Business Report

In Fictional Mall, Clues to PayPal's Strategy

The Internet payment giant is trying to break into brick-and-mortar retail.

Hidden near the lobby of PayPal’s headquarters in San Jose, California, is a small shopping center. There’s a hardware store with well-stocked shelves, a coffee shop, and even a chic boutique boasting hip bags and leather boots. The only thing missing: customers.

Faux sale: Goods on display at the fictional Hudson + Vestry boutique, part of a mock shopping center PayPal uses to demonstrate payment technology. A display at rear shows the profile of a customer.

That’s because this impeccably neat minimall is actually a showcase created by the online-payment behemoth to give visiting merchants—and journalists like me—a peek at how PayPal hopes to dominate the way people pay for stuff in the so-called real world, too.

Some of the experiments on display began to reach malls and checkout counters this month. That’s when Home Depot became the first large retailer to begin accepting PayPal at its payment terminals. The company also unveiled PayPal Here, a triangle-shaped credit card reader that plugs into a smart phone. It’s similar to the reader sold by the mobile payment startup Square.

PayPal’s new brick-and-mortar strategy marks a big shift for the company, which got its start by giving small merchants a way to accept credit card payments online for a fee. That niche has grown rapidly, and last year PayPal (which was acquired by eBay in 2002) processed $119 billion in transactions, including $4 billion from mobile devices like phones and tablets.

E-commerce continues to grow rapidly but still accounts for only 9 percent of all U.S. retail sales, according to comScore. The remainder occurs in physical stores, which explains why retail payments are rapidly becoming a battlefield contested by tech companies including PayPal, Google, and even mobile-phone operators.

Sam Shrauger, a PayPal veteran responsible for the company’s product strategy, says the company’s ultimate goal is to get all the stuff in your actual wallet—credit cards, debit cards, gift cards, coupons—working together in a digital fashion, to give you more flexibility in how, and when, you pay for things.

While it might sound risky to launch so many new products at once, Rick Oglesby, a senior analyst with Aite Group, says the strategy appears to be working. “They have a very ambitious, cross-ecosystem approach, which I think is significant,” he says. “That makes them a very disruptive force across a big swath of the business.”

Accepted here: Credit card terminals at Home Depot now accept PayPal. Payments are made by entering a phone number and a PIN.

One advantage for PayPal is that it already has 106 million active users globally and is a familiar brand. “It’s really extending an existing relationship versus creating a brand-new one, and I think that positions them extremely well,” says Forrester Research analyst Denee Carrington.

A big challenge, says Carrington, will be getting large merchants to accept PayPal. That’s why the Home Depot deal is significant. The system allows you to pay with PayPal by entering a cell-phone number and a PIN. On a recent trip to a store near San Francisco, I sidled up to the checkout counter with a bottle of carpet cleaner and entered my digits at the existing card-swiping terminal. It wasn’t faster than handing over cash or swiping a card, but avoiding those motions felt both illicit and cool. (I already had a PayPal account, but before my shopping trip I had to go online to set up a PIN and enable the new feature, which is called “store checkout.”)

Given the expected growth in mobile-phone payments, PayPal is also working on extensive changes to its smart-phone app—currently just a version of its website interface optimized for phones. For instance, starting in May, PayPal will begin letting you change the way you pay for a purchase after the fact. Maybe you used your credit card to purchase a $500 TV, and a day later decide it would be better to put $300 of that on your debit card. PayPal’s phone app will allow you to make the switch, as will its website. “What is really hard right now is to use our money in the ways that are most easily tailored to what it is we’re trying to do,” says Shrauger. 

What’s next? PayPal’s ideas for how its technology could evolve were on display in the faux mall. I was given a tour by Josh Schoonmaker, an actor and expert in “experiential marketing” who used a variety of iPhones and wall-mounted screens to illustrate how PayPal thinks people will shop in the near future.

Mobile wallet: A phone app in testing by PayPal would allow consumers to redeem coupons and choose from several ways to pay.

First, we stopped at the mock hardware store, DIY Tools, where Schoonmaker described a consumer who wants to buy a grill but isn’t quite ready to make the leap, so he puts it on a wish list within his PayPal smart-phone app. Walking by the store, the consumer would receive an alert on his phone from DIY Tools—a store he has authorized to send him ads—offering him $75 off on grills. “We know he’s got a grill on his wish list, so we can say, ‘Oh, this actually matters to you,’” said Schoonmaker. The consumer could then add the coupon to his phone’s digital wallet, and $75 would be automatically deducted from his total when he bought a grill from the store.

Schoonmaker then led me to Hudson + Vestry, PayPal’s fictional boutique. Imagine, Schoonmaker said, that the store was closed when a fictional shopper, Karen, came by to check out some boots in the window display. No matter—Schoonmaker showed me how Karen, a member of the store’s loyalty club, could scan a QR code on the ‘s window and receive an offer for $1,500 in credit that she could use to make purchases later that day (this overture would come from Bill Me Later, which is a short-term credit service PayPal owns). Karen could even use a Hudson + Vestry-branded page inside the PayPal app to view the boots in the desired size and color and to put a pair on hold.

The merchant would see Karen’s request and could respond by slyly placing a matching leather jacket near the boots in the store. That way, Schoonmaker said, “when Karen comes back in, as a store owner, I’m ready to go.”

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