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Smartphones have opened up the possibility of turning mobile devices into virtual wallets. And today, PayPal has made a big land grab for mobile payments with its new iPhone app.

In addition to making it easier to send and receive payments from a mobile device, the app uses Bump Technologies to let users share money instantly by touching phones. With more companies getting into mobile payments all the time, this could go a long way to help PayPal retain digital payment dominance. But there's one clear reason this won't replace cash.

Free to download, PayPal's new app gives users an easy to way to share restaurant bills, calculate tax and tip and view their payment history. But the Bump integration is the most interesting feature. Bump allows users to share contact information between nearby phones. For those concerned about bumping into a random stranger and sending them money from your pocket, it's not that easy to Bump a payment. Users have to have the PayPal app open and request to send or receive money. 

But making it so easy to swap funds is a great move by PayPal. More companies are getting into mobile payments all the time. Leading the forefront right now is Square. Led by Twitter's Jack Dorsey, Square is a tiny device that attaches to the iPhone and allows users to accept credit card payments. 

Aside from the fact that users need a special device to use it, Square is a new service that still has to overcome consumer distrust of the medium. Handing your credit card off to someone else can be sketchy. If you've never heard of Square, that little white box attached to a phone could be disturbing. At a recent charity even I attended, people who didn't have previous knowledge of the company were a very hard sell for mobile donations. And that makes sense, it's not apparent where your credit card information goes or whether your credit card number is then stored somewhere on the Square enabled phone.

PayPal offers mobile payments from a trusted service provider. And while scanning your credit card is a step up from having to type in the number, PayPal offers an even better upgrade — not having to use a card at all.

That payment option is going to be incredibly appealing to consumers — and businesses alike. Already, retailers are getting into the business of mobile payments. This fall, Starbucks launched an app that lets consumers upload gift cards to their phones for mobile payment at the coffee counter

That actually is one of the inhibitors to wide spread usage of PayPal as a mobile payment device. Starbucks gets to keep all of the money that consumers spend on its gift cards. If businesses can figure out a way to do mobile payments on their own, they'll save a lot of money.

Both Square and PayPal take a cut of of the money that gets paid through their services. PayPal takes a percentage of every transaction. It's free to send money with a bank account, but credit card payments are subject to a fee executed by PayPal. Meanwhile, if users want to access the money they've been paid through the service, PayPal also takes a cut — usually 2.9%.

PayPal has an advantage when it comes to mobile payments because people trust the company with their money. 80 million people use PayPal's website and 200 million are registered. And those numbers are growing. As The New York Times notes, PayPal's mobile transactions climbed from 24 million in 2008 to 140 million in 2009.

As Facebook acknowledged earlier this month with its own PayPal integration, offering PayPal as a payment option is an easy way to get people to spend money in a digital environment.

But as long as people have to pay a fee to access money they've been paid with a mobile phone, rumors of this sort of thing replacing cash will be highly exaggerated.

Image: PayPal

Meghan Keane

Published 16 March, 2010 by Meghan Keane

Based in New York, Meghan Keane is US Editor of Econsultancy. You can follow her on Twitter: @keanesian.

721 more posts from this author

Comments (4)

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Heather Taylor

Hi - I'm Heather and I run social media for PayPal in the UK. I was reading the article (it's really great btw) and I wanted to flag up something that may seem misleading: "It's free to send money with a bank account, but credit card payments are subject to a fee executed by PayPal. Meanwhile, if users want to access the money they've been paid through the service, PayPal also takes a cut — usually 2.9%."

If you accept a payment & someone uses their credit card to fund it, you as the reciever will be charged a fee but you will not be charged to access the money. You can transfer money to your bank account free of charge. You won't be charged double fees which is what this seems to imply.

over 6 years ago

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Michael

@Heather Taylor: A further clarification: do all *requests* for funds initiated through the iPhone Paypal app, run afoul of the 2.9% fee?

Here's a scenario:

1) I'm out with 4 friends, and I initiate a "Split the check" request through my iphone Paypal app.

2) Each member of the group pays me through the request with their paypal balance or bank account (no credit cards involved).

3) Will I, as the requester, pay 2.9% + $0.30 (USD) for each of their payments to me?

If so, then the app remains less-than-stellar. Split-the-check is a great feature, and I completely understand that Paypal is entitled to compensation for their service. However, the price is such a gouge (good grief, it's the same as a credit card fee! I might as well set up a merchant account with Google Checkout and defray my costs via AdSense!).

If Paypal wants to dominate this space, which it is well-positioned to do, given its name recognition and the accessibility/convenience provided by the app, I'll make two suggestions:

1) Charge no fees for requests/transactions under a certain amount (say $100). This is will accelerate adoption-of-use, cost a minimal amount to Paypal (due to the transaction price ceiling), and leave Paypal with a legitimate differentiation from its competitiors entering the electronic payment arena.

2) If you must charge, create a similar competitive advantage and accelerated adoption rate, by charging a minimal *flat* fee w/ no precentage - say $.25. The same ceiling for these terms could apply (say $100), before a requester would run afoul of a higher fee structure.

If you do this, you'll be miles ahead of the card companies, Google Checkout, and Apple's forthcoming offering. And let's face it: the company who can grow the largest user-base the fastest, will have a huge competitive advantage in the future, in dictating market-place payment practices.

I realize yor current fee structure seems to corporate, but consumers like me will pass your service by (I already have, since the fee structure changes in the past 12-18months) because of those minimal fees, and continue with their prior payment practices. Don't retard the present growth opportunity by chasing after a few dimes now. Your current strategy is future-dollars, tripping over present-day-dimes.

over 6 years ago

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Heather Taylor

If it is transferred with your PayPal balance or bank account, there are no fees in place on personal payments. All payments through the PayPal app are deemed as person to person payments at this time.

Thank you for all your additional suggestions.  It's great to hear what users think so we can make the products you use, better.

over 6 years ago

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Carlos

I'd like to see a contest - three queues at the train station ticket windows - twenty people in each queue.
In queue one, they have cash and are served by an attendant.
In queue two, they bump payment, but must ask attendant for the ticket.
In queue three, they order their ticket using their phone while approaching or standing in the queue and are served by a machine.

Instinct says queue three beats queue two which beats queue one. If vendors can save time and labour AND have the funds in the bank instantly - they'll be rushing to install bump payment facilities. Already there are millions of accelerometer enabled phones. This will be big. The teens will form a critical mass fast - they want to carry their phone and nothing else. Everybody hates queues.

almost 6 years ago

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