PayPal enters the Indian market. India represents a larger opportunity of people outside of the banking system with less payment options and it is a good fit for PayPal because it can leverage its brand since it is already a player in the online payments business.
Obopay, an American player in this arena already entered the Indian market this year, which we also think is a good sign. But for this same reason and the fact that this business relies in building a huge network of users in a timely manner, we believe that PayPal should move fast into aligning Indian mobile operators and banks to have a sound start.
Conclusions
PayPal is in an excellent position to develop compelling electronic payment solutions for several large and growing markets. Non-retail payments: interactions where large amounts of money are transferred in a unique billing/payment structure (for example, lawyers, contractors, rent) are opportunities where PayPal has the ability to develop extremely attractive payment solutions and leverage its trusted brand name to help with product launch and marketing. Emerging market mobile payments: as emerging markets leapfrog traditional payment methods and embrace the convergence of applications into the phone, there will be a huge opportunity to spread a mobile payments solution around the world. PayPal can leverage its brand as a trusted player in the online payments business to help align the mobile operators and banks that will be required for these initiatives to be successful. Remittance: PayPal’s end goal is to have a presence in the Latin America and Caribbean countries and to serve the e-commerce in these locations. Remittance, not only can act as a bridge to this goal, but also it can be a significant source of revenue at the present time. Building from PayPal’s existing electronic fund transfer infrastructure, PayPal can lower the cost of remittance for end users. 17
In the past, PayPal’s non-traditional offerings have had difficulty gaining traction. To succeed in the future, PayPal will have to re-think its practice of relying mostly on branding and word of mouth advertising to launch and market its new offerings. In addition, as PayPal moves into international markets, the company must be poised for market research due diligence; the mistakes from the China expansion showed firsthand the value of understanding the culture and buying behavior in the markets they wish to penetrate.
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Appendix
Nonretail Payment Calculations
Contractor payments US market I. Estimate of number of contractor market size (US): There are currently 316k licensed contractors in CA 41 . The population of CA is estimated at 37M, therefore approximately 1 in 120 CA residents is a licensed contractor. Assuming 300M people live the US 42 , we can use the above 1/120 ratio to approximate the number of independent contractors in the US; the answer is 2.5M.
II. Estimate of contractor payment market size (US):
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2.5M licensed contractors $60k average contractor salary 43 (labor costs) Estimate that labor and material costs are equal (conservative) 2.5M*$60k*2 = $300B US market for contractor payments.
Attorney payments US market
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Approximately 1.1M active lawyers in US 44 2k billable hours per year (40x50) Estimate 60% occupancy $300 per hour average bill rate 45 1.1M*2k*$300*0.6 = $400B US market for attorney payments Assume 60% of lawyers’ services are monetized by hourly billing $240B market for client to lawyer payments with check/credit card.
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41 42 43 44 45
http://www.cslb.ca.gov/ http://quickfacts.census.gov/qfd/states/06000.html http://www.simplyhired.com/a/salary/search/q-Independent+Contractors/l-Anaheim,+CA http://www.abanet.org/ Laffey Matrix: http://en.wikipedia.org/wiki/Laffey_Matrix
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Tax preparation payments US market
• • •
155M individual Federal returns filed in 2008 46 80% returns done professionally (125M) 47 $300 average filing fee 48 125M*$300 = $37B market 40% of TPV is channeled through ''check only" firms $15B market size for "check only" based tax preparers $22B market size for "check + credit card" based tax preparers
• • • •
PayPal’s Potential Revenue Sensitivity to Market Conditions in the Remittance Market
46
http://www.irs.gov/newsroom/article/0,,id=188359,00.html. 30M out of 155M are e-filed from the home with software like "TurboTax". 47 http://www.irs.gov/newsroom/article/0,,id=188359,00.html. 30M out of 155M are e-filed from the home with software like "TurboTax". 48 Bruce Moeller, CPA, J.D 394 Bell Marin Keys Blvd. Suite 1, Novato, CA 94949
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Exhibits
Exhibit 1. 2005 – 2008Q3 PayPal Performance
Exhibit 2. Market Size of non-retail payment in the US. (All assumptions used to generate these data are listed in the Non-retail Payment Calculation in Appendix)
Exhibit 3. U.S. Households breakdown by Tenure for 2007.
US Households by Tenure 2007
1%
30%
Own/Buying Rent No Cash Rent
69%
22
Exhibit 4. U.S. households breakdown by Rental Costs per Month for 2005.
Households by Rental Costs Per Month 2005
6% 15%
7% 18% Below $250 $250- $500 $500-$1000 $1000-$1500 $1,500 or more
54%
Exhibit 5: Remittance from the U.S. to Latin America and the Caribbean in (US$ Million) in 2007. The figure is taken from Inter-American Development Bank’s Multilateral Investment Fund (IDB-MIF).
23
Exhibit 6: The growth and the nominal amount of remittance from the U.S. to LAC countries. Picture taken from Remittances Ebb and Flow with the Immigration Tide by Federico S. Mandelman, ECON South: Volume 10, Number 3, Third Quarter 2008.
Exhibit 7: Process steps for remittance through formal channel from U.S. to Latin countries. Picture taken from The Remittance Marketplace: Prices, Policy and Financial Institutions by Dr. Manuel Orozco at George Town University: June 7, 2004.
