Exactly How Screwed Is PayPal? (Hint: Very)
It has taken more than a decade, but PayPal -- the coaster of the Internet that has had a downhill ride with the wind at its back pretty much since acquisition -- is finally under serious threat.
It may not be showing up in PayPal's numbers yet. Indeed, by the time you start to see these things on the balance sheet, the damage is irreversible. The question is whether it can still be reversed now. I'm arguing no for three big reasons.
The first is the decreasing relevance of eBay. PayPal was never founded to be merely the payment arm of eBay, but eBay was so dominant in ecommerce at the time and the need for digital payments on the platform was so great that that became the bulk of the business.
But Amazon has long since outdone eBay and every year eBay seems to get more stale and less relevant to younger digital natives. Expectations today are of a UI about a billion times more sophisticated than eBay. Has anyone under 30 ever bid on something on eBay? Sure PayPal is used widely outside of eBay now-- as proven by the fact that it's the biggest part of the business now. But that's still its bedrock. Being inside an aging Web giant never helped anyone innovate.
The second is that culture of coasting. PayPal hasn't had to innovate until now. And even its newer products look remarkably like competitors-- witness the digital wallet product. At this week's PandoMonthly, PayPal founder Elon Musk alluded to this when he said that eBay's product road map today is actually less ambitious than the one he wrote in 2000. "PayPal should be where all the money is...And it's definitely not," he said.
Hear it from him directly below:
And thirdly, PayPal is finally facing serious competition-- and not just from one startup, from all sides. Square is the sexiest of the bunch. Seemingly, it doesn't affect PayPal much, since Square is so focused on real-world credit card transactions.
But that's like saying Etsy doesn't hurt eBay because it doesn't have auctions. The truth is Etsy has replicated a lot of what was great about eBay early on, and was lost in the comparative Wal-Mart-esque era of Buy It Now eBay. Plenty of people who were eBay's core power-users early on are now setting up, say, their own vintage clothing shops on eBay. And more to the point: Etsy is the place that you go to browse and look for cool stuff. It's taken over that serendipitous online thrift store vibe that made eBay so addictive in the early days.
While it's true that kind of shopper hasn't been driving eBay's revenues for a long time, you can't deny Etsy is nibbling away at the company's base. Similarly, Square will take the place of a lot of edge cases where PayPal was used. Times when you would send your friend $20 for concert tickets, or split a check using electronic payments. And it's sexy, because it's consumer facing and such a magical experience. That's had another effect on PayPal that's more subtle: It's made payments a hot area to invest again.
Now let's get to the center of the bulls-eye: Braintree Payments is just murdering PayPal when it comes to enabling merchant payments online. It has excelled at providing white-glove human-powered service. This does a lot more than make signing up way more easy. PayPal is so automated that it will frequently mis-diagnose a surge in payment as "fraud"-- cutting off a customer's ability to take payments at a crucial time, like a holiday sale or a pledge drive for a charity.
Braintree has hugely innovated on the mobile side too, enabling the who's who of companies actually making money on mobile including Uber, Fab and HotelTonight. One-click payments and stored credit card details has lead to mobile being a huge percentage of the $4 billion in transactions Braintree is processing annually. Sexy sexy sexy.
But somehow another startup -- Stripe -- is fast becoming a serious threat to Braintree by targeting developers within organizations. While PayPal had years of coasting without a hard charging competitor, the heat around this space hasn't given Braintree the same luxury.
Consider the recent experience of Paul Carr with NSFW Corp. They decided to try out PayPal and Braintree. PayPal was an utter disaster and a horrible experience. Braintree-- as expected-- had impressive customer service that guided them through the process. The one negative: Because Braintree is trying to work with the existing back-end financial infrastructure, Paul's developers were at their mercy. The company quoted a four working day approval time which meant in theory that they could spend a week of development time on Braintree integration, only to be declined at the end. (There were other quirks too: Braintree required that NSFW Corp. accept The Discover Card along with Visa and MasterCard. This required a separate set of forms, and separate approval.)
