Why mobile wallets?

The idea behind a mobile wallet is that a customer will pay for their purchase at the point of sale with the cellular phone, rather than a credit card. Because over 90% of the US population uses a mobile phone, arguably a higher percentage than people whom even own a credit card, a mobile wallet solution boasts a potential existing user base of nearly everyone. Unlike trying to invent some payment technology from the ground up, which has worked fewer times than I have fingers on 1 hand, a mobile wallet will capitalize on existing technologies and existing products that are widely in use.

How a mobile wallet should work:

This is one area there are going to be many answers for. I will take a purely consumer approach to it. The mobile wallet must work as follows:

• Must allow me to use any payment method I chose (Credit card, bank account, paypal, etc.)
• Must allow me to use my existing card and bank account.
• Must work with my existing phone (1 software installation is acceptable).
• Must be just as fast or faster than using my credit card.
• Must provide me additional security in the event I lose my phone.

This is the bare minimum for a functional mobile wallet. Note that the first 3 features stress independence from the company that supports the mobile wallet, and being able to use multiple methods to pay. This is extremely important, as there’s no chance in getting me or anyone to change card issuers, banks or anything else just because your company offers a mobile wallet. The mobile wallet must be independent of any requirement to use a specific card issuer, bank, or other service provider.

Where’s my mobile wallet?

As of writing this article, no company has come close to implementing a working mobile wallet solution. We’re going to hear stories from a number of companies on how close their mobile wallet solutions are, but realistically there is an enormous amount of work before these become reality. Not only does a very intuitive software program need to be created for a person to load onto their phone, but retailers must have software / hardware that allows them to interact with the phone, and retailers must have some connection to the wallet platform through their credit card or other payment processor, more on this later…

One idea that is beginning to rear its ugly head, is that cellular phone companies can bypass credit card companies and banks and simply add a charge to a customer’s phone bill. While this is a fantastic idea that would eliminate one of the biggest hurdles in the entire system, there’s no possible way it’s going to work given the current customer sentiment towards cellular carriers and cellular infrastructure. Cellular companies are neither operating under a business model to grant revolving credit like a bank, nor one that would allow them to underwrite and manage businesses whom accept payments on their platform. Personally, I wouldn’t even entertain the idea of my cellular carrier becoming my bank or credit issuer! Lastly, the SMS billing systems have already shown merchants what the cellular companies think their billing service is worth, which is nearly 50% of the transaction amount. For retail merchants, 5% let alone the current 50%, is simply not acceptable. It’s going to take policy and operating changes that would rival a country switching from socialism to democracy for cellular carriers to successfully become mobile wallets providers. Being some of the largest companies on earth, I just can’t see them moving quick enough with the amount of interested that this technology has developed in a short amount of time. Consumers may drive the payment industry, but no amount of consumers is going to force retailers to pay 50% to accept a mobile payment!

The real hurdles

Throwing my cellular provider’s mobile wallet out the window, there are several areas that major hurdles must be overcome before mobile wallets are close to becoming reality.

Customer software

The first hurdle, and the easiest to overcome will be creating software that works on a variety of mobile phones. This software is what will interface with a merchant’s POS system or other payment capturing device. It will act as the bridge between the merchant and the customer’s payment method. Realistically this isn’t an extremely difficult technical feat considering that a vast number of mobile phones supporting Bluetooth and other communication protocols. It will simply be a matter of allowing the wallet application access to the internet and the Bluetooth or communication capabilities of the phone.

Merchant software / hardware

Merchant based software and hardware on the other hand will be a huge problem. The easiest path for merchant to interface with the software on a phone will be some sort of 3rd party peripheral. This could easily be something the size of a PINpad and would ideally use existing connection options on the POS or terminal to communicate with the customer’s phone. The difficult part comes in trying to get the authorization through the mobile wallet platform. Many POS systems and terminal use dial or proprietary methods to connect to processor or the internet… There are 3rd party companies like gift card providers that interface with POS systems and credit card terminals, but they are very limited in the systems that can use them. While I think that this burden will be on the shoulders of the POS companies and the credit card terminal manufacturers, it’s no less daunting tank in the overall picture. Based on what I’ve observed of POS and terminal manufacturers over the past 10 years, particularly with regard to the speed that new technologies are adopted, I believe that this will end up being the final piece of the mobile wallet puzzle.