24
Exhibit 8: Survey of Latinos remitting to Latin America in July 2007. Table taken from Toward the mainstream: current trends and dynamics of remittances to Latin America and the Caribbean by Manuel Orozco. Inter-American Dialogue: February 2008.
Exhibit 9: Remittance transfers details broken down for each LAC countries. Data collected by Central Banks of each country and World Bank Development Indicators (* 2005; ** 2003 data). The Local Economy and Local Governments’ Responses to Remittances in Latin America and the Caribbean. Inter-America Dialogue: June 2008.
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Exhibit 10: Table showing remittance and other indicator. Table taken from Toward the mainstream: current trends and dynamics of remittances to Latin America and the Caribbean by Manuel Orozco. Inter-American Dialogue: February 2008.
Exhibit 11: Remittance distribution in LAC region. Picture taken from Competition and Remittances in Latin America: Lower Prices and More Efficient Markets by Lenora Suki. Columbia University: February 2007.
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Exhibit 12: Mobile payment users share - worldwide estimated for 2008. Values take from Gartner, "Dataquest Insight: Mobile Payment, 2006-2011" World Mobile Payment Users Share ‐ 2008
3% 1% 11% Asia/Pacific U.S. W. Europe Others
85%
27
Marketing for High Tech Entrepreneurs UC Berkeley Fall 2008
Chris Anderson, Vera Dadok, Aby Galsky, Samuel Lin, Camilo Mendez, Bonnie Zhu 12/8/2008
0
Table of Contents
Executive Summary ........................................................................................................................ 1 Introduction ..................................................................................................................................... 2 Background ..................................................................................................................................... 2 PayPal and eBay ......................................................................................................................... 2 Value Propositions .......................................................................................................................... 3 Buyers ......................................................................................................................................... 3 Sellers.......................................................................................................................................... 3 Operations ....................................................................................................................................... 4 Product and Services ................................................................................................................... 4 Revenue Sources ......................................................................................................................... 4 Performance ................................................................................................................................ 5 Current growth strategy .................................................................................................................. 5 Growth in Established Markets................................................................................................... 5 Expanding to Emerging Markets ................................................................................................ 6 Failure in China and Lessons Learned ........................................................................................ 6 New Product Development ......................................................................................................... 7 Critique of growth strategy ............................................................................................................. 7 New opportunities / strategies for growth....................................................................................... 8 Non-Retail Payments Opportunities ........................................................................................... 8 Incentives for New Contracting Payment Solutions ................................................................... 9 Incentives for New Attorney Payment Solutions.................................................................... 9 Incentives for new rental payment solutions .......................................................................... 9 1
Recommendations for new payment solutions ..................................................................... 10 A new revenue model ........................................................................................................... 10 Targeted marketing ............................................................................................................... 11 Remittances ............................................................................................................................... 11 Matches Core Competencies and Goals ............................................................................... 11 Factors that Facilitate Entry into Market .............................................................................. 12 Market Size ........................................................................................................................... 12 Recommendation to PayPal Regarding Remittance ............................................................. 13 Mobile Payment in Emerging Markets ..................................................................................... 14 Conclusions ................................................................................................................................... 17 Appendix ....................................................................................................................................... 19 Non-retail Payment Calculations .............................................................................................. 19 Contractor payments US market ........................................................................................... 19 Attorney payments US market .............................................................................................. 19 Tax preparation payments US market................................................................................... 20 PayPal’s Potential Revenue Sensitivity to Market Conditions in the Remittance Market ....... 20 Exhibits ......................................................................................................................................... 22
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Executive Summary
As a dominant player in online payment business, PayPal, a subsidiary of eBay, processes 8.3% of $600B global e-commerce market. PayPal has presence in 190 markets and accepts 19 currencies with 44% of its revenue from outside of US. In addition to its simple, quick and secure online payment services, PayPal has begun developing additional payment services via mobile phones, browser add-ons and more. Through new partnerships and its tie with eBay, PayPal’s revenue has been growing steadily at over 30% for the past three years. PayPal often relies on brand recognition and word of mouth advertising to promote its new products. While this has worked very well for traditional products, it has made it difficult for several of its newest offerings to gain traction. In the future as PayPal saturates its established markets and encounters competition in emerging markets, PayPal will face difficulties if additional expansion is not pursued. We have identified three new opportunities for PayPal: non-retail payments in US and remittance and mobile payments in emerging markets. Non-retail payments including rent, attorney fees, and contractor payments are an untapped market where millions of transactions take place. Due to the unique payment structure in these segments, PayPal can offer a very compelling value proposition in this payment space. For example, PayPal can set up a system tailored for renters that uses a larger flat fee and requires funding by debiting bank or PayPal accounts (for highest PayPal profit margins). Similarly, PayPal could address lawyers and contractors by developing payment solutions that enable incremental payments and up front advancements in a single invoice, thereby matching the needs of these industries payment methods. Remittances services are currently expensive and PayPal is in a unique position to leverage their existing online fund transfer infrastructure to offer a lower cost to customers. The Dominican Republic, Jamaica and Guyana have been identified as penetrable markets due to their large volume of both remittance fees and banking populations. In order to break cultural and consumer behavioral barriers, PayPal will need to conduct extensive marketing research and test acceptance levels in addition to building partnership with local institutions. Mobile payment platforms are leapfrogging traditional payment methods in emerging markets with a high proportion of unbanked population. India has been identified as a compelling mobile payment market due to the regulatory environment and high acceptance potential. The mobile payments industry has a substantial first mover advantage; we believe PayPal should move quickly to align mobile operators and banks in this region. In addition, PayPal should conduct extensive market research to be sure they understand the culture and buying behavior in India. All opportunities we’ve identified leverage PayPal’s existing infrastructure, core competencies, and current value offerings. Due to PayPal’s history of new product offerings not gaining traction as a result of ineffective promotion, we believe PayPal should devote more resources into advertising the sophistication and novelty of these new services. These recommendations will help PayPal to achieve its goal of being the global standard for online payment solutions.