While he was waiting-- although perfectly happily waiting because comparatively Braintree was so much better than PayPal-- I suggested Paul try out Stripe. As it was explained to me, he could move a lot quicker with Stripe because the company is doing more than just the payment gateway-- it's enabling the whole chain, including all its own risk analysis. After arguing with me for a good thirty minutes that Stripe couldn't be as good as I was suggested. He tried it and his developer, Josh, pretty much lost his mind.
From Josh's email to Paul (I cut the most salacious points. I mean, the things he wanted to do to Stripe went a little overboard.):
I've verified that it works, both on the backend and the frontend. I just need to make it live, have Paul test it with his credit card, get the SSL working on the server, and it will be READY.
Their API is so simple -- fuck EVERYBODY else, I want to marry Stripe and have a billion of their babies.
IT WORKS. Sure enough, NSFW Corp launched its subscription offering using Stripe today, less than a week after our conversation.
Stripe not only raised another $20 million two months ago at a reported $500 million valuation, it's signing up big customers. Increasingly, it gets into massive companies -- even ones you wouldn't think of as particularly developer heavy-- the same way it did with NSFW-- developers just go nuts over it and sneak it into new projects. Like most modern enterprise software apps, Stripe then tries to expand within these customers once it has a foothold. It has a staff of just 28 people and is already run on thousands of sites.
It's not a massive surprise that Stripe is leagues better than PayPal. Stripe's co-founder Patrick Collison counts PayPal founders Peter Thiel and Musk as investors. It's even backed by original PayPal investor Sequoia Capital. The payment band appears to be back together.
Other bloggers have questioned these guys wanting to kill their "baby"-- but PayPal hasn't been their baby for a very, very long time. It's actually pretty common when founders sell a company and are frustrated with its stagnation to try again to resurrect their original vision. That's a big reason Michael Arrington encouraged me to start (and invested in) PandoDaily. And on a grander scale the entire revenge-narrative behind soon-to-file-an-S1 enterprise software company Workday. "They so clearly want this to happen and want it to be solved more than they care about PayPal being the one to do it," Collison says.
Thiel in particular has been heavily involved in the company, according to Collison. He invested $5 million of his own money, and he's dusted off a lot of the original plans for PayPal-- particularly his ambition to have a truly global currency for a global Web. That's the ultimate plan for Stripe-- and that's far different than what anyone else is doing.
It's also of massive importance. Investors love to defend seemingly insane valuations of consumer Web companies by saying there are now one billion people on the Web. Imagine how valuable that reach could be if they were all enabling to buy things from you. It could be game changing for huge countries like Indonesia, which is the fifth largest country in the world, social and gaming junkies but have no good mobile or electronic payment system. The first step was Canada, where Stripe has just gone live. It's actively working on Western Europe too. "It's the fastest any payment company has gone international," Collison says. "We just launched the company eight months ago."
It's not a focus many people in the Valley have, which makes the ambition all the more impressive. Collison admirably fights not to get sucked into the ecochamber. He recalls when speaking at SXSW, when someone asked if mobile payments would ever take off. The rest of the world finds that statement hilarious. Chinese Web giant Tencent took off solely because of the ease of mobile payments, as Tencent founder and CEO Pony Ma discussed at last fall's Disrupt Beijing. And a sizable percentage of the Kenyan economy flows through M-Pesa. "That question could only be asked at SXSW," Collison says.
This is to say nothing of Google's moves into payments which shouldn't be totally counted out, and more tangential companies that nibble away at specific verticals like Rally, which enables payments for nonprofits and causes. One of Rally's value ads is you don't have to leave the cause's page to make a payment. A small, but important thing when you're trying to look like a grown up organization people should trust with donations.
Simply put, PayPal has been suddenly outdone on almost all fronts: Peer-to-peer payments, servicing both companies with high-touch service needs who are better off with Braintree and developer-driven startups who fall for Stripe in NSFW ways. (Pun intended.) And thanks to years of not having to try, it's unclear whether they could reverse it even if they agreed with me.
It may take another decade, but one of the most ambitious companies of the late 1990s is sounding a lot more like the grape lady these days.
(Peter Thiel is an investor in PandoDaily.)