After weeks of rumors that a deal might come together, PayPal has announced it’s buying Braintree, a Chicago-based payments startup, for $800 million.
PayPal, a unit of eBay, is already a large player in payments. It is dominant in Web-based e-commerce, and has big ambitions to process payments in retail stores as well. But a big gap was emerging in its lineup: the growing field of processing payments within mobile apps.
The Mobile Shift
While PayPal had honed its offering for e-commerce over the years, the system of bouncing shoppers to another screen to enter their PayPal login credentials in order to check out proved too cumbersome for people spending money on smartphones.
When ReadWrite met with PayPal CEO David Marcus recently, Marcus cited his team’s desire to create “frictionless” experiences. But some of those best examples of friction-free commerce—for example, the way you can store your credit card with on-demand transportation service Uber’s app once, and then have rides billed automatically, without having to reenter your card or log into an online wallet, weren’t coming from PayPal.
Braintree, it turns out, is the processor of payments for Uber. Airbnb, the lodging marketplace, is a customer as well. And PayPal risked losing those app developers as customers.
Braintree’s Grand Plan
It’s a no-brainer that having to enter and reenter your credit card on a mobile device is a pain, and anything that avoids that will encourage users to sign up for an app that charges money. That’s a service both Braintree and PayPal wanted to offer.
After acquiring Venmo, a much smaller New York-based payments startup, Braintree began betting heavily on a product called Venmo Touch. Venmo Touch promised to let a user enter a credit card into one app and then remember the number in other apps—assuming all the app developers involved used Braintree on the back end and incorporated the necessary software into their apps.
But those were all big ifs, which are now made less problematic by PayPal and Braintree becoming one entity. If PayPal’s own app (which it recently rebuilt) is included in the budding Venmo network of apps, it will instantly have 140 million consumers with credit cards entered—a big reason for app developers to get on board.
Another wild card was Facebook. The social network is testing a new product called Autofill, which similarly promises to carry users’ credit-card number from app to app. PayPal and Braintree are both partners—though tellingly, Braintree had a product ready to go, while PayPal was still in preliminary talks with Facebook at the point Autofill began tests. (A Braintree rival, Stripe, is also involved in the test.)
Braintree, however, was much smaller than PayPal. Braintree CEO Bill Ready recently told ReadWrite that the company is doing $12 billion in annual payments volume, $4 billion of which was on mobile. Contrast that to PayPal, which reported doing $43 billion in its most recent quarter—or almost 15 times the size of Braintree’s budding business.
PayPal was building similar tools for developers, but says buying Braintree will help accelerate its efforts, and will keep it as a standalone unit, with Ready running it. (Before joining Braintree in 2011 as CEO, Ready had started and sold two payments companies.)
“We wanted to go startup fast,” John Lunn, global director of the PayPal Developer Network, told ReadWrite. “Braintree is going to be the platform for developers. We’re not going to change anything… we’re going to use this new Braintree platform as the new outward-facing platform for developers.”
He mentioned that PayPal had “big-company problems” with serving developers. Instead of making app developers go through the same customer-service center that a consumer might use to report fraud on an e-commerce transaction, they’ll have a dedicated customer-service team operated by the Braintree unit, Lunn says.
And for developers confused about what service to use going forward, Lunn says, “If you want to bet on the future platform, bet on Braintree.”
Battling Regulators Together
A combined PayPal-Braintree could help developers with one big issue: lowering credit-card processing costs. PayPal is already licensed in many parts of the world to move money around—in Europe, it even operates as a bank.
One big issue for mobile-app payments is that when an app like Uber stores a credit card, the transaction is classified as “card not present,” a category that Visa and MasterCard deem as higher-risk and thus higher-cost. That’s silly, since the consumer in that case is riding in the same vehicle as the driver, with that location verifiable through his or her smartphone.
That’s far better proof of identity than, say, when someone swipes a plastic credit card at a gas station.
In recent conversations with ReadWrite, both PayPal’s Marcus and Braintree’s Ready acknowledged card-not-present was an issue they were working on with the big banks and credit-card networks. Together, they should be better situated to push to modernize the payment system.
Photo by David Marcus