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Introduction
PayPal Inc., a subsidiary of eBay Inc., is in the business of online payment solutions, acting as a secure middleman for transactions in ecommerce between online merchants or sellers and customers or buyers. It is an international company, supporting transactions in 19 currencies and with 44% of revenue from outside of the US 1 . In addition to basic online payment services it has begun developing additional payment services via mobile phones, browser add-ons, and more.
PayPal is aiming to become the “online payment network of choice around the world” 2 . PayPal currently has an 8.3% share of global ecommerce and plans to gain an increasing share of global ecommerce payments in the next decade by increasing the frequency of use of current services, developing new offerings, and expanding existing services to new markets.
Background
The merger of two companies, Confinity and X.com, created PayPal in 2000. PayPal grew rapidly, prompting eBay to acquire PayPal for $1.5B in 2002, when more than 50% of the eBay users preferred PayPal as a payment method 3 .
PayPal and eBay
PayPal has achieved a significant amount of its success due to its relationship with eBay. eBay provides PayPal with a large, protected market that plays a key role in building PayPal’s huge user base. eBay also increases the power of PayPal’s brand, offers a free avenue for advertising PayPal, and access to eBay’s adjacent Marketplaces 4 . However PayPal has expanded beyond eBay and provides services for many other online merchants, pulling in 49% of their Total Payment Volume (TPV) from non-eBay sources in Q2 2007 5 . Growth for PayPal depends on
1 2
www.paypal-media.com/documentdisplay.cfm?DocumentID=2260 eBay Annual Report, 2007 3 http://news.cnet.com/2100-1017-941964.html 4 eBay Annual Report, 2007 5 https://www.paypal-media.com/documentdisplay.cfm?DocumentID=2260
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increased growth in ecommerce outside of eBay, but eBay’s exclusive use of PayPal continues to provide an important barrier against PayPal competitors.
Today PayPal has over 63M active accounts, accepts 19 currencies in 190 markets, processes over $64B per year and has revenues of over $600M per quarter. PayPal’s TPV was approximately 9% of global e-commerce in 2007 6 .
Value Propositions
Buyers
For buyers who want to make payments online, the PayPal platform is a financial gateway that allows simple, private, and secure payments on a large number of websites. Unlike paying directly with credit cards online, paying with PayPal does not require sharing sensitive information such as credit card numbers on merchants’ websites and simplifies payment information entry to only an email address and password.
Sellers
For vendors who want to sell products online and collect payments electronically, the PayPal platform is a payment processing solution that allows them to accept secure online payments from customers in over 190 markets and in 19 currencies. Unlike online solutions provided by traditional merchant accounts, PayPal’s product can be set up quickly and easily and has a low cost transaction fee structure 7 .
6 7
https://www.paypal-media.com/documentdisplay.cfm?DocumentID=2260
eBay Annual Report, 2007
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Operations
Product and Services
PayPal’s principal product is their online global payments platform. The company offers an online payment platform for eBay and off-eBay accounts and merchants. Many companies carry PayPal as a payment option, including Barnes & Noble, Toys R’ Us, Southwest Airlines, Delta Air Lines, Blockbuster, among others.
PayPal offers other services to facilitate payments and money transfers. For example, PayPal Mobile is a way to check your PayPal balance, send request money and buy products online by using a mobile phone. PayPal Plug-In is another product that allows the user to use PayPal on the Internet anywhere that MasterCard is accepted.
PayPal also has other financial products such as the PayPal ATM/Debit Card, PayPal Plus Credit Card, PayPal Pay Later, PayPal Money Market Fund, among others.
Revenue Sources
The overwhelming majority of PayPal’s revenue is from transaction fees paid by online merchants. Typically, transaction fees are a $0.30 flat rate on top of 1.9 to 2.9 percent of the payment amount.
PayPal’s profit varies depending on the base source a customer chooses to fund the payment. When transactions are processed with a credit card, the majority of the transaction fee received by PayPal goes straight to the credit card company. However, when customers use money directly from PayPal accounts or bank accounts 8 , the transaction fee is nominally profit. Approximately 60% of transactions are processed with credit cards.
