Following in the footsteps of Amazon's efforts in the payments space, PayPal announced a new service they're calling Adaptive Payments (TechCrunch has the new API posted). It allows merchants/developers to become payment aggregators whereby they can accept and dynamically distribute payments among multiple parties. It's a great move by Paypal that leverages the network of users they've built over the past decade as well as their global payments capabilities, but there are some limitations. I think there are a few things to note.
Context
Paypal has overcome several limitations and or unappealing features of traditional payment methods (check and credit card - I'm excluding cash in this discussion) and payment channels (banks and wire transfer services). For example, for an individual to pay someone, instead of writing a check or sending a wire transfer, a Paypal user can easily send money to another Paypal user.
Credit cards, which are used for a substantial percentage of all commerce in the U.S. and around the world, were built around a 1:1 relationship between cardholder and merchant. However, not user to user (though MasterCard just recently announced a transfer service using Obopay's platform). This is one structural limitation that has provided Paypal the opportunity to grow like it has.
Target Opportunity
Adaptive Payments solves a few key problem for merchants and developers: 1) global B2B, B2C and C2C money transfers. A U.S. business can accomplish the same payment flexibility as Paypal's new service by using electronic funds transfers (EFT) domestically, and not require that the recipient have a Paypal account. However, things get complex and there are several limitations when expanding outside of the U.S. 2) Paypal service eliminates the need for recipients to have a bank account and 3) dynamic, global and multi-party payment distribution.
Limitationsof Adaptive Payments
According to Paypal's API's, all payment participants are required to have a Paypal account: “The payment sender, receiver(s), and application owner must each have a PayPal account. Senders and receivers may have personal accounts; however, application owners must have business accounts.” The solution works for prearranged payment distribution relationships as the barrier to participate is setting up a new Paypal account beforehand.
For realtime, non-prearranged payment situations, this solution has a serious drawback which could hinder it's adoption. Paypal has no choice but to maintain this requirement because payments have to stay on it's network. In other words, in some situations, its greatest strategic asset may also turn out to be its Achilles heel.
Network Effect
I think the big story in all of this is the following: the major card brands such as Visa, MasterCard, American Express and Discover have done an exceptional job over the years building a global network of cardholders and accepting merchants to facilitate commerce. It's now a global standard. They have built substantial barriers to entry for others (look at Revolution Money who has raised around a $100 million to try and penetrate the U.S. market).
Collectively, the internet, globalization, social networks, and mobile phones have been shifting the payments landscape and reducing these barriers. It's the wave that Paypal and other innovators have been riding and has turned what was a potential threat and minor scratch for the card brands into an open wound.
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Following in the footsteps of Amazon's efforts in the payments space, PayPal announced a new service they're calling Adaptive Payments (TechCrunch has the new API posted). It allows merchants/developers to become payment aggregators whereby they can accept and dynamically distribute payments among multiple parties. It's a great move by Paypal that leverages the network of users they've built over the past decade as well as their global payments capabilities, but there are some limitations. I think there are a few things to note.
Context
Paypal has overcome several limitations and or unappealing features of traditional payment methods (check and credit card - I'm excluding cash in this discussion) and payment channels (banks and wire transfer services). For example, for an individual to pay someone, instead of writing a check or sending a wire transfer, a Paypal user can easily send money to another Paypal user.
Credit cards, which are used for a substantial percentage of all commerce in the U.S. and around the world, were built around a 1:1 relationship between cardholder and merchant. However, not user to user (though MasterCard just recently announced a transfer service using Obopay's platform). This is one structural limitation that has provided Paypal the opportunity to grow like it has.
Target Opportunity
Adaptive Payments solves a few key problem for merchants and developers: 1) global B2B, B2C and C2C money transfers. A U.S. business can accomplish the same payment flexibility as Paypal's new service by using electronic funds transfers (EFT) domestically, and not require that the recipient have a Paypal account. However, things get complex and there are several limitations when expanding outside of the U.S. 2) Paypal service eliminates the need for recipients to have a bank account and 3) dynamic, global and multi-party payment distribution.
Limitations of Adaptive Payments
According to Paypal's API's, all payment participants are required to have a Paypal account: “The payment sender, receiver(s), and application owner must each have a PayPal account. Senders and receivers may have personal accounts; however, application owners must have business accounts.” The solution works for prearranged payment distribution relationships as the barrier to participate is setting up a new Paypal account beforehand.
For realtime, non-prearranged payment situations, this solution has a serious drawback which could hinder it's adoption. Paypal has no choice but to maintain this requirement because payments have to stay on it's network. In other words, in some situations, its greatest strategic asset may also turn out to be its Achilles heel.
Network Effect
I think the big story in all of this is the following: the major card brands such as Visa, MasterCard, American Express and Discover have done an exceptional job over the years building a global network of cardholders and accepting merchants to facilitate commerce. It's now a global standard. They have built substantial barriers to entry for others (look at Revolution Money who has raised around a $100 million to try and penetrate the U.S. market).
Collectively, the internet, globalization, social networks, and mobile phones have been shifting the payments landscape and reducing these barriers. It's the wave that Paypal and other innovators have been riding and has turned what was a potential threat and minor scratch for the card brands into an open wound.