Tech

A new way to pay

Online money systems like PayPal and Canada’s CertaPay could change the way banking works

Brice Scheschuk March 12 2001
Tech

A new way to pay

Online money systems like PayPal and Canada’s CertaPay could change the way banking works

Brice Scheschuk March 12 2001

A new way to pay

Tech

Brice Scheschuk

Online money systems like PayPal and Canada’s CertaPay could change the way banking works

One of the things I love most about the power of the online world is the emergence of well-thought-out killer applications that grow virally, amassing millions of users in short periods of time. The two best-known examples are Hotmail, the free e-mail service purchased by Microsoft Corp., and Napster, the music file-sharing service. A lesser-known but equally important killer app is PayPal, which has attracted six million users and the attention of banks and credit-card companies around the world.

A long-running problem that has plagued individuals and businesses doing transactions online is how to accept and make micropayments. These are very small payments that cannot be made in a cost-effective manner using traditional debit and credit cards or bank account transfers.

Transaction fees destroy any profit margins in micropayments.

Enter PayPal, a two-year-old Palo Alto, Calif.-based company that has solved the micropayment problem with a very elegant solution. Use e-mail to send and receive payments from any person or business to any other person or business. Oh yeah, and dont charge any fees for person-to-person transfers (subject to certain caveats, especially, for now, outside the United States). The power of this service is readily apparent. From eBay auctions to small businesses that cannot obtain creditcard processing accounts to paying back friends who lend you cash at the pub one night, the service has numerous uses. What’s more, all transactions are secure and insured.

How does PayPal work? Quite simply. A user transfers a block of money from a bank account or credit card into a PayPal account, which can move funds to or from anyone with an e-mail address. If you send money to someone without a PayPal account, the person receives an e-mail indicating funds are available for receipt. That person has a strong motivation to sign up for a PayPal account to receive the funds. Money in a PayPal account can be transferred to credit cards and bank accounts or received as a cheque.

As PayPal became more successful, it expanded its services. The company began providing tailored services for auction sites like eBay, a natural fit for a person-to-person, small payment service. Premier and business accounts were added to allow individuals and businesses to accept unlimited creditcard payments at very reasonable rates without going through the painful—and believe me, it is very painful— process of obtaining a merchant account. Users can now

Brice Scheschuk is a Toronto-based chartered accountant and president of a technology investment company.

also make payments with Internet-enabled mobile phones.

Late in 2000, PayPal expanded into 25 countries on all continents except Africa. Canada was one of the first to benefit from PayPal’s service. Unfortunately, the international version of PayPal has significantly higher fees and does not offer all the functionality of its U.S. equivalent. Expect this to change as competition intensifies and local players get involved.

Even with all these uses, the power of PayPal has not even come close to being realized. Every time funds are shifted out of the PayPal system to a bank or credit card, PayPal incurs costs. If the company can entice users to keep their funds with PayPal, it begins to threaten traditional financial services firms and could rapidly build revenues. The minute PayPal begins to pay interest to its users on funds held with it and offers other banking services, the company is competing with the banks while offering a service that most banks don’t—person-to-person payments. As the number of users increases, PayPal stands a better and better chance of becoming a standard that won’t be dislodged. This scenario is coming closer to reality. The company recently announced an alliance with MasterCard to launch a co-branded debit card. More businesses sign up to receive payments over PayPal every day. I anticipate that numerous other banking services are on the way.

Naturally, competitors are springing up to challenge PayPal and dissuade existing customers from moving to it. In Canada, the CIBC, the Bank of Nova Scotia and TD Bank recently announced agreements with Toronto-based CertaPay to provide PayPal-like services to Canadian customers. Though similar, CertaPay will operate within the existing account structure of the banks. There will be no need for users to open a new account with an intermediary to send and receive immediate person-to-person payments. If Canadian financial institutions offer a fee structure similar to PayPal in the United States, they stand a strong chance of dominating the direct payments business.

CertaPay says the banks have yet to indicate whether they will offer direct payment services to businesses. One major attraction of PayPal for Canadian firms is the ability to receive online payments by credit card without a merchant account. For PayPal, it’s all part of becoming a standard. The more places a user can pay with it, the less reason the user has to send funds another way. Any Canadian company transacting business online in the United States would be remiss not to look at PayPal’s services.

Finally, a killer application has been found for online banking. The question is, will it kill traditional retail banks?