8
eBay Annual Report, 2007
4
Performance
PayPal’s revenue is almost directly related to the dollar amount of payments or TPV. PayPal’s revenue has been growing steadily at over 30% for the past three years to $1.8 billion in 2007 (see Exhibit 1). In addition, the percentage of off eBay revenue has improved from 35% to 42% in the past two years, indicating that PayPal is successfully improving revenue from merchant services and other off eBay offerings. PayPal also has a substantial international offering: over 44% of its revenues are from non-US sources 9 .
Current growth strategy
PayPal’s growth strategies can be divided into three categories—strategies within established markets, expansion to new geographies, and development of new services.
Growth in Established Markets
In established markets, such as the U.S. and Australia, PayPal enjoys excellent brand recognition and a large user-account base. In these markets, PayPal’s goal is to increase customer usage. To achieve this, PayPal is partnering with large corporations and exploring strategies to increase PayPal’s share of eBay transactions. Last year, PayPal partnered with Barnes and Noble, Toys R’ Us, and several other large retailers in the US. Little advertising effort is put into attracting small online merchants 10 , but PayPal’s brand and simple solutions for integrating one-click payments and shopping carts on these websites continues to draw new businesses.
PayPal’s general strategy is to keep operating costs low by spending very few resources on advertising. Instead PayPal relies on word-of-mouth, eBay, and merchant customers 11 (with the PayPal button on websites) to maintain and increase awareness of PayPal’s primary product. By
9
eBay Source Interview with Jeff Lowman, PayPal Strategy Group conducted by the group, Nov.2008 11 Add more stuff: web developers, online news, tech blogs, etc.
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targeting big merchant customers like Barnes and Noble, PayPal further increases visibility, market penetration, and user accounts.
Expanding to Emerging Markets
Expanding to new geographical territories is one of PayPal’s core focuses 12 . Its transactional revenue growth rate within US dropped from 36% in FY2006 to 22% in FY2007 while that of international maintained 46%. Yet despite significant effort, not all of PayPal’s endeavors to enter foreign markets have been successful.
Failure in China and Lessons Learned
In attempts to capture some of the 220 million potential online shoppers in the China’s ecommerce market, PayPal rolled out PayPal.cn in 2005. However, by mid-2007, PayPal’s share of China’s third payment market was only 1.6%. The setback was largely attributed to nuances and challenges of online payments in China market. These include ambiguous governmental regulations, consumers’ continued preference for cash payments, low credit card usage, and online payment restrictions for debit card users. In the end, PayPal’s failure in China boiled down to their inability to understand the local market and culture 13 .
The experience in China harshly reminded PayPal that a successful rollout requires two things: the technical infrastructure and an understanding of users’ buying behavior in that local market. If and when PayPal expands into Asia, South America, and southern Africa, the lessons from China will likely prompt extensive market research so that a platform tailored to the unique needs of the market can be implemented.
Interview with Jeff Lowman Taobao has a layout that is similar to a Chinese department store with separate sections for women’s and men’s department. In contrast to Taobao, eBay Eachnet provided no phone support and discouraged buyer-seller contact that could lead to haggling.
13
12
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New Product Development
PayPal is currently acquiring and developing several new products and services. Some of their recent offerings have been PayPal Mobile in 2006 14 , PayPal Plug-In (November 2007) 15 Bill Me Later 16 , and they even have plans to add a credit product to their offerings. This December PayPal is beta testing PayPal Student Account, a service that is similar to an online allowance 17 . Finally, an iPhone application has recently been produced 18 and continues to be under development 19 .
Although many of their new products sound promising, their track record for promoting many of their previous products has been poor.
Critique of growth strategy
PayPal relies too heavily on brand recognition and word of mouth advertising to market and sell its new product offerings. PayPal’s association with eBay and strong brand recognition were effective marketing tools for their well-known online payment platform, however this company image and branding does not extend to new services that are significantly different from PayPal’s typical offerings.
The president of PayPal recently admitted that the mobile platform has not succeeded in the US 20 even as mobile financial transactions are attracting new competitors and expanding as a market in the US and abroad 21 . While new products and services are continually being bought and developed, it seems that these products are developed and then left unused by the majority of PayPal users. PayPal needs to put more effort into marketing and promoting their new products or stop wasting resources developing them.
14 15
http://www.techcrunch.com/2006/03/22/paypal-mobile-launches-and-its-awesome/ http://www.reuters.com/article/technologyNews/idUSN1840572920071119 16 http://premium.hoovers.com/subscribe/co/overview.xhtml?ID=ffffjrytrrxyjcrhxy 17 http://bits.blogs.nytimes.com/2008/12/01/paypal-brings-the-weekly-allowance-into-the-21st-century/ 18 http://www.finextra.com/fullpr.asp?id=22340 19 Interview with Jeff Lowman 20 http://www.americanbanker.com/article.html?id=20080324AZ23ATWO 21 http://www.multicellphone.com/obopay-mastercard-partnership-for-mobile-payment-service/
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New opportunities / strategies for growth
Three areas have been identified as large markets that will integrate well into PayPal’s existing infrastructure, core competence, and value offering. These areas include:
Non-retail payments As PayPal expands to more financial services, specific solutions and fee rates should be considered to draw in new types of transactions such as rent, professional service fees (i.e., contractors, lawyers), and more.
Remittances As PayPal is globally available, they have the opportunity to simplify remittances for users.