Credit card processors

The biggest hurdle for mobile wallets to work is there has to be a mechanism that would link a customers credit card and/or bank account with their phone (This hurdle is due to the bureaucracy of Visa/MC not the actual implementation). This doesn’t sound a particularly daunting task, but if you’ve worked with Visa and MasterCard and their books of regulations and operating procedures, you would know how difficult it is to go against the grain on anything related to their systems. The “grain” that I am referring to is not allowing a business to accept a payment for another business (also called factoring). In short, this means that the mobile wallet provider cannot accept the customer’s payment and then pay the merchant. The payment must go directly from customer to merchant. For the payment to go from customer to merchant, through the mobile wallet, there has to be a lot of back-end integrations and agreements between processors and platforms, card issuers, and communication platforms. The complexity of integrating with multiple processors across multiple processing platforms is well beyond the scope of any article that I can write, but it would take years to perform even by someone who knows what they are doing.

A realistic outlook

If I were to bet on when we see the first mobile wallet, I think we could safely say 5 years before anything exists at all, and 10 years before it is common. This is my best case scenario based on a mobile wallet working relatively close to the above description. The exception is if Paypal makes a mobile-retail platform, which could probably exist in a few years for select retailers. This would be much simpler to implement since Paypal doesn’t have to adhere to the Visa/MC regulations as described above and they have their own platform, which would bypass the bureaucratic mess that everyone else is going to run into. However, Paypal is in its infancy in the retail world, and still has many of its own hurdles to clear. We will most likely see mobile wallets progress in steps. I would bet that we will first see Visa or MasterCard apps that link your credit card to your phone. From there we can probably expect to see 3rd parties pushing for more independent services and banks should be joining in soon after. Eventually we will need to end up with mobile wallet providers that can handle all cards and bank accounts without having to use multiple companies. Only then will we truly have a mobile wallet.

Just a few months ago, MasterCard announced they would open up their API’s to developers. Just before MasterCard, Visa purchased Cybersource, the company that owns Authorize.net. Amazon.com and Google, 2 of the largest presences on the internet, have their own payment systems, priced identically to Paypal, already with millions of users. And yet, Paypal continues to dominate the alternative payment market. Just imagine if 4 of the largest, and most powerful companies on earth put your business in their cross-hairs…

So how is it that a company like Paypal can withstand competitors, despite their own fallacies, and still maintain near-unchecked dominance over online payments?

Let’s start at the beginning…

In the beginning there was eBay. eBay revolutionized online shopping and person-to-person sales, and not just on the internet. eBay was truly the first, very-successful, online auction and marketplace. No auction site to this day has even put a challenge to eBay’s huge user base. The primary competitors now, are Craigslist and Amazon.com, both operating on entirely different business models, and only 1 with their own payment system. In 2002 eBay purchased the already successful Paypal to replace their failing Billpoint service. Both were payment options that buyers and sellers could use for eBay transactions. Paypal at the time was beating eBay’s Billpoint in popularity, so the acquisition was obvious and well overdue. Eliminating all competition from eBay payments allowed Paypal to gain complete dominance over alternative payments. There were a few others out there, but since eBay was the place to sell stuff, and Paypal was virtually built-in, Paypal became the only choice. eBay’s structure has always made it difficult for traditional merchant accounts and payment gateways to be used, so Paypal was almost always chosen by businesses if not for any reason but convenience. All the while, Paypal continuously advanced on a second front which consisted of a simple shopping cart, customer invoicing and person-to-person payments. This allowed anyone to send and receive money from other people, and allowed just about anyone to sell products on a website. Through these 2 channels, Paypal quickly became the one and only online payment provider.

Paypal has also greatly expanded its website integration methods, allowing for very customized and efficient buying experiences, enticing large ecommerce sites to use them as well.

Paypal plagued with problems

Paypal as a service provider is not without problems. Since their inception, they have been plagued by their poor quality of customer service, virtually non-existent human support, and draconian risk management procedures.

