Page Updated 2007-7-6

Insider’s Report on Payments

PayPal: 21st Century Cash

By Patti Murphy

I must admit, I’m a bit of a banking industry snob. Call me “old fashioned,” even “quaint,” but I believe banks play a crucial role in the economy as keepers of the gates to the payments system. And I’ve never been keen on the idea of non-banks acting like banks, for a variety of reasons, not the least of which is federal deposit insurance protection.

So it may come as a surprise that I recently added a MasterCard-branded PayPal debit card to my wallet. PayPal, after all, is owned by eBay

I’ve been using PayPal for a few years, in much the same way my mother would use the not-so-secret stash of cash she called her “mad money.” She’d use that to buy something extravagant when she was mad about something; it would generally cheer her. I use my PayPal account as though it’s cash, for extravagances like downloading iTunes.

In my mind’s eye, PayPal is a 21st century version of cash, especially when you add a debit card feature to the account.

As a young teenager in the late 1960s, I enjoyed buying vinyl records; we called them “45s” or “singles.” They cost 99-cents, and I would pay using the cash I earned doing odd jobs. Now I’m a considerably older adult, but I still enjoy buying music at 99-cents a pop, only today it’s online rather than at the local record store.

I like using PayPal for these purchases because it’s convenient. I set up an account with PayPal, which is tied to my checking account, but I usually keep some money in the account at PayPal. Then, when I set up an account with an online merchant (like iTunes), I provide my PayPal account information and from then on I can add a tune to my collection with the ease of a mouse click.

The downside to having a PayPal account, and keeping “mad money” stashed there, is accessing that cash in a pinch. That’s where the PayPal debit card comes into play: I can use it at the point of sale just like cash, and if I really need the “green stuff” I can spring for the ATM fee.

Recently, PayPal offered me “back up funding” for my MasterCard debit card. The options are to link the card directly to my checking account, or apply for a PayPal credit card. I don’t need that; it’s too much like borrowing. But then, people do sometimes need to borrow cash.

I had an opportunity during the NACHA Payments 2007 conference to meet with Rene Pelegero, senior director for industry relations, strategy and compliance at San Jose-based PayPal. He likened the PayPal debit card to a stored-value or prepaid debit card; the value to PayPal comes from transaction interchange, he said.

Pelegero stopped short of describing PayPal as a bank. “We complement banks,” he said, explaining that PayPal “rides the rails of the bankcard and ACH networks.”

[Less than a month later, however, PayPal announced it had been granted a bank charter through the European Union. That bank, based in Luxemburg will open in July. But don’t expect the FDIC or Fed to follow soon; a PayPal bank isn’t likely here.]

In an era when the handshake on a sale is as likely to be electronic as it is a pressing of the flesh, there needs to be an electronic equivalent to cash and coin. PayPal is becoming the electronic standard for transactions that just 10 years ago were handled using cash, coins or personal checks.

There are alternatives to PayPal. Google Checkout comes to mind, but it’s not nearly as fast and cash-like as PayPal.  And I’ve not yet had any of my Internet-savvy friends offer to “Google that over to you in the morning” after asking me to pick up the tab at a group outing.

“What PayPal brings to the equation is a level of trust,” said Pelegero. “To move money between two parties that otherwise may not know each other, and to do that with an increased level of security.” He added that PayPal has invested in a multi-year strategy to enhance fraud detection.

To further insinuate itself into the consciousness of the 21st century shopper, meanwhile, there’s PayPal Mobile. It uses a text-messaging based transaction initiation process; users tender cash with the ease of text messaging.

Next time your with a group ask folks to quick pull out their cell phones, then ask them to pull out their debit cards. In a race, cell phones will win every time. Or ask any parent of a teenager how frequently they use cell phones to text message, and the image of cell phones as wallets begins to emerge.

A 2006 survey by Visa brings that image into clearer focus. In a survey of 800 American consumers, 77% aid they would find it difficult to get through a day without their mobile phones. Even more telling, consumers in that survey were twice as likely to carry mobile phones as cash; 18 to 34 year olds were four times as likely to carry phones instead of cash. And more than half of those between the ages of 18 and 44 worry about not carrying enough change to make small purchases.

Originally prepared for Green Sheet

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