The shareholder value Carl Ichan, John Donahoe and eBay’s Board aspire to create is a consequence of the customer experiences each company can manifest autonomously, not as a direct result of their legal separation.
Simply put: PayPal will be a bank. eBay will be a marketplace and commerce platform. These are not symbiotic entities or customer experiences.
Incremental Utility and Satisfaction in Bespoke User Experiences
Reid Hoffman cites that PayPal may have interest in “expanding into banking, peer-to-peer lending, and other strategic growth areas”. With the provision of these services PayPal is moving towards being a financial institution. As such, it is moving into a highly regulated arena with significant implications to the customer experience – especially on account setup for merchants and consumers.
Regulated financial institutions fall under anti-money laundering (AML) and counter terrorism financing (CTF) regulations resulting in know your customer (KYC) experiences. After 9/11 these regulations took on particular significance in the US, and the US government has pressured governments globally to curtail the estimated3%-5% ($2.17- $ 3.61 trillion) of Global GDP that is laundered annually. Currently PayPal by and large exists in regulatory grey-area that allows its customers to forego many heinous consumer and merchant authentication processes.
Having personally led PayPal Australia through the woods of being forced by the Australian government to comply with their local AML/CTF regulation and having to significantly burden the PayPal Australia experience with KYC protocols; I can assure you that eBay does not want KYC processes as a gating factor for Marketplace merchants or consumers.
Imagine you want to sell your Google Glasses on a future PayPal/eBay entity where PayPal is a regulated financial institution. You go to setup your account as a “merchant” on eBay and because of eBay’s affiliation with PayPal you are asked to scan and send in your Drivers License, Passport, Tax Records, Bank Information, Building Lease, Business License, and several other authenticating documents. Internationally (the future of both companies’ growth) you may be asked to visit a post office, 7-Eleven, or government agency to have someone physically review and approve your documentation.
Rhetorical question; given the aforementioned process would you proceed with listing your item on eBay or go to the easiest alternative marketplace?
The Past Poor User Experience
eBay and PayPal know that the service with the least-friction customer experiences will win – therefore they know that if they want to achieve their future ambitions they cannot integrate the user experiences of each entity or entangle a hyper-regulated financial institution with laissez faire marketplaces or commerce platforms.
Ease of use has been a consistent threat to PayPal. All the “PayPal is holding my money” experiences that are replayed on hate blogs and with our friends, family, or our own money are the result of AML/CTF KYC regulations. These regulations are the reason the PayPal ecosystem was temporarily threatened by the rise Stripe and Braintree with their process-free and developer-simple APIs. When Stripe first launched a developer could run a test-payment in a few minutes. At PayPal, in part due to regulatory compliance, developer accounts/tokens would take 5+ days to issue before you could run a test payment. This led to developers rapidly adopting Braintree and Stripe in lieu of PayPal.
For eBay the rise of Craigslist, Gumtree (now eBay), Rakuten, Alibaba and Amazon’s easy-to-list-products marketplaces are exemplary of the benefits of low-friction, localized experiences.
All Other Reasons are Distractions
Let’s leverage one of the original detractors, and now primary promoters, of the PayPal / eBay split, Reid Hoffman. Hoffman cited three reasons for a separate PayPal: 1) Increasing Optionality, 2) The Importance of Leadership, 3) Preserving key synergies while moving forward.
- Increasing Optionality
Said another way, from a customer perspective the brands and customer experiences cannot live together. Each brand is moving independently to a mature brand definition:
PayPal as a payment mark (e.g. VISA, MasterCard, American Express), lender and bank.
eBay as Earth’s marketplace and commerce platform.
As the user experience and the brand are inextricably linked the companies must look to redefine the borders of their experience.