Paypal has one of the poorest track records of customer service anywhere and I believe it rivals any company on earth. I can’t think of a single aspect of Paypal’s business that I haven’t heard major complaints about. Additionally, it’s not just the fact that Paypal has complaints, but the poor manner in which they address, or fail to address, their customer’s problems. There’s over 7,000 complaints with the BBB alone in the past 3 years. There’s millions of angry buyers and sellers that have lost money through Paypal, many of these while following Paypal’s policies to a T. To be quite honest, there’s probably few companies, that could survive with the amount of negative experiences and negative press as Paypal.

Many people, probably the majority, never have problems with Paypal, but many of those who do, often end up abandoning their service altogether.

Onto the answer

Paypal will continue to dominate payments despite complaints, problems, and time, for these reasons.

1. They’re already accepted and used everywhere.
2. They are available where merchant accounts are not.
3. They offer P2P payments.
4. There’s no other option!

They’re already accepted and used everywhere

Paypal’s user base is currently over 100 Million (the number of active accounts is substantially lower). With the sheer number of web users that have a paypal account, and the number of businesses that accept it, it is going to be a daunting task to try and move people away from it.

They are available where merchant accounts are not

As someone who runs a merchant account provider, I can tell you that Paypal has an enormous advantage in that they are not restricted to the people they can service. Paypal is available in most countries in the world. Merchant account provides and most processors are restricted to a few countries. There’s no contracts with Paypal, no terms, monthly fees or termination fees. Lastly, Paypal can facilitate Person to person payments. Merchant account providers cannot do this, neither in principle nor the actual mechanism to facilitate them.

There’s no other option

Realistically, until there’s a huge Paypal abandonment, there’s no other option than Paypal. Payment services are a consumer driven industry. Until consumers want to pay with something else, they will continue to use Paypal. The catch 22 is that merchants accept what their customers use for payment and consumers wont switch until merchants accept it.

For a quick example of how slow payment technologies move, just look at contactless payments. They’ve been around for many years yet only a small percentage of card holders have contactless cards, and an even smaller percentage of merchants accept it. Nothing I have seen in the past 5 years offers compelling evidence that contactless or smart cards or mobile or any other technology will make a move any time soon. There’s often a lot of press and noise on these new technologies, but very little actual implementation.

They offer P2P payments

Paypal offers P2P (person-to-person) payments, allowing any person with an email address to send money to another person. This has 2 competitive advantages. It first gives Paypal the massive user base that’s not restricted just to businesses. Second, it gives them an enormous cost advantage over merchant account providers. Since roughly 50% of Paypal’s payments are funded from an account and not a credit card, Paypal isn’t charged any fee for these. They do however charge the merchant the fee. When you put this into their own cost/revenue breakdown, it effectively reducing their internal cost by 50%.

Visa and MasterCard have made it so difficult to create the type of business (Called an aggregator or 3rd party processor), there’s little chance of anyone being able to successfully do it. Just try to find a relevant accurate guide on how to set up a payment aggregator or 3rd party processor. It doesn’t exist because it’s only been done a few times, and of those that have succeeded, even fewer have survived. In the research I’ve done and helped others with on this type of business, it would take tens of millions of dollars just to get established. A business like this would need to have an enormous user base or some very good reason to people to start using their service or they would simply fade away like the many that have tried.

Where the competitors are going wrong.

The key mistake that Visa, MasterCard, Google, and Amazon are making is that unless they can answer the P2P payment issue, they will never pose a real threat to Paypal. Paypal is just as innovative on everything from mobile payments to ecommerce as anyone out there. They created their X-platform and are opening it up to developers, which allows for very advanced development like 3rd part payments, aggregating, and mobile or retail integration. Visa and MasterCard have no chance by themselves, it’s absurd for them to think that their brand is important enough without the other issuers to make in this space. I can’t see all of the issuers joining forces to create a massive P2P payment system any time soon, not to mention they would have more antitrust lawsuits flying than has ever been seen.

Realistically, these Paypal challengers are only banking on Paypal’s poor customer service reputation to try and gain a market share, and Paypal users aren’t jumping ship.

I would say that right now, Google and Amazon are the only ones with a shot, and based on their user base, they have a good one. Aside from the lack of P2P payments, they are still failing in getting consumers to switch their payment systems, and until they do, they will not pose a real challenge.

So, how do the 3 alternate payment methods compare to each-other from a merchant’s perspective? There are 3 main areas that merchants are generally interested in, cost, protection, and integration. The following is a comparison of Google Checkout, Paypal, and Amazon payments in these 3 areas.

