Online Payment Service Providers – Opportunities and Challenges

As the usage of Internet for business transactions increases, we now have dozens of online payment service providers, of which are specific to a country and some are global.  This wikipedia page has a comprehensive list:

PayPal is the undisputed leader in online payment service providers. Google has tried to build market share for its Google Checkout over the last two years but feedback from my customers and business partners is that Google Checkout is still not their preferred online payment mechanism.

Most other online payment service providers are limited in their appeal, and are used by specific niches of customers. For example, there are some payment providers for online pharmacy transactions and online betting transactions. These are large industries however as the legalities are not the same or favorable in all countries, therefore such payment providers are able to offer a solution that is needed by the companies in these industries.

Escrow.com deserves a mention. It is a very useful site for business transactions, and their fee is very nominal for the value of the service that enables totally unknown parties to conduct business transactions.

Overall, there is no serious competition to PayPal today. PayPal has built a large market share due to its easy payment sending and receiving options. On October 3, 2002, PayPal became a wholly owned subsidiary of EBay. Over the last 7 years, EBay has acted as the perfect growth platform for PayPal creating about 10 million of PayPal users worldwide.

PayPal’s total payment volume, the total value of transactions, was US$ 60 billion in 2008, an increase of 27 percent over the previous year. This $60 billion of 2008 represented nearly 9 percent of global e-commerce and 15 percent of US e-commerce. In fact, at an analyst day on March 11, 2009, eBay CEO, John Donahoe announced that PayPal could be a larger driver of revenue than EBay marketplaces business. So clearly, there is a huge demand for safe and easy online payment systems like PayPal, which has become the market leader with a big lead over the competition.

The economics of owning a popular online payment system are very attractive.

Online payment sites don’t pay interest on money held in the user accounts. A majority of active user maintain some working capital for day to day transactions. While the numbers are not available in public domain, we can do some rough math. PayPal has about 10 million users, and assuming an average money balance of 100 USD per user, that’s a billion dollars of interest free capital or float that PayPal maybe enjoying at any given time. Good acquisition by Ebay!

It is surprising that over the years, Amazon has not taken any major step in this direction to grow or acquire a payment system like PayPal. So where can competition come from? From social networking sites.

One of the major changes in the Internet landscape since 2002 is the rise of giant social networking sites like MySpace, Facebook, Twitter, and LinkedIn. Each of these sites has millions of regular users. And a site like Facebook can develop its own payment system and virtual currency, which makes it possible for a marketplace to grow. We already see hundreds of third party applications on Facebook, and many of them sell low cost items. A virtual currency can be a powerful solution. I believe Facebook is already working along these lines.

There is also value is trying to solve one specific problem of international trade – the problem of varying currency conversion rates. If a large payment site can create some form of protection against currency rate changes, by using its own virtual currency in the marketplace that could be a powerful innovation that can nurture and grow a wide variety of international trade. On this front, PayPal and EBay are best placed to make something possible. A virtual currency in a global marketplace is the next big milestone for online payments. It will take extensive collaboration with banks and financial institutions, and we will have to wait and see who will take up this big challenge.

About the Author:  Shankar AVSB is the Director of MyOrbit Online, a London based Internet business with over 100 websites in different industries. He closely follows Internet business and online payment systems for conducting international trade and has advised numerous companies in improving their online business. Shankar is also the CEO of 7Avenues Private Equity, which runs ventures in Retail, Supply Chain, Services and E-Business. He can be contacted from here.

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