- The Importance of Leadership
Mr. Hoffman – PayPal’s leadership bench strength is tremendous:
- Gary Marino founded BillMeLater, sold it for nearly $1Billion to eBay and is now running 60%+ of PayPal’s P&L
- Don Kingsborough is a strategic visionary and CEO animal; previously the President of Atari (when Atari mattered), CEO of Worlds of Wonder (Teddy Ruxpin and Lazer Tag anyone?) and CEO of Blackhawk networks (Ever seen a gift card? 80% chance that’s Don’s work).
- Allen Olivio is a branding guru former Apple, Amazon, Yahoo and AT&T.
- Patrick Dupuis is a 20 year GE CFO and former CFO of Sitel.
Additionally PayPal has been a factory for entrepreneurs and a magnet for payments talent. Outside of the founding PayPal Mafia, recent former PayPal execs include:
- David Marcus, a serial entrepreneur who left to lead the future of Facebook
- Peter Karpas, Xero’s North American CEO
- Brian Biglin, Chief Risk Officer at Intuit
- Sam Shrauger, SVP Digital Solutions at VISA
- Nik Sathe, CTO at American Express
- Osama Bedier, former head of Google Payments
- Nat Natarajan, CTO / SVP at Intuit’s Consumer Tax group, and
- Scott Thompson, CEO at ShopRunner and formerly Yahoo.
PayPal is clearly not lacking in leadership. Rather it suffers from a lack of focus on the user experience when exceptions occur. Said another way: When things go right people love PayPal. It’s only when questions arise for PayPal that things go horribly wrong – which typically means a customer has crossed an AML, CTF or KYC threshold.
3) Preserving key synergies while moving forward
It is a fait accompli that PayPal and eBay will still hold hands and ride into the sunset. However they will now have an open, not codependent, relationship.
For many years eBay needed PayPal’s revenue and growth to support its turnaround and stem the marketplace’s decline. Forbes recently quoted Donahoe saying: “Ebay has strong margins and cash flow and you took that cash flow and invested it in the faster growing parts of the portfolio, mainly PayPal. The nice thing about the spin-off is that it allows eBay to keep its own profits and reinvest it back in the businesses that will best to drives incremental growth and provide a more cohesive capital allocation. It will let eBay control its own destiny.”
The subtext here is that for many years, a dollar spent in PayPal product and market development was guaranteed to yield a higher return than a dollar spent in eBay product and market development. However Donahoe and the Marketplace and Enterprise leadership team have been able to articulate a successful change in trajectory in eBay’s marketplace and commerce platform. They are now growing under their own momentum – and therefore it makes sense to invest in maturing their offering.
What happens next?
Having led the creation of PayPal’s point of sale product and witnessed first-hand the mobile transformation in the company, the response to Stripe’s threat, the acquisition of Zong, Where.com and the subsequent acquisition of BrainTree (and therefore Venmo) – I cannot see where PayPal’s optionality has been historically limited. PayPal exists on nearly every major merchant site in the US. For those merchants PayPal was missing; it just bought the Braintree portfolio.
Regarding competition – Entrenched incumbents present a potential medium to long-term risk to PayPal, new market entrants are nipping at PayPal’s heels, but for the moment PayPal remains the 100 lb gorilla. Apple Pay is 2007 payments technology in a 2014 flaccid / flexible phone that will take years to achieve mass-market adoption, Square’s $5B valuation will never be supported on the open market and no sane entity will purchase them at that price, and Stripe’s elegantly simple APIs have earned them a $1.75B valuation but they are not a serious threat to the PayPal + Braintree entity. PayPal just needs to survive long enough to let Square’s balloon deflate and they will remain the pervasive, alternative player in the payments market.
eBay has a portfolio of companies that, when combined appropriately, forms a platform of eCommerce capabilities that is potentially unrivaled. They just need to tie their companies together and they will have a killer retail platform and marketplace.
And all the while we, the users, get to enjoy the benefits of further optimized experiences and services, bespoke to their unique intent, that allow us to pay for, finance and sell anything anytime, anywhere, anyway.