Cost

Since cost is one of the most, if not the most, important aspects of any payment system, we’ll waste no time in comparing these. All of these services offer volume based pricing, meaning if you process many thousands of dollars per month the cost comes down considerable.

Standard processing fees:

Micropayments:

It’s no coincidence that Google and Amazon have priced their services exactly the same as Paypal. Paypal has a terrible reputation from many sellers perspective, and I think that Amazon and Google are betting that by simply matching their costs, they will gain customers based on their quality of service.

Seller protection

Google Checkout, Paypal, and Amazon Payments are all considered 3rd party processing systems. What this means is that they are accepting payments on behalf of your business. With a traditional merchant account, your business has a direct relationship with Visa and MasterCard through your credit card processor, whereas a 3rd party processor, you are basically using the 3rd party processor’s merchant account.

Seller protection is of significant importance because the 3rd party processor is responsible for any expenses related to chargebacks and fraud from your business. If you receive a chargeback, they generally pass expenses down to your business, but the 3rd party processor is ultimately accountable to Visa and MasterCard for expenses associated with these. Google Checkout, Paypal, and Amazon Payments employ their own fraud screening, customer dispute, and chargeback management systems. Since you have very little control and access to your customer and transaction information, it is important to understand what sort of protection you have available, and what sort of pre-filtering you can setup to prevent unwanted transactions in the first place. One good note about Amazon payments in particular, is that many of the potential customers using this services have long standing relationships with Amazon.com, which can greatly reduce the number of potential fraudulent orders.

Account taken over? – All 3rd party processors introduce a second avenue for fraud that traditional merchant accounts do not have, which is when an account gets hacked and taken over. hacked accounts are not always immediately discovered creating a real chance that you accept payment and ship an order that was placed through a hacked account. As far as I have seen, seller protection is not extended to hacked accounts even though there is no way for you to know if you are accepting payment from a hacked account.

Lastly, since all 3rd party processors have their own dispute resolution systems, a customer actually has 2 chances to make a dispute or chargeback. The first is directly with the 3rd party processor through their dispute resolution system, and the second is directly with their credit card issuer. This gives customers 2 chances to recoup their money if they are unhappy with your services, or are trying to defraud a merchant by making a chargeback after receiving their order.

Paypal

Paypal allows for the most flexibility in the parameters that are required for you to accept a payment. You can specify countries, confirmed shipping addresses, payment types, among many others. For Paypal to provide protection to a seller a number of certain qualifications must be met otherwise Paypal will not cover the cost of a chargeback. Since a merchant can manually change their own requirements for accepting a Paypal transaction, it’s possible to inadvertently remove oneself from seller protection.

Additionally, likely due to the number of people using it, Paypal is probably the #1 avenue that fraud is committed over the internet. Search around and you’ll find thousands if not millions of cases where sellers have lost their money and product, and in many cases complying with all Paypal seller policies. You’ll find an equal number of upset buyers who lost money from an unethical sellers.

• The transaction must be marked eligible or partially eligible for Seller Protection on the Transaction Details page.
• The item must be shipped within 7 calendar days of receiving payment to the shipping address on the Transaction Details page, and in accordance with our shipping requirements.
• In the event a buyer files a claim, you need to respond to our request for documents and other information in a timely manner.
• The item must be a physical, tangible good that can be shipped. Your primary residence, as listed in your PayPal account, must be in the United States.

With that being said, Paypal does offer reasonable protection for merchants selling tangible products who can meet Paypal’s requirements on a transaction. Once such requirement is proof of shipping, which essentially requires a signature from the actual person whom placed the order. Anyone who has ever shipped for a business knows that the person making the purchase is the same person that signs for the package about 1% of the time, and packages are usually left on a doorstep or with the first person with a pen. In many circumstances, this does not count as verified delivery.

So, while Paypal is by far the most used 3rd party processor, they also offer the least amount of seller protection, and have an uncountable number of negative experiences reported with their customer service, and policies. Paypal’s risk management also leaves something to be desired, and I would say it is inevitable for a merchant’s funds to be help at some point with Paypal. While this is unrelated to seller protection it is a huge pain to send the documents to Paypal and then hope to have your account reinstated. Since Paypal does very little to pre-qualify buyers or sellers, the account-hold situation will forever be an undesired Paypal feature.

