The "New PayPal": two things to note when thinking about PayPal's latest moves

Today PayPal announced a new digital wallet following announcements about supporting offline retailers, improving its mobile app and others, as well as PayPal Here, its new Square competitor. This could be waived off as yet another attempt to go into the coupon, Social-Local-Mobile-Offline-Small-Business trend that's flushing payment providers in the US. It can also be perceived as a hasty response - much like a lot of others' - to Square, a company whose effective PR machine turned it into the elephant in the boardroom for almost any financial services company (I think Square has a lot of potential, but also that a lot of companies don't understand where they're going. But that's a different discussion). But there are two things to take into consideration here that are unique to the Gorilla in the market of online payments.

Unlike other providers outside of banks or credit card companies, PayPal is the only company that can make money from the fact that people and companies want to move money around efficiently (that's why trying to compete on price is an effort that's doomed at inception). Even in cases where the source of that profit looks flimsy (such as FX arbitrage) it is not really the case - PayPal's global reach is not an easy position to attain and barriers to entry are high. No other contender has this ability as a financial institution or the deep understanding of regulations and how often they change. But I digress.

The way I see it, PayPal is doing what it's doing since its leadership understands that the company's long term growth can be stifled by two major components: its third party ecosystem, and the threat of shrinking margins.

Over the first 12 years of its existence PayPal focused on the actual move of money while growing an international presence. For its unique advantages it charged (and still charges) high fees. As a result of that focus, services grew around PayPal offering it as a payment options as part of a payment "wall" or some broader "checkout" solution. So PayPal enjoys a smaller share of wallet and a smaller share of revenues in return for all types of user acquisition channels - since the higher margin services are provided by these third party providers. From what I'm hearing behind the scenes, PayPal is cracking down on these services, forcing them to, for example, stop using a single bus account for all of their sub merchants and creating a direct relationship with these merchants, who are now forced to have their own PayPal accounts. In addition to the company launching more merchant focused features and acquiring relevant IP, I believe this is an orchestrated effort to reclaim the ecosystem.

The other part of margins. PayPal converts users to ACH to reduce transaction fees and be profitable. Google, ISIS et al (let's say these two are in the same league) do not have the same ability. No other company knows how to use ACH effectively, not to mention Bill Me Later style credit (trust me, we at Klarna know how difficult that is). But even with all this PayPal is feeling the shrinking margins - it was not able to bring BML to a large enough crowd; plus, its reliance on card associations is putting a strain on margins - despite the Durbin amendment making debit cards cheaper in the US, costs in the rest of the world don't really favor direct debit over cards. In addition, despite a lot of efforts PayPal hasn't found the formula the have people keep substantial account balances - and its customer care reputation doesn't help, either. The new digital wallet initiative is a smart way to bring BML to consumers, branded differently - not as a financing solution but as a flexible lifestyle solution.

Like any other payment company, PayPal has to worry about two major issues - user acquisition and access to capital. However, at its size and status and if it wants to continue growing, PayPal needs to be worried about a few unique challenges. While it's catering to its users needs, the company is also making a few smart steps in order to set itself for success in the future. 

A quick point about buyer psychology

There are multiple things I need to worry about beyond just fire fighting, but the thing I keep getting back to is users' mindset and how we are impacted by it. It fascinates me to what extent and how much deeper we need to go in understanding customer psychology. I wrote in the past about how much easier it is for people to steal online because of anonymity and distance from actual face to face human contact; one of the folks here at Klarna equates this to an open cookie jar in an empty room. Would you take one?

Most people would. That's the amazing, oh-so-human day to day situation we need to work with. The difference from your usual eCommerce payments risk situation stems from the fact that instead of trading tokens of trust issued by other financial institutions (issuing banks in the case of credit cards, for example) we basically establish and sell trust between buyers and sellers on our own, based on our data and inference (more on how this impacts the multiple facets in a payments business - maybe in a future post). That's a very different ball game when not only is the customer's identity not a given, but their mere ability or willingness to pay could be in doubt.

So instead of focusing on identity verification given a credit card (with a sprinkle of repeat offenders and hackers on top) we must look at a broader spectrum of credit and abuse issues. And the question about the customer's current and future mental state (future being upon receiving the request to pay) determines our ability to approve a purchase no less than the question whether this is a real person or not. The levers we need to pull, then, expand beyond identifying bad guys. Can I instill financial responsibility in a first time buyer  through a well designed buying experience? Will the busy businesswoman forget about our payment request in her busy schedule?

