In the previous blog, we discussed how banks have been able to attract consumers to mobile forms of payment as a means of generating revenue, often at the slight expense of business profit. However, banks are not necessarily safe in the evolving market of mobile and networked forms of payment. PayPal, a fast growing Consumer-to-Consumer (C2C) model of payment1, poses a threat to bank revenue.
Founded in the U.S.A. in 1998, PayPal accounts currently hold roughly thirteen billion dollars in wealth, which would make them the 21st largest bank in North America2. PayPal functions as a means for consumers to transfer money between each other or pay businesses. Consumers can place money in their PayPal accounts, either in 1 of 66, 000 partner stores or via an account transfer, to make online purchases or buy from businesses that accept the payment method2. There are no transaction limits and personal transactions (between two private consumers) are free, while business transactions still face a roughly 2% fee2. This presents a distinct problem for traditional banks as they miss out on transaction fees.
While PayPal does not operate in many of the areas a bank does, since they don’t offer interest on accounts, loans, checks or other services2, they do present a disruptive innovation to traditional banks incumbent services. By offering an extremely convenient, fast, and cheap method of payment they have been able to take transactional business away from banks. A survey conducted by International Post Corporation found that, in 2016, 42% of Europeans preferred PayPal as their method of online payment, more than any other service3. They cited increased security (due to anonymity) and convenience as their reasons3. This presents a massive disruption for traditional business banks in the mobile pay market.
PayPal offers mobile phone applications, mobile wallet services, and one click payment options, all of which put it in direct competition with mobile pay options offered by banks (some of which we will discuss in later blogs). While at first glance this may not seem too worrisome for institutional banks, any competition in areas of customer convenience and transactions is a serious threat to their business model and cannot be taken lightly. With the growing popularity of online shopping1 and mobile pay, banks could not sit idly by while these services and revenues were taken from them. In many ways PayPal, and similar services, can be seen as the disruptive innovation that made the advancement of card methods and mobile pay a necessity for banks. By utilizing the connectivity of the internet and networks, PayPal innovated in a way that forced businesses and banks to adapt to the new era of convenience demanded by consumers.
Footnotes
1 Gonzalez, Andres. (2004). PayPal: The legal status of C2C payment systems. Computer Law & Security Review, 20 (4). Retrieved From http://www.sciencedirect.com/science/article/pii/S0267364904000512
2 Demos, Telis. (2016, June 1). PayPal Isn’t a Bank, but it May Be the New Face of Banking. The Wall Street Journal. Retrieved From https://www.wsj.com/articles/as-banking-evolves-fintech-emerges-from-the-branch-1464806411
3 Kats, Rimma. (2017, January 14). Cross-Border Shoppers Worldwide Favor PayPal. eMarketer. Retrieved From https://www.emarketer.com/Article/Cross-Border-Shoppers-Worldwide-Favor-PayPal/1015225