Google Checkout

Google offer’s excellent chargeback and fraud protection, however merchants have very little control over buyer requirements. This isn’t necessarily a problem considering that the buyer’s country / location can be a requirement for purchasing through your company via Google Checkout. Google takes a very lenient stance on chargebacks and will rarely charge a merchant for a chargeback or fraud even if the merchant loses. Google as a company has a way of commoditizing products and services and their payment service is no exception. I’ve personally seen Google absorb chargeback costs for merchants, where a merchant account provider or paypal would have billed the merchant every time.

Google’s official policy is as follows:

Guaranteed Payment: Checkout’s Payment Guarantee protects 98% of Checkout orders on average — when an order is guaranteed, you get paid even if it results in a chargeback.

Free Protection: While merchants are typically charged for fraud protection services, Google’s comprehensive protection is free.

Lower Fraud Costs: Checkout’s fraud detection systems reduce fraud and manual review costs by proactively filtering out fraudulent orders.

More Sales: The same systems also help increase sales by identifying legitimate orders that you might otherwise mark as fraudulent.

Fair Treatment: Unlike other services that immediately deduct funds from you for chargebacks, Google does so only after a decision has been made as to who is at fault.

With moderate success, Google applies their typical do-no-evil attitude to the Google Checkout service.

Amazon Payments
Amazon offers protection similar to Google Checkout. Amazon’s official statement is:

If a seller follows the Amazon.com Community Rules when listing, selling and shipping their item and, can document shipment to the customer or that the buyer received the correct item, Amazon.com usually does not hold the seller responsible for the reimbursement of the claim. Otherwise, Amazon.com will usually debit the reimbursement for the claim from the seller’s account.

The gotcha here is again the “document shipment to the customer”. As with Paypal, it is very difficult to actually prove that the person placing the order received the package.

Amazon payments is still a newcomer to the payments business, and has positioned themselves somewhere between Google and Paypal. Something that neither Paypal or Google Checkout have, Amazon has the huge benefit of millions of active Amazon.com customers, many with years of history purchasing from Amazon. This pre-qualification goes a long way in reducing fraudulent orders and chargebacks. Going out on a limb, I think it’s fairly safe to say that accepting payments from Amazon is going to be safer than any other payment method because of this existing relationship.

As far as potential customer service blunders, one thing to be careful of here is Amazon customers expect a certain degree of service when it comes to product delivery and return/refunding orders. Amazon’s policies on these are far more lax than most online retailers, so there’s definitely the potential for conflict if a customer wants to return a product outside a business’s normal policies.

Non-tangible goods

There’s very few processors who handle payments for non-tangible goods like digital downloads, consulting, and other services very well, 3rd party processors are hardly an exception. This is because a customer can make a chargeback with their card issuer for a number of reasons that are virtually un-challengable. Chargebacks like “product not as described” are almost impossible to beat even with superb descriptions, disclaimers, and anything else merchants try to throw at their customers. Until Visa/MC/Amex issuers change their chargeback policies, it’s unlikely that merchants will receive any relief from these types of chargebacks for non-tangible goods and services where the accuracy of the description is easily interpretable. Amazon is currently making the most public push to cater to digital sellers, and of the 3 they offer the most options and protection for this type of service.

Integration

Integration is likely an afterthought for the business owners, but is the most important feature for a developer. All 3 providers offer integrations ranging from simple to advanced allowing developers to create unique and completely customized checkout systems. The most simple integrations require only pasting HTML into an existing website, while the advanced methods use API (Application programming interface) which allows for a seamless connection from an existing website to the processor. API’s allow for passing information like shipping and tax, in addition to a number of other data possibilities, directly to and from the website’s shopping cart.

Paypal

Paypal is probably the easiest to integrate with. There are literally thousands of scripts online, and just about every shopping cart software is ready to go with Paypal out of the box. Paypal offers several methods of integration.

• Website Payment Standard (HTML buttons to place on a website or blog)
• Express Checkout or Website Payment Pro (API integration for simple and advanced payments on an existing shopping cart)
• PayPal payment gateway (ex-Verisign’s Payflow gateway)

The most simple Paypal integration is the buy now buttons that almost anyone could paste in their website to allow a customer to purchase an item from them.

