Amazon rains on PayPal's parade
Posted on Wednesday, August 22, 2007 by Bryan Johnson
PayPal is a great story. In less than 8 years they've been able to sign up 133 million users in over 100 markets. In 2006, they generated nearly 30% of eBay's (PayPal is owned by them) $1.4 billion operating income.
But Amazon is about to rain on their parade. The secret to PayPal's lucrative business model is that they charge the equivalent of credit card fees for transactions that really amount to ACH (electronic check) transactions.
The cost of an electronic check transaction is substantially less than a credit card transaction. (Click here to see where credit card fees come from.) For example if you take payment from a PayPal user who's pulled funds from their checking account, you're going to pay 2.90% and .30 cents. PayPal's cost on that is less than a penny.
If someone uses a credit card to fund their PayPal account, PayPal increases the rate and charges the receiver 4.9% and .30 cents. PayPal has been making huge profits for years now using this model. Amazon has squarely set their crosshairs on PayPal's making machine of processing electronic check transactions at credit card rates.
Amazon is the only player in the online payments space that could pull this off. They are leveraging 69 million registered and active Amazon users who can immediately replace their PayPal account with one from Amazon. So with a third and probably final major entrant into the online payment processing space, PayPal, Google, and Amazon will have to hash it out between themselves.
Google's attempt at buying market share by waving fees has not been successful and their inability to access funds from a checking account has been a shortcoming. We'll just to wait and see if this is a space they really want to play in. Until then, most merchants are trying to gauge demand for each different payment type to determine if integrating all of these different methods makes sense. PayPal had the sandbox all to themselves for quite sometime but they better start brainstorming about ways to replace the income they are going to lose when Amazon starts raining on their parade.
Comments
Jon Thornton said on Thursday, August 23, 2007:
Google's entry into the payment processing industry has always puzzled me. Aside from waiving the processing fees, I recall a tie-in with adWords, but it seems silly to launch a product like that just to promote adWords.
Amazon's product makes much more sense. Aside from the massive user base, Amazon has been offering a bunch of other products, like S3 and basic supply chain management, that compliment their payment processing offering. It seems like they're making a play to move from online retailer to retail platform.
Any thoughts on what the true mission of Google Checkout is?
Brayn Johnson said on Thursday, August 23, 2007:
I agree that Amazon has a better fit with a payment service offering. Google's offering not only fell short of matching PayPal and didn't even really fill a pressing need for merchants. I think the rationale on Google's side was that at the time PayPal's offering was fairly limited to ebay, person to person, etc. and less as an additional alternative payment type for merchants. Google saw the opening and hastily threw themselves into the game trying to buy share. Ebay CEO Meg Whitman recently gloated over their trouncing of Google Checkout. I don't think that consumers will want to maintain more than one payment service for general web use and so in this regards PayPal has a great head start. But to date usage has been driven by consumer demand and not by merchant acceptance. I might look for this to change as Amazons rates are better than PayPal's for small dollar ACH tickets.
Alternative payment providers see opportunity said on Thursday, January 03, 2008:
[...] profits have also lured in quite a few players who want a piece of the action. Companies like PayPal, Google Checkout, Amazon, Tempo, Bill me Later, and Gratis Card are just a few who are trying to [...]