The other interesting thing is that since Klarna owns the stack (we issue credit, acquire merchants, manage reminders to pay) I have many more touch points with the customer. That calls for more negotiation and, actually, relationship building that both sides are interested in (buyers keep coming back to Klarna-powered checkouts). That's a plus in many ways since I can control the buyer's experience and correct earlier mistakes, be them false positives or false negatives. But the question remains - and it's a complicated one - how do you impact the buyer's mental state within a very short sequence of clicks and without hurting conversion?

Have I mentioned that I love my job?

(BTW, we're hiring)

What I Hoped Would Be Announced At Innovate2011

Late post, I know. Hyper-growth life (yes, that was a #humblebrag).

I went to x.commerce (ex-PayPalX-Innovate) to check on industry trends, meet friends and exchange ideas. I didn't have huge expectations but I did hope to see a couple of things emerge from the whole x.commerce effort that will extend both the Marketplaces and PayPal divisions beyond where they are today. This has yet to come in full, but some early signs are still visible and look promising.

eBay has made some very interesting acquisitions which have an obvious synergistic quality to them, and it seems that it's managing these integrations well - as in, not forcing them to immediately assimilate but rather trying to make their products available within the greater eBay portfolio context. Now the question is whether all of these acquisitions can be actually leveraged together into a coherent, complete set of products and services. This leads me to what I was hoping to see.

The two things I had hoped to see coming from eBay were (1) An integrated social commerce suite that allows commerce to go anywhere - basically showing that if sellers don't come to marketplaces, marketplaces will come to them. Preferably, this would be integrated with FB's open graph and allow real personalization based on social data. (2) A real transactional identity strategy and toolbox that allows PayPal's data and identity assessment to be extended by commerce sites to tie past purchasing behavior and enhance user experience. I was hoping for these two things since in my POV, both would have shown that the Marketplaces and PayPal divisions understand the limitation of their business model (mainly, the need to own the experience on eBay.com and the consumer relationship for PayPal) and they are willing to partner and really provide access to some of their assets for others to expand on them. x.commerce, in general, was the right evolutionary move from PayPalX, since payments alone are not enough to build a really big and vibrant developer community - the problems a more flexible payments API is solving are not big enough (vs a new payment rail, but that's not what PayPal was offering).

While both were sort-of touched upon and generally speaking the direction is impressive, both the general x.commerce vision in general and the PayPal Access product specifically seem, still, a bit limited. In the x.commerce case, demanding that all capabilities communicate through the "fabric", as well as the way APIs expose information about the buyer (categorical answers such as "engaged", "casual" etc) demonstrate how eBay is trying to maintain as much business logic behind the APIs rather than provide raw data based on varying permission levels (at the consumer's discretion). PayPal Access is very similar in that sense - as one participant noted, currently looking a bit like a re-branded Express Checkout with a nifty sign-in module. I (hope to) see both of those concepts evolving more in the coming year as eBay incorporates more feedback from users, and becoming more open with its data and services. There's really a lot to be done in social commerce if eBay wants to continue being relevant, and I think it recognizes that. Time to take the big, platform agnostic, open-web-style leap.

Identity Theft - Whose Problem is it?

With Fraud Awareness Week happening this week, one of the main things I hear about (apart for, obviously ZEUSZEUSHACKEDMACHINESFRAUDZEUS) is identity theft and ways to deal with it. I wrote in the past about issuing additional secrets, basically, I don't believe in it - and the more I hear about two factor auth, the more worried I become. The problem is that because traditional methods fail, identity theft stops being the individual's problem and become society's problems.

Why?

When large entities (read: governments) realize that issuing secrets doesn't work (even digital passports and IDs get stolen and forged), they start thinking about solving that in the most obvious way (if you're a gov official): storing something-you-are type authentication factors. This is how biometric repositories are created (and then hacked. But that's a different story). If only everybody would be more laid back about behavioral profiling based on available online identities... but then again, this isn't a product nicely packaged with a nice RFP that gov and banks can understand.

Oh well. Don't come asking for my finger prints.

Klarna is looking for a Manager of Risk Forecasting and Analytics

Trying to purchase something online is still far from a perfect experience. Not only are you taken through a tedious sign-up process, you’re also expected to trust the merchant and pay them before you even get to look at the merchandise. No wonder that only 9% of total commerce is done online: it’s just not easy enough. Klarna is looking to solve all that. 

