eBay Gets Physical

eBay's (Nasdaq: EBAY  ) PayPal is stepping out of the digital world and into the realm of physical brick-and-mortar retail.

Earlier this week, the company unveiled its ambitious multifaceted plans to take on Google's (Nasdaq: GOOG  ) payment-processing advances as well as startup Square. PayPal's approach will differ in a handful of ways and offer numerous methods to process payments to merchants. The company will be combining the services of a gaggle of recent acquisitions: Zong, BillMeLater, Milo, and Where.

Users will be able to pay using a telephone number and PIN thanks to Zong, apply for credit on the go through BillMeLater, and browse real-time inventory with Milo, while Where sends out location-based coupons.

In addition to the phone number and PIN combo, users can opt for a swipe-able PayPal-issued card that lacks any account information and isn't tied to any specific bank account. The card would also be used in conjunction with a PIN, similar to a debit card. A smartphone-enabled approach would allow for scanning a product barcode to check the merchant's inventory in real time and even have the product shipped directly to your address and eliminating the need to visit the register.

What it's not
In contrast to Google Wallet, the system won't rely on near-field communications, or NFC, chips, which have been drawing a lot of attention recently. Too bad for NFC chip maker and official Fool recommendation NXP Semiconductors (Nasdaq: NXPI  ) , but good for merchants since it means they can use their existing point-of-sale terminals instead of embarking on the costly and time-consuming process of building up NFC infrastructure. The roughly three-year ramp-up period in NFC infrastructure is a possible reason the technology may not be included in Apple's (Nasdaq: AAPL  ) forthcoming iPhone 5.

Security, schmecurity
My initial gut reaction to the phone number and PIN concept is skepticism over its security. PayPal's ease of use by traditionally linking to your email address has been a double-edged sword in my experience because it has made the company a bona fide fraud magnet. In its efforts to add various layers of much-needed security, the company sometimes hinders legitimate users.

For example, like most netizens, I have numerous email addresses -- some of which are defunct -- in addition to having multiple credit cards shared with my wife. PayPal's policy is to allow a credit card to be linked to only one email account. I once tried to use one of said credit cards through PayPal only to be blocked because the card was linked to another email address. It was nearly impossible to get any sort of information from the company since, for security reasons, the company refused to even tell me which of my own email addresses it was linked to -- and it ended up being linked to an inactive address. In the end, I had already processed the payment through a different medium.

Using a phone number is even easier, leading to much greater security concerns. This is also how I check into my local 24-Hour Fitness gym: I punch in my phone number, followed by a PIN, and then scan my fingerprint. Having only a phone number and PIN is less secure than my gym.

A nondescript PayPal-issued card sounds appealing. Since it won't include any account-sensitive information printed on it -- which, in retrospect, makes credit cards seem rather silly for proudly displaying such information -- the card presumably would be easily replaceable and remove the hassle of changing compromised account numbers when lost or stolen.

A whole new world
The announcement represents the first major instance that PayPal has emerged out of its digital comfort zone and into the touchy-feely offline domain currently ruled by Visa (NYSE: V  ) , MasterCard (NYSE: MA  ) , and American Express (NYSE: AXP  ) . It offers the prospect of faster adoption since it will function with existing infrastructure and devices -- most smartphones today currently don't include NFC chips.

It's an exciting prospect that has the potential to drastically broaden PayPal's horizons and drive revenue growth if merchants support the initiative. The primary challenge that the company will face is how to balance security concerns with ease of use. Investors expressed their confidence in the plan by sending parent eBay's shares up more than 6% yesterday.

What do you think? Will PayPal make physical retail easier? Share your thoughts in the comments box below.

Fool contributor Evan Niu owns shares of Apple, but he holds no other position in any company mentioned. Check out his holdings and a short bio. The Motley Fool owns shares of MasterCard, Apple, and Google. Motley Fool newsletter services have recommended buying shares of eBay, Visa, Apple, NXP Semiconductors, and Google and creating a bull call spread position in Apple. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


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  • Report this Comment On September 17, 2011, at 6:30 AM, H3D wrote:

    "My initial gut reaction to the phone number and PIN concept is skepticism over its security."

    I guess as a journalist, you can be excused.

    We can make systems as secure as you like, but the human always brings them down to earth.

    My bank thought that a signature wasn't strong enough, so they introduced a PIN.

    But they assume people are thick, so they limit the PIN to 4 digits. And then, to prove that they are as thick as they assume everyone else is, they continue to accept forged signatures from people who can't guess the PIN.

    The advantage of using a phone is that it can use best practice security, say based on a 4096 bit key, and allow the user to select the level of security to be applied to accessing that key.

    My phone is already set up to wipe itself after 3 wrong PIN entries, and my PIN is 12 characters including numerical and mixed case. I can wipe the device remotely if I loose it, or just ask it where it is.

    Since I, and not the bank, can choose the rules for getting access to use my key, I envisage using something like

    Up to $20 max $200 in one day, just wave the phone, provided long password entered within last 72 hours

    Up to $200 max $1000 in one day, enter short password then wave phone, provided long password entered in last 72 hours

    Up to $20000 max $20000 per week, enter long password.

    These are my defined limits, not the banks. Clearly they also have credit limits and fraud detection limits.

    If you think this is too complex, that's fine, you can choose a simpler one, or even a different piece of software altogether.

    But now rather than the bank deciding that a choice of 4 digits OR a signature is more secure than a signature (idiots), you will be able to choose the most secure mechanism that you are willing to tolerate.

    The use of smartphones should make payments far more secure. But I think I'll skip on Google. I don't want Beta test payment software, and my purchasing history used to bombard me with even more adverts from the highest bidder.

    When it's ready for the big time, Apple will be there.

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