Mobile payments in emerging markets PayPal can use its mobile payment technology to become established in new geographies where mobile phone penetration is high and non-cash financial solutions are needed.
NonRetail Payments Opportunities
The identified non-retail opportunity for PayPal is the creation of payment platforms tailored for rental payments, independent contracting payments, professional services paymentscharity payments, etcetera. The total payment volume for contractor and attorney payments is $300B and $240B respectively (see Exhibit 2) 22 .
Independent contractors and lawyers share a similar and unique payment structure that is based off of an advancement of initial start up funds and incremental payments throughout the clientcustomer relationship. Due to the uniqueness of this payment structure, we believe PayPal can offer a very compelling value proposition in the contractor and lawyer payment space. Similarly, tenants typically pay rent on a monthly basis after an initial larger security deposit.
22
See Appendix-Non-retail Payment Calculation for details of market sizing.
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Incentives for New Contracting Payment Solutions 23 Today, contracting payments are predominantly made by check, however, there are many incentives to switch to instant electronic payments: eliminate the need to place liens on property while waiting for checks to clear, eliminate weekly bank runs to finance operations, eliminate carrying large sums of cash for materials purchases, enabling electronic payment of employees and subcontractors, and increasing accountability and documentation of contractor operations.
Incentives for New Attorney Payment Solutions Today, we estimate that over 40% of lawyer payments and money transfers are via check. For smaller firms and independent lawyers that only accept check, waiting for checks to clear - or even worse, dealing with bounced checks - hampers business. In addition, the nature of the attorney-client interaction lends itself to a payment structure where clients are forced to make small payments throughout the interaction, creating many opportunities for checks to bounce. Obviously credit card payment solutions would mitigate most of this hassle, however many small firms have not adopted this payment method due to infrequency of use. A professional payment / billing solution (that accepts credit card), would alleviating hassles with checks and in addition would likely increase the perceived level of sophistication and image that the client has for the attorney.
Incentives for new rental payment solutions Rent is most frequently paid by check, cash, or money order, although some landlords now offer credit card payments in person each month or automatic debiting of the tenant’s bank account 24 . Most of these methods either involve the tenant mailing the payment to the landlord or walking to the rental office, both inconvenient for the tenant. The automatic debiting requires the tenant to give out sensitive bank account information to the landlord or other party conducting the
We define independent contractor payments as fees paid whenever someone comes to a residence or business to make repairs (i.e., plumbing, electrical) or modifications (i.e., remodeling, painting). 24 Stewart, Marcia. “Every Tenant’s Legal Guide.” Nolo, 2007.
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transactions. For tenants with Internet access or home or work, paying the rent via the Internet in a secure and optionally automatic way would simplify life.
In March 2008, 82% of households had Internet access 25 . Of the 116 million households in the US in 2007, 69% households were owned and 31% rented (see Exhibit 3) 26 . Therefore, approximately 35 million households pay rent.
Recommendations for new payment solutions Because contractors and lawyers share a similar payment structure, several payment solution characteristics will be compelling to both customers. For example, both lawyers and contractors would value a payment architecture with an invoice that could grow throughout the interaction and be paid off intermittently as various fees are addressed. For the lawyer, this may be retainer fees, billing for services, filing fees, et-cetera; for the contractor this may be advancing payments for materials purchases, start-up costs, or weekly payments. Additionally, lawyers and contractors might both value a platform that can store detailed records of accomplishments at each payment step so the customer can view them in an online invoice and for record keeping. Partnerships with shopping cart providers should ease PayPal’s burden of developing these solutions.
A new revenue model These offerings would be different enough from their current products that they may require a new revenue model tailored to suit the needs of the new customers. For example, when dealing with large payments of over $500 per month 27 as in a typical rent or lawyer payment (see Exhibit 4 for rental costs breakdown by amount), PayPal’s current fee structure of taking a percentage of the transaction may not be feasible. However, PayPal could set up a system that uses a larger flat fee and required funding by debiting bank or PayPal accounts (for highest PayPal profit
25 26
http://www.webpronews.com/topnews/2008/05/14/18-of-us-households-have-no-internet-access http://www.census.gov/population/socdemo/hh-fam/cps2007/tabH1-all.xls 27 http://factfinder.census.gov/servlet/DTTable
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margins). This would be easy to implement with PayPal’s current infrastructure, and the added convenience for both parties would be well worth a few dollars to customers.
Targeted marketing For contractors, marketing would probably be most effective in Home Depot catalogs and other places where contractors are likely to look. Likewise, for lawyers or renters, the service could be marketed in lawyer magazines, traditional lawyer channels and home owner magazines, respectively. Following the early adopter phase, reference-based vertical marketing should be used for each identified market segment. For example, in the contractor industry, the payment solution will work for electricians, contractors, plumbers, architects, builders, etc.
Remittances
PayPal should enter the remittance services market from the U.S. to Latin America and Caribbean countries (LAC). Remittances from the U.S. to LAC were approximately $50 Billion in 2007 28 and experienced a positive growth rate of 6% from 2006 to 2007 29 (see Exhibit 5). Also, PayPal can use remittances to enter new global markets without additional product development.
