Will PayPal’s History Derail Its Discover Card Deal?

PayPal’s new deal with Discover Financial Services may have just opened the door for the payment service’s users to pay for goods and services in seven million Discover card locations, but there are big questions whether this deal will really accelerate the future of mobile payments.

There are quite a few challenges PayPal, a subsidiary of eBay, will need to overcome in order to pull this off, not the least of which is the fact that the service it’s initially offering won’t be a mobile payment system at all.

Shoppers Still Need A Card

First, customers will need to use a Discover-backed, PayPal-branded card in order to pay at the register. That’s mostly due to the fact that almost all those seven million merchants don’t have the special PIN (personal identification number) pads that PayPal currently uses for its in-store payment system: a system currently in place in just 16 U.S. retail chains, around 3,000 locations, according to PayPal’s Anuj Nayar.

So users will have to sign up to get the card to start pulling their funds from their PayPal accounts. Only as stores upgrade their point-of-sale systems to include the PIN pad will shoppers be able to enter their mobile phone numbers and individual PINs (something else for which they will have to sign up).

What Is PayPal, Anyway?

Another big obstacle may be PayPal itself. The company’s history is riddled with anecdotes about frozen funds for what seem to be arbitrary reasons. Visit Paypaysucks.com and you’ll see a daily list of the company’s reported missteps.

This kind of bad press is something that a lot of financial institutions see, of course, but that’s part the problem: PayPal is hard to define as a financial institution. It’s not a credit card company - all a user’s funds are provided by… the user. So is it a bank that holds your money? But PayPal is not FDIC insured, so what happens to the money if there’s a glitch?

As long as these questions persist, PayPal will face a lot of friction getting participants into this in-store payment system, not to mention the future app-based payment tool it’s currently testing in France.

New Target Users?

But PayPal’s target audience may not care so much about these complaints, which are usually made by eBay power users who often have a lot of money floating around in PayPal accounts at any given time. Motley Fool’s Douglas Ehrman has a pretty good idea on who will likely be the users of PayPal’s new service:

“The segment of the consuming population that is likely to quickly transition to this form of payment is teenagers and young adults. Suddenly a group of consumers that had to rely on cash or collaboration from their parents to obtain a credit card will be able to head to the mall and buy things in a new, progressive way,” Ehrman writes.

Expanding on Ehrman’s hypothesis, there’s another user group that might be interested in PayPal’s new mobile payments: consumers with poor credit histories who can’t obtain a normal credit card. Since funds are debited from funds already added to PayPal, this payment system might give such consumers a little more payment flexibility than a bank debit card.

If PayPal’s mobile payment ventures do take off, businesses may be very interested in adopting the new service, if only to give customers a convenient way to pay without the hassle and security problems associated with cash, and the high costs of credit card interchange fees.

If PayPal can get its own house - and reputation - in order, that is.

 

Disclosure: The author wrote a book on social media for Peachpit Press in 2011. Peachpit is the publisher of PayPal’s official imprint.