PayPal makes its money by giving away payment services to senders as a free service and charging recipients to receive the money. But, all recipients aren't treated equally - depending upon how PayPal views what kind of recipient they are: a personal users or a business. PayPal has three basic classes of accounts: Personal, Premier, and Business. Most small businesses operate as Premier accountholders while the Business account offers additional features for managing multiple employees accessing a business PayPal account, etc. For this discussion, we'll treat Premier and Business accounts the same - they're by and large business users, even if the business is a small one.
Personal recipients can receive funds without paying any fees up to a maximum (for US accounts) of $500 each month. So, for small value person to person payments, PayPal collects no fees when both sender and receiver are using only personal accounts and the two accounts are using the same currency (PayPal can make money from currency conversion fees if the two accounts are denominated in different currencies). Note also that personal recipients can't receive fees funded by a sender from a credit or debit card. If a sender does send them funds from a credit card, PayPal forces the user to upgrade from personal to business status and then collects fees from the sender - or requires the user to decline receiving the funds if they decide not to upgrade from a personal account.
One rationale for forcing this upgrade is purely financial - PayPal has to pay fees as a merchant on any credit or debit card funding transactions and it doesn't have the ability to recoup those fees from personal account receivers. The other rationale for forcing this upgrade is more subtle: ensuring PayPal stays in compliance with card association acceptance rules.
If the recipient is a business (all TTB receivers will almost certainly be classified as businesses), then PayPal charges fees for domestic payments ranging from 2.9% (plus 30 cents per transaction) down to 1.9% depending upon monthly transaction volume (fees charged for international payments are 3.9% to 2.9%). PayPal's Fee Schedule provides a summary of these fees.
So, bottom line, PayPal Mobile makes money from those payments where you're sending money to a business - with TTB being just one example of such a payment, but not when you're sending money to another personal account holder. PayPal also makes some incidental revenue from currency conversion where payments are being sent internationally.
Is That All There Is? What's Missing In PayPal Mobile
Any rudimentary analysis of the mobile payments space would differentiate between payments between remote parties and payments made face-to-face at a physical point of sale. At this time, PayPal Mobile appears to only address the remote party case - and says nothing about providing consumers more convenient payments at physical point-of-sale locations.
This isn't too surprising - as there's no infrastructure yet built to be able to accept those payments. Some suggest that as contactless RFID readers get deployed that mobile payments will emerge as more important than contactless card-based payments - but that's yet to be seen.
PayPal CEO Jeff Jordan is speaking to the wireless industry's CTIA conference in a few weeks. Presumably he's not going to talk about PayPal Mobile as we see it today but, rather, will talk about partnering opportunities between PayPal and the wireless carriers. Otherwise, why would he be there? These partnering efforts could involve addressing physical point-of-sale opportunities or, perhaps more likely in the near-term, involve a more elegant (and, to the consumer, convenient) "wallet" application on the phone - a step that does require the cooperation of the wireless carrier to get there (unlike basic SMS).
Other Thoughts and Reader Comments
Below are some other thoughts about PayPal Mobile from some of the partners at Glenbrook and as received from other Payments News readers and "friends of Glenbrook".
Leaked to the blogging community and operational only for a few days, PayPal has become the 800 pound gorilla in mobile commerce. They have such a strong base to build from (verified users, registered cards, registered DDA accounts, verified ship-to addresses, hyper-advanced fraud screening, big customer support centers, etc) that players lacking these existing assets will have a tough time entering the mobile commerce space. I can't image a new mobile payments startup recreating this infrastructure. Other want-to-be players in the mobile payments market will face a similar challenge.
P2P mobile payments sounds futuristic (and will get a lot of coverage in the mainstream media), but the Text to Buy (TTB) feature is the breakthrough idea. TTB is targeted squarely at convenience -- and convenience has proven to be the singular value proposition that has driven innovation in consumer payments over the last three decades.
The P2P feature feels like a 'head fake'. Maybe it's a nifty feature that will help draw some teenagers into the service (the Joe Camel of payments?) but the real action is likely to be in the Text to Buy function.
Longer term, maybe there is a play in international money transfer, given the high rates of cell phone ownership in some other countries, though I still wonder if PayPal makes it easy enough to convert these transfers into cash in the destination countries. Maybe there will be more clues about this when PayPal's Jeff Jordan keynotes at CTIA in a few weeks? Seems like it would require lots of carrier integration on both the send and receive sides because of the low incidence of FI account ownership in the target populations both here and abroad.
PayPal's motives have to be incremental transactions and broader merchant acceptance. I don't see this driving additional new users to PayPal. Everyone that would even remotely consider using the this already has a PayPal account. But this (especially TTB) could unlock some new merchants for them.
In addition to placing the TTB codes on billboards and in catalogs, I can also imagine manufacturers placing TTB codes directly on their products. When people need to order another one (for replacement) or order one just like their friend has, they can just pull out their phone, punch in the TTB product code, and have the same exact product sent to their house. Distributors could sell the initial product through traditional channels and with traditional payment mechanisms. Incremental sales (using TTB) would be driven back to the original manufacturer.
TTB obviously builds on and extends everything PayPal has. It leverages the verified relationship, the default payment instrument, and the default ship-to-address. The one thing it adds (and this is a big one thing) is the TTB product code database. The TTB product code is conceptually similar to the Electronic Product Code (or EPC) that RFID advocates believe will one day be used as a universal product identifier. The TTB product code is not that advanced. It doesn't map to a unique instance of a product, only to a specific type of product available from a specific merchant. But it's here today and will be managed by PayPal.
One can also see how the TTB concept might evolve over time. The TTB product code could be embedded in 2D barcode. Instead of keying in the product code, you could imagine that consumers would simply take a picture of a TTB bar code. This type of product barcoding is hugely popular in Japan already.