Matches Core Competencies and Goals Providing remittance service to LAC opens the door for PayPal to provide other services (such as e-commerce) to LAC. This is a straightforward way to be a first-mover in these markets.
Additionally, PayPal already has extensive knowledge and technical skills needed to deal with currency exchanges and money transfers across different countries. With these abilities, handling remittance to LAC should pose no trouble for PayPal.
28 29
International Fund for Agricultural Development (IFAD) and the World Bank Paulina Ibarra. US Slowdown Affects Remittances in LAC. The World Bank: April 8, 2008.
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Factors that Facilitate Entry into Market
30 The remittance market is highly fragmented. There are no mature markets in LAC . Besides
Mexico, the major MTOs (such as Western Union, MoneyGram, Vigo, and etc.) have less than 20% of the market. Remittances play an increasingly large role in the economies of LAC, contributing to economic growth. Remittances receivers help increase banking, reduce poverty
31 and social inequality . Due to these benefits, many governments promote the sending of
remittance through banks.
Market Size PayPal’s potential market size in remittances from the U.S. to LAC is approximately $2.4 billion after filtering out the red herring information (Exhibit 6) 32 . Estimating that PayPal will gain a 15% market share and charge a 3% fee (lower than the lowest average fee on remittances at 3.9% in El Salvador 33 ) 34 , the revenue to PayPal would be $10.6M, (1% of PayPal’s profits now).
Additionally, the market for remittance to LAC is growing in three fronts: amount, channel, and banks. Remittance market, even after being affected by the U.S. economic downturn, still shows positive growth of 6% between 2006 and 2007. Second, the switch form informal channel to formal is increasing in many of the LAC countries. Countries such as Mexico and the Dominican Republic have remittance through formal channels at a rate of 85% and above . Lastly, there is a rise in the number of remittances performed through banks, which corresponds to increasing
35
Manuel Orozco. The Remittance Marketplace: Prices, Policy and Financial Institutions. Georgetown University: June 2004. 31 Conference Report: Research on Remittances to Latin America and the Caribbean. Inter-American Dialogue: March 14, 2007 32 Of the $50 billion in remittance, approximately 43% is actually performed through formal channels32. Within this 43%, the average number of transactions remitted through banks is about 11% 33 USD 2.4B in remittance, the average cost of remittance ranges from as low as 3.9% in El Salvador to about 11.66% in Barbados (with an average of 8.25%, see Exhibit 9) 34 Manuel Orozco. The Local Economy and Local Governments’ Responses to Remittances in Latin America ad the Caribbean. Inter-America Dialogue: June 2008. 35 Lenora Suki. Competition and Remittances in Latin America: Lower Prices and More Efficient Markets. Columbia University: February 2007.
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number of receivers who own bank accounts. As shown in exhibit 9, in countries such as Dominican Republic, Guyana, and Haiti, more than 60% of recipients of remittances have bank accounts.
We have analyzed the sensitivity of PayPal’s potential revenues to factors such as changing in overall remittance market size, formal channels usage, bank usage, PayPal’s market penetration and fees is shown in Appendix . It is surprising to see that PayPal’s potential revenue is most sensitive to changes in number of remittance through banks. A 1% increase in bank usage will result in a 9% increase in revenue or $6.7M for PayPal. This is very good for PayPal because many governments of LAC countries are working together with the U.S. to educate, facilitate, and improve remittance channels, especially banking channels. Programs such as the New Alliance Task Force (NATF) have been created in the US to increase the amount of immigrants with bank accounts and promote financial education among these communities.
36
Moreover, to
solve the problem faced by the migrant workers related to inaccessible to formal channels due to the lack of accepted identification documents, new identification cards have issued by the LAC countries. All these programs work to both encourage the migrant workers to send money through formal channels and increase their enrollment in bank accounts. These help expand the part of remittance market that PayPal can enter.
Recommendation to PayPal Regarding Remittance In order for PayPal to successfully enter this market, we have two recommendations. First, enter countries with high remittance fees and a high percentage of population with bank accounts (mainly because PayPal will only consider markets where the financial institutions are already in place 37 ). Table below is a list of countries that PayPal should consider based on these two criteria.
36
United States Government Accountability Office. International Remittances: Information on Products, Costs, and
Consumer Disclosures. Report to the Committee on Banking, Housing, and Urban Affairs, U.S. Senate: November 2005.
37
Interview with Jeff Loman, a global strategist working at PayPal Nov 2008
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Dominican Republic Jamaica Guyana Haiti
Remittance Fees (%) 6.4 8.2 10.14 6.7
Average Transfer (USD) 176.00 209.00 179.00 123.00
Annual Volume (USD in M) 2,410 1,651 270 985
Recipients with Bank Account (%) 66 65 62 68.4
Moreover PayPal needs to develop relationships with banks and credit unions in the developing countries through revenue sharing, technology transfer, and/or partnership. 86% of the remittances that are distributed in LAC region are cash payment picked up at office, branch, or other distribution points (see Exhibit 11). Only 4% is direct credit to an account. Therefore, in order to succeed in these developing countries, PayPal would require the financial institution to serve as a distribution channel.