Most website owners would want to use the express checkout or payments pro integration methods. These offer the cleanest user experience. I personally recommend the express checkout method of integration. Your customers start and end on your website, offering the best opportunity for the customer to complete a purchase and the least confusing checkout method possible. The API integration methods allow for uploading shipping and shopping cart information directly into Paypal, and offers support for calculating shipping and tax if the customer changes their address while on Paypal’s website. While the information and code samples that Paypal provides are severely lacking in documentation and organization, the pre-made scripts are a good start for many to get some of the more advanced checkout features going. My personal opinion on the pre-made scripts is that the code is grossly overdone, good programmers or those with a large number of website visitors, should really look into writing their own code to save system resources and reduce complexity.

The Paypal gateway is the former Verisign Payflow link and pro payment gateways. Using these requires a merchant to sign up for a more traditional merchant account through paypal. A merchant still needs to use one of the other integration methods to accept direct paypal payments from their customers.

Recently Paypal has been making huge advancements in developing their integration platforms. Developers are beginning to gain access to systems allowing for aggregation, mobile payments, and a variety of other advanced payment resources. Paypal is pushing the front-line of web and mobile payment development and is desperately trying to get developers to buy into their platform, which in my opinion is working.

Google Checkout

Google also offers several methods of integration from the most simple paste in scripts to very advanced API functions. Google also offers email invoicing, and the Google checkout shopping cart, through their administration panel.

Google’s most basic integration is the Checkout Store Gadget and buy now buttons,which allow website owners to visually create products and buy now buttons and then past them into their website. Multiple options can be added to a product and once clicked on the buyer can quickly make a purchase through the Google checkout system. The store gadgets are a great way to add a few products to a website, but if a store owner has an existing website or a full catalog of products, they’ll want to use one of the more advanced integration methods.

Google’s API offers advanced shopping cart integration and many features to streamline the purchasing process. Google also provides a number of well designed integration scripts in just about every language to get programmers off to a quick start. The API supports fully uploading a customer’s shopping cart items and descriptions, and allows for custom shipping and tax calculations, sales, discounts, coupons and just about anything else a website owner can come up with. Google Checkout is a moderately difficult service to integrate with, but the pre-made scripts are great and most medium level programmers shouldn’t have too much trouble once familiar with Google’s API.

Once a user is setup with a Google checkout account, it takes about 2 clicks total to make subsequent purchases. This is very important to help sales, as 3rd party checkout systems offer a mixed bag of conversion rates compared to an on-site checkout.

Amazon Payments

Amazon offers several methods of integration again ranging from simple paste-in code, to the most advanced API integration.

Amazon’s most simple method of integration is the Amazon Simple Pay, which is similar to Google and Paypal’s button creating features. Again like Paypal and Google, most website owners with more than a handful of products will want to use the more advanced integration methods.

Amazon’s API’s are very robust and offers a number of very advanced features. To list them all would be a post in itself, but they offer just about anything a business owner could want from pre and post transaction payments, variable amount donations, recurring payments, aggregation, 3rd party payments, credit card authorization and capturing, and all of the normal features a payment system would have. With the huge amount of features comes a the burden of trying to integrate Amazon’s system into a website, and I again stress that it is no easy task once a website moves past the basics.

The typical method that most merchants will want to use is Checkout by Amazon, which allows for a merchant to include shipping and tax information when their customer completes a purchase on Amazon’s checkout page. Checkout by Amazon will meet the needs of the majority or websites, and includes several sub-checkout methods for different situations, one allowing for a very quick conversion. The Amazon PayPhrase requires only that a customer enter their secret phrase on the checkout button, and the purchase is complete! Checkout by Amazon will not cater to developers with very special checkout needs, which is there Amazon’s most robust API comes into play, however 98% of website should be perfectly fine with Checkout by Amazon.