Klarna was founded 6 years ago by three Swedish entrepreneurs and has been growing rapidly ever since, thanks to its offering. It lets customers pay only after getting their product, while guarding merchants from risk – making purchases simpler and safer for everyone while growing sales for merchants. This also drew one of the best VCs in the world – Sequoia – to invest in the company. 

We are Klarna’s Risk Management and Decision team; we deploy state of the art methodologies and tools (forensics, pattern recognition, network analysis, advanced statistics and even Theory of Constraints) to deliver the decisions that make Klarna’s business model possible. We’re looking for an experienced Risk Analytics and Forecasting Manager to join the team. 

This is where you come in.

The Manager of Analytics and Forecasting will oversee Risk’s activities in loss forecasting and provisioning, loss trend analysis and reporting, and risk controls and compliance. They will be required to maintain and further develop our risk reporting system including originations, portfolio quality, fraud etc. You should be well versed in and able to understand loss line development, its relation to the company’s P&L and how to best present and explain it to internal stakeholders as well as external partners, banks and regulators. 

The ideal candidate will be an impressive domain expert in the development and improvement of our provisioning and forecasting methodologies and tools as well as deep dives into trends and their drivers; all this while guiding and directing the teams that report to you in day to day tasks. While reporting and analyzing our performance and serving as a source of knowledge for loss reporting, they should also recognize that Klarna is a growing and accelerating company, and know how – even prefer – to successfully deal with the challenges of life in a company at the hyper-growth stage. 

Some formal requirements:

• This is a full time position in Stockholm, Sweden. You should be local or ready to relocate.
• Excellent communication skills in English (written and spoken); Swedish is a plus.
• 5+ years of experience in a similar role, preferably in an eCommerce/Payments company, is a strong plus. Candidates with less than 5 years also encouraged to apply.
• Good knowledge of the IFRS standard; knowledge of USGAAP is a plus.
• 2+ years of experience managing more than 4 people.
• Advanced degree in a relevant area (accounting, statistics) is a plus.
• A combination of startup and corporate experience is a plus.
• Previous experience working with regulators is a big plus.

For more information, email me directly: ohad.samet@klarna.com

Why is the blog unattended?

It's because I'm head down with the team at Klarna, working to build a really awesome user experience and payments product. I have a few posts cooking, but this one's going to be a rather slow roast...

Beyond NFC and coupons: is there real value in payments?

If there's anything I can honestly say about the latest talks about payments, offers and connectivity technology (read: NFC) is that I am underwhelmed. I have voiced my opinion about NFC before, but the extent to which payments related discussions are focusing on what I find to be irrelevant is just mind boggling.

The issue most participants are missing is the intrinsic value in the payments business itself. When discussing NFC and offers, payments are often treated as a necessary evil - an almost commoditized way to move money between two accounts, based on existing rails (mostly credit card), where you optimize on cost (fees and losses). All that, to get to the real prize - users' personal data, to be leveraged for alternative revenue streams. This is the embodiment of the factory approach, and it is self perpetuating since inefficient user behavior management creates bad cost structures, and drives payments into becoming a loss leader. Is that what payments are about?

No. Consider PayPal: the company hit profitability, among other reasons, by offering instant bank payments even though the existing infrastructure (to this day) only clears after 3-5 days. Data was not used to further segment the population for better delivery of advertising content; it was data used to deliver quality decisions and decision supporting tools, and enabling capabilities that users would not have otherwise.

What are the added benefits of a payment option? The ability to move money quickly and for a reasonable price; the ability to drive commerce; responsible access to debt. Any solution that doesn't create more or cheaper commerce activity is not a change in payments - it's a new advertising platform. Extracting that value, however, requires more deep technology and data science/decision design capability than are usually invested in payments, which is probably (together with lack of domain knowledge) why only a handful of companies ever succeeded in bringing real benefits - and they grew into gorillas. Effective risk management and automated decisions can make the difference between making a payment and earning a paying customer and rejecting it; they also make the difference between approving a good customer and a fraudster or a kid using their parents' account. They also constitute the  difference between your struggling gateway business and a PayPal or a Visa. Companies that invest the time and research get rewarded by a substantial revenue stream just from moving money around; companies who don't are forced to treat payments as customer acquisition cost.

The above is the reason why NFC-enabled, offers-driven "wallets" don't strike me as innovation in payments: they are not. Improved underwriting, new payment rails or enabling commerce in a new setting are, but those aren't included in the debate. This is how a huge chunk of business opportunity is being missed.