Mobile Payment in Emerging Markets
The slow adoption of PayPal Mobile in the US market does not imply that the mobile payments business is not promising. According to a study made by Gartner there is still huge growth expected – Mobile payment is a service at an early stage with an expected 32.9 million users worldwide in 2008, growing to 103.9 million users in 2011 38 . In this same study, Gartner also notes that:
"The service [mobile payments] is easier to justify in emerging markets, where many people are unbanked or underbanked, and there are few payment options...In developed markets banks should be aware of alternative services from nonbanking institutions, such as PayPal and Obopay, that can compete on lower fees and faster transactions and that are more proactive on the mobile front”
Therefore, we believe that PayPal should consider launching its mobile payment proposal in a market that embraces this technology and that has a higher need for this service than the US.
38
Gartner, "Dataquest Insight: Mobile Payment, 2006-2011"
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Asia/pacific accounts for 85% of the total mobile payment users in the world and will be the highest growing region in the next years.
Every participant that wants to be a relevant player in mobile payments should be in Asia that is why we recommend that PayPal focus in this market.
There are basically two different technologies to make mobile payments 39 , Near Field Communications (NFC) and SMS. NFC is a technology based in RFID that requires implants in the handset and the merchant’s POS to make the transaction and it is usually used for retail and transportation payments. The technology is advanced but its business model is relatively complex to implement because it requires the alignment of different players. An SMS-based service is simpler to deploy because it does not require a special handset it only requires the negotiation of usage of mobile operator’s network. SMS PayPal’s technology is SMS based which is also the leading technology for P2P payments, buying entertainment content and some mobile banking services. To determine which market to enter is important to consider the technology they use and the need of a P2P service.
There are 4 different segments of countries in the Asia/Pacific region 40 : The leaders: Japan and Korea The mobile tigers: Hong Kong, Singapore and Taiwan The mid-market: Thailand and Malaysia The giants: China, India, Philippines and Indonesia Japan and Korea were early adopters of mobile technology and similarly of mobile payments. These are mature markets where there are strong established players and where NFC is highly
39
http://takemetoyourleader.com.Present and Future of Mobile Payments, August 29, 2008, Rob Gonda KPMG, Mobile Payments in Asia Pacific, 2007
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implemented and dominated by a few operators. There is little room for PayPal in this market because the incumbents are very strong, the market adopts cutting edge technologies and P2P transactions don’t have much traction.
The mobile tigers are the most highly mobile penetrated countries in the world but have little adoption of mobile payments, just NFC for transportation services and for some retail stores. These are also mature markets that have demonstrated little interest in mobile payments and where users are not looking for new payment methods besides the traditional ones.
The mid markets are starting to adopt NFC technology and are focusing more on bill payments and mobile banking. There is a growing opportunity for Person-to-Person payments and content distribution but these markets are small and there would not be much scale to put some effort in developing the mobile payments business.
India and China have a large number of mobile subscribers and therefore a large potential for mobile payments, Philippines and Indonesia have a large number of users of SMS. In this segment is where the opportunity for PayPal resides, specifically in China and India.
Philippines is already doing a lot of use of SMS payments but it has rooted players in the business and therefore is difficult for a new entrant to gain market share. Indonesia represents a large opportunity because there is interest in moving further in mobile payments adoption but this country is highly risky because it has the largest number of fraudulent electronic transactions in the world.
Both China and India represent the most attractive markets. First, their size represents a huge opportunity – China has around 600 million mobile users while India accounts for 315 million. Second, there is a real need for person to person mobile services because both countries have low banking adoption, most of the transactions are cash-based and there is huge commerce activity between people in far away regions – China has 73 ATMs per million people, India has 25 16
compared with the US that has 1,353 – China has 457 Point of Sale Systems per million people, India has 270 and the US has 8,647.
However, given the failure that PayPal already had in China with its online payments attempt, the strong positioning of the local players and the difficult regulatory environment of the country, we would recommend that PayPal enters the Indian market. India represents a larger opportunity of people outside of the banking system with less payment options and it is a good fit for PayPal because it can leverage its brand since it is already a player in the online payments business.
Obopay, an American player in this arena already entered the Indian market this year, which we also think is a good sign. But for this same reason and the fact that this business relies in building a huge network of users in a timely manner, we believe that PayPal should move fast into aligning Indian mobile operators and banks to have a sound start.
Conclusions
PayPal is in an excellent position to develop compelling electronic payment solutions for several large and growing markets. Non-retail payments: interactions where large amounts of money are transferred in a unique billing/payment structure (for example, lawyers, contractors, rent) are opportunities where PayPal has the ability to develop extremely attractive payment solutions and leverage its trusted brand name to help with product launch and marketing. Emerging market mobile payments: as emerging markets leapfrog traditional payment methods and embrace the convergence of applications into the phone, there will be a huge opportunity to spread a mobile payments solution around the world. PayPal can leverage its brand as a trusted player in the online payments business to help align the mobile operators and banks that will be required for these initiatives to be successful. Remittance: PayPal’s end goal is to have a presence in the Latin America and Caribbean countries and to serve the e-commerce in these locations. Remittance, not only can act as a bridge to this goal, but also it can be a significant source of revenue at the present time. Building from PayPal’s existing electronic fund transfer infrastructure, PayPal can lower the cost of remittance for end users. 17
In the past, PayPal’s non-traditional offerings have had difficulty gaining traction. To succeed in the future, PayPal will have to re-think its practice of relying mostly on branding and word of mouth advertising to launch and market its new offerings. In addition, as PayPal moves into international markets, the company must be poised for market research due diligence; the mistakes from the China expansion showed firsthand the value of understanding the culture and buying behavior in the markets they wish to penetrate.
