How PayPal Can Kick Facebook’s Butt

One day after Facebook casually announced that it had eclipsed the 350 million user mark, I’m going to revisit the question of who will succeed in developing the dominant Web 2.0 payment system.

In my previous post, I made the case that PayPal was better positioned than Facebook to achieve this, a position I stand by even in light of the latter’s staggering growth. As I noted, there are four reasons why it will be difficult for Facebook or any other competitor to unseat PayPal: 1) payments networks are incredibly hard to build, 2) payments are not a core competency of most companies so they’ll struggle to deal with the complexities of the market, 3) non-fiat currencies are a hard sell to consumers, and 4) a Web 2.0 payments network would have the most value if it’s also compatible with real world transactions. All of these points (especially the last one) suggest that PayPal is in the driver’s seat.

But being in the driver’s seat doesn’t mean you’ll cross the finish line, much less take the checkered flag. If PayPal wants to become the Web 2.0 payments network of choice, it has a lot of work to do. Let’s take a look at some of the strategic measures it would need to pursue.

First, PayPal needs to foster an ecosystem around it that engages developers, expands its influence, and decentralizes innovation. Fortunately that’s what the company has taken strides to do recently, with the PayPal Innovate09 conference and the launch of the PayPal X Developer Network site. So it looks like the company is enthusiastically throwing its support behind its API, a feature my former colleague Dave McClure was calling for back in 2002 when he was PayPal’s “director of geek marketing.” So the good news here is that PayPal is making strides to emulate Facebook and Apple, who’ve already reaped the benefits of an army of third party applications, but it still has a long way to go. Getting developers to further integrate PayPal into games, virtual goods, and other social applications is key to dominating Web 2.0 payments. Innovative companies like Payvment that are using the API deserve the company’s support—and maybe even some venture funding from PayPal. Google does it, and it wouldn’t be hard for PayPal to allocate a few million dollars from its annual cashflow into a payments-focused venture fund.

Second, PayPal needs to expand the types of payments its core functionality services. Currently, PayPal’s “send money” functionality lets you classify transactions as goods, services, and eBay items. Clearly this is insufficient for the Web 2.0 universe, where content or simulated goods are often the center of transactions. But the need to expand payment types goes beyond just slapping a few new categories into a radio box—PayPal needs to explore making payment types user-defined. If a social network wants to sell stored value units (e.g. how Slide charges “gold” for premium Superpoke actions) then PayPal needs to accommodate them. And there’s no way to accommodate the limitless ideas of social entrepreneurs except by allowing for user-defined payment types. But this should be part of the core functionality available to all users on the main site through both send money and website payments, not something that depends on developers building into third party apps.

Third, PayPal needs to make a vigorous effort to allow users to export their eBay Feedback and PayPal reputation scores out of the eBay marketplace and onto anywhere they’re needed on the web. The reputational information that eBay/PayPal has collected on its users’ behalf is hugely valuable—and under-leveraged. Reputation isn’t too important for many social activities like re-tweeting or even deciding who to friend on Facebook, but when money is involved that dynamic changes. If “social” payments are to become a significant part of ecommerce, they can’t be confined to transactions between friends. Counter-party reputation will help instill confidence and empower this form of commerce, and the information available to PayPal/eBay is something that Facebook, Amazon, and Google can’t match.

(Brief aside: I’ve long been an advocate of eBay liberating Feedback scores from its site and allowing users to port their reputation elsewhere on the Web, including homepages, blogs, and social profiles. Back in 2003, after eBay acquired PayPal, I informally pitched the idea of exporting Feedback to my new colleagues on the eBay side of the company but it failed to gain traction. I’m sure that was in part due to my own communication deficiencies, but I also encountered some “we don’t do anything to cannibalize eBay’s core marketplace” pushback. With their marketplace stagnant and PayPal acknowledged as the core driver of eBay’s future growth prospects, I doubt the dynamic would be the same today. Plus, eBay CEO John Donahoe and PayPal president Scott Thompson both seem to realize how important PayPal’s growth is to the future prospects of eBay Inc.)

Fourth, PayPal needs to enable users to tweet payments. The mechanism for sending money via Twitter could be pretty simple, and it’s important enough to be part of PayPal’s core functionality. To do this, PayPal will need to let users link their account with Twitter, something their users have already been trained to do by linking PayPal to their eBay account as well as banks and credit cards. Some form of verification would probably be required; the hurdle needs to be a bit higher than what it takes to synch up third party apps like TweetDeck due to security concerns. One way to do this would be for PayPal to send a unique code to a user’s primary email address, which they then have to copy into a direct message on Twitter to @PayPal.)

Once this is set up, tweeting money would be easy. I think the simplest way would be to send a direct message to @PayPal followed by a simple syntax that includes the recipient’s Twitter username, the amount, and an optional note. Using a DM to convey the send money instructions to @PayPal would preserve privacy for both sender and recipient. If the recipient has already linked his PayPal and Twitter accounts, he would then get a DM from @PayPal confirming that he’s got cash. If the accounts aren’t linked, he’d get tweeted a notice from @PayPal that he’s got cash (but no specifics on the transaction since tweets aren’t hidden), along with a shortened link to take him to PayPal’s site to claim it by linking accounts. This flow would be simple and elegant, and once the accounts are linked people could tweet money without having to login to PayPal’s site.

You might be asking, if the goal is to become the Web 2.0 payments gold standard, why focus on Twitter first, as opposed to Facebook? I think Twitter is the better forum for PayPal to go after right now for a couple of reasons. For one thing, integration would be easier given the open nature of Twitter’s platform. Also, the overlap in the Venn diagram of PayPal (78 million active users) and Twitter (93 million active users) should be close to 100%. Twitter’s users still skew toward the tech savvy and early adopters, whereas Facebook’s 350 million accounts are obviously less tech savvy on average because they look more like the world as a whole (i.e. there’s a lot of Baby Boomers using Facebook).

PayPal should have a significant portion of Twitter users linking their accounts within 1-2 quarters, which would give it a strong launch pad for going after the rest of the Web 2.0 universe. Think of what third party developers could build after users begin to link their PayPal and Twitter accounts on a serious scale. Also, capturing payments for the majority of the Twitter user base would also give Facebook a major disincentive to block PayPal from its site, which (like eBay before them) is a temptation they’ll probably face once PayPal starts playing in their sandbox.

This is by no means an exhaustive list of the steps PayPal would need to take to secure leadership in Web 2.0 payments. We haven’t even touched on pricing, much less Facebook integration. But it’s a good start.