E-BUSINESS SPECIAL REPORT
Did PayPal Kill Online Payment Systems?

Already, the company has outlasted rivals like Beenz.com and far outpaced others like RocketCash.com. But although many firms have ceded the market for person-to-person (P2P) payments to PayPal, there are signs that others still see plenty of opportunities in certain subsectors of the online payment world. Could they succeed, or has PayPal so dominated the market that would-be startups are destined to failure?

Room To Grow

Last year, for example, security firm VeriSign (Nasdaq: VRSN) purchased CyberCash and integrated that company's payment system into the VeriSign online storefront offerings. And just last week, I4 Commerce landed US$23 million in venture funding that will help it spread the word about its online payment system, known as Bill Me Later.

Mark Lavelle, vice president of business development at I4, told the E-Commerce Times that his company is targeting a US$400 billion market of Web site and retail catalog shoppers who either do not have a credit card or want to buy without supplying credit card information. The service, offered at Buy.com and eBags, among other sites, lets consumers use their birth date and part of their social security number to make purchases.

"Our message to retailers is that it's not a zero-sum game where they can only give consumers one option," Lavelle said. He noted that while credit cards are used in only about 35 percent of offline retail purchases, they are used more than 95 percent of the time online. "That's not because people love paying with credit cards. We contend that it's because, by and large, people don't have choices.

"There is a lot of evidence out there that people are still not buying online because of security concerns tied to their credit cards," Lavelle added. "We think if consumers have more choices, that will mean more sales and more profitability for retailers."

400-Pound Gorilla

Still, I4 and other competitors face a formidable foe in PayPal, which has steadily built a massive online audience and instant name recognition among many shoppers, Gartner (NYSE: IT) analyst Avivah Litan told the E-Commerce Times.

Thanks to a hugely successful word-of-mouth campaign -- and some guerrilla marketing tactics in its startup days that involved giving away cash -- PayPal began gaining 20,000 new members per day before it was even a year old, a pace it generally maintained until the eBay (Nasdaq: EBAY) takeover.

In fact, a survey of 1,000 online consumers conducted last year by Gartner found that 33 percent considered PayPal a "highly trusted" payment option, while nearly one-third had already used PayPal.

"They've got a platform on which they can build even more growth," Litan said. "The level of brand awareness has them in a position to become the e-cash standard for Internet purchases."

Future Perfect?

But there is one variable that may affect PayPal's future in unpredictable ways: the eBay factor. EBay bought PayPal last year, shortly after the online payment firm's IPO.

An eBay spokesperson did not respond to requests for comment about the auction giant's plans for PayPal. But eBay auctions traditionally have made up well over half of all PayPal transactions and revenues. In fact, analysts say that if PayPal has one weakness, it is a lack of diversity.

IDC analyst Aaron McPherson told the E-Commerce Times that foreign currency exchange and money-wiring services are areas that would make sense for PayPal to pursue.

"They've got a trusted platform, and they should build on that," McPherson said. At the same time, credit-card companies also have strong relationships with consumers, and most have developed their own online payment options or are working on doing so. "There is still room for a lot of players, but whether any of them [can] become as dominant as PayPal is in the person-to-person market is another question," he added.

The next chapter of PayPal's history has yet to be written, but if past performance is any guide, the company will be a tough competitor. Although PayPal's dominance likely will not prevent newcomers from succeeding within various niches, it seems unlikely that a startup with lofty ambitions could take on this Goliath and prevail. Then again, history is littered with improbable Davids.