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Appendix
Nonretail Payment Calculations
Contractor payments US market I. Estimate of number of contractor market size (US): There are currently 316k licensed contractors in CA 41 . The population of CA is estimated at 37M, therefore approximately 1 in 120 CA residents is a licensed contractor. Assuming 300M people live the US 42 , we can use the above 1/120 ratio to approximate the number of independent contractors in the US; the answer is 2.5M.
II. Estimate of contractor payment market size (US):
• • • •
2.5M licensed contractors $60k average contractor salary 43 (labor costs) Estimate that labor and material costs are equal (conservative) 2.5M*$60k*2 = $300B US market for contractor payments.
Attorney payments US market
•
Approximately 1.1M active lawyers in US 44 2k billable hours per year (40x50) Estimate 60% occupancy $300 per hour average bill rate 45 1.1M*2k*$300*0.6 = $400B US market for attorney payments Assume 60% of lawyers’ services are monetized by hourly billing $240B market for client to lawyer payments with check/credit card.
• •
•
• • •
41 42 43 44 45
http://www.cslb.ca.gov/ http://quickfacts.census.gov/qfd/states/06000.html http://www.simplyhired.com/a/salary/search/q-Independent+Contractors/l-Anaheim,+CA http://www.abanet.org/ Laffey Matrix: http://en.wikipedia.org/wiki/Laffey_Matrix
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Tax preparation payments US market
• • •
155M individual Federal returns filed in 2008 46 80% returns done professionally (125M) 47 $300 average filing fee 48 125M*$300 = $37B market 40% of TPV is channeled through ''check only" firms $15B market size for "check only" based tax preparers $22B market size for "check + credit card" based tax preparers
• • • •
PayPal’s Potential Revenue Sensitivity to Market Conditions in the Remittance Market
46
http://www.irs.gov/newsroom/article/0,,id=188359,00.html. 30M out of 155M are e-filed from the home with software like "TurboTax". 47 http://www.irs.gov/newsroom/article/0,,id=188359,00.html. 30M out of 155M are e-filed from the home with software like "TurboTax". 48 Bruce Moeller, CPA, J.D 394 Bell Marin Keys Blvd. Suite 1, Novato, CA 94949
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Exhibits
Exhibit 1. 2005 – 2008Q3 PayPal Performance
Exhibit 2. Market Size of non-retail payment in the US. (All assumptions used to generate these data are listed in the Non-retail Payment Calculation in Appendix)
Exhibit 3. U.S. Households breakdown by Tenure for 2007.
US Households by Tenure 2007
1%
30%
Own/Buying Rent No Cash Rent
69%
22
Exhibit 4. U.S. households breakdown by Rental Costs per Month for 2005.
Households by Rental Costs Per Month 2005
6% 15%
7% 18% Below $250 $250- $500 $500-$1000 $1000-$1500 $1,500 or more
54%
Exhibit 5: Remittance from the U.S. to Latin America and the Caribbean in (US$ Million) in 2007. The figure is taken from Inter-American Development Bank’s Multilateral Investment Fund (IDB-MIF).
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Exhibit 6: The growth and the nominal amount of remittance from the U.S. to LAC countries. Picture taken from Remittances Ebb and Flow with the Immigration Tide by Federico S. Mandelman, ECON South: Volume 10, Number 3, Third Quarter 2008.
Exhibit 7: Process steps for remittance through formal channel from U.S. to Latin countries. Picture taken from The Remittance Marketplace: Prices, Policy and Financial Institutions by Dr. Manuel Orozco at George Town University: June 7, 2004.
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Exhibit 8: Survey of Latinos remitting to Latin America in July 2007. Table taken from Toward the mainstream: current trends and dynamics of remittances to Latin America and the Caribbean by Manuel Orozco. Inter-American Dialogue: February 2008.
Exhibit 9: Remittance transfers details broken down for each LAC countries. Data collected by Central Banks of each country and World Bank Development Indicators (* 2005; ** 2003 data). The Local Economy and Local Governments’ Responses to Remittances in Latin America and the Caribbean. Inter-America Dialogue: June 2008.
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Exhibit 10: Table showing remittance and other indicator. Table taken from Toward the mainstream: current trends and dynamics of remittances to Latin America and the Caribbean by Manuel Orozco. Inter-American Dialogue: February 2008.
Exhibit 11: Remittance distribution in LAC region. Picture taken from Competition and Remittances in Latin America: Lower Prices and More Efficient Markets by Lenora Suki. Columbia University: February 2007.
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Exhibit 12: Mobile payment users share - worldwide estimated for 2008. Values take from Gartner, "Dataquest Insight: Mobile Payment, 2006-2011" World Mobile Payment Users Share ‐ 2008
3% 1% 11% Asia/Pacific U.S. W. Europe Others
85%
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