Amazon Flexible Payments represents the pinnacle of ecommerce payment technology at this point. Amazon Flexible Payments is also the obvious reason why Paypal has invested millions in their platform as it is truly a huge step ahead of anything out there. Amazon Flexible Payments allows for developers to create very complex payment mechanisms involving multiple parties and/or very flexible payment time-frames and parameters. Want to bill one customer, pay another and take a cut, Amazon Flexible Payments. Need to charge a customer a month after they download your software, Amazon Flexible Payments. If you can think it up, Amazon Flexible Payments can probably do it. However, with the huge set of features comes the difficulty in implementing them, and as stressed above is not an easy task. Amazon Flexible Payments is the most difficult payment system to integrate with, and is one of the more difficult API’s I’ve ever encountered. Amazon Flexible Payments supports only more advanced integration methods like SOAP (If you don’t know what this means, don’t worry, you don’t need to know). Realistically most beginning and even some intermediate and advanced level programmers will have a very difficult time integrating with many of Amazon’s more advanced services. The benefits for the right business are worth it, but most websites will be better suited with Checkout by Amazon.

Concluding thoughts

I cannot make a judgment on which 3rd party payment method is better because in the end it all comes down to your customers. Naturally you should use what your customers want to pay with, and for hopes of better conversion, it is a good idea to offer your customers alternate payment methods in case they do decide to use them. In the almost 10 years I’ve been running ecommerce websites, I can still honestly say that nothing beats straight credit card acceptance, through a payment gateway, at least for tangible products. Paypal makes a very strong statement if your business sells very-tech related products. If I were to pick 2 payment methods that I think every ecommerce website will benefit from, it would be direct credit card acceptance through a merchant account / payment gateway and Paypal. Just based on the usage, these 2 are absolutely essential. Google and Amazon have some amazing features, usability, and speed, but until more customers want to pay with them, they are still not on a comparable level.

It all started around the 1st of February.

All payments sent from personal Indian accounts are reversed. This would basically be like accepting a credit card, and 5 days later (long after the merchandise or service has been performed) that money is given back to the customer!

When reversed, there are several immediate reactions. First off, it is confusing to anyone who sent a payment and had it returned a few days later. It is more confusing and upsetting to the business that accepted that payment as they are now without the money and without the service or product that was paid for. Additionally, this unbalances the accounts of thousands and possibly millions of account holders, not just in India. Many of these recipient account holders made payments to other businesses. When the original amount was reversed and subtracted from their account, any recipient account lost money, and many Paypal accounts went negative. Some people got paid, while others lost the money. Paypal was also blocking any withdrawals to an Indian bank account, so even if a business did manage to get paid, there was no way for them to take the money out of Paypal.

As usual Paypal was completely mum about the actual details of the events of what was happening, further compounding the frustration and confusion that was sweeping Indian paypal account holders and those who received a payment from an Indian account. On February 5th, I had speculated that there was some government intervention going on, as the scope and damage that these events were causing were absolutely massive. Even at this point an Indian Paypal user could send money, and at first would seem successful, but would be returned several days later.

On the 6th of February, with Paypal users continuing to panic still trying to send money, Paypal finally publicly announced that there was a problem with personal payments.

I’m writing to let you know that personal payments to and from India and transfers to local banks in India have been suspended while we work with our business partners and other stakeholders to address questions they have about the service.

While this was an unacceptably vague response to the seemingly massive situation that was unfolding, it was nevertheless some response.

More problems…

About a day later, a second problem had been discovered with many Paypal accounts. After being refunded, many Paypal users noticed that foreign exchange fees had never been refunded. Thousands of Indian freelancers, Indian businesses, and worldwide businesses who accept payments from Indian account holders are getting more upset and confused. Although Indian payments only make up a small portion of Paypal payments, it’s clear that there is a major problem affecting far more people and businesses than just Personal Indian account holders. Now there’s money, paypal fees, and separate foreign exchange fees lost in millions of payments and refunds, a true accounting nightmare.

Everyone knows there is a problem, but nobody knows what it is and Paypal won’t say a word.

On February 10th the truth finally comes out.

1. Why did you suspend local bank transfers and personal payments to and from India?

We temporarily suspended these services to respond to enquiries from the Indian regulators, specifically questions on whether personal payments constitute remittances into India.

We’re working with the regulators and our bank processing partners in India to get this resolved as quickly as we can. We realize that this is causing considerable inconvenience to our customers and I want to reassure you that this is a top priority for the leadership at PayPal

2. When will personal payments be turned back on?

The regulators recently let PayPal know about revised licensing rules that we are now actively engaged in securing. Personal payments to and from India will be suspended for at least a few months until we fully resolve the questions from the Indian regulators.

3. When will local bank withdrawals be available?

Customers should be able to withdraw their funds to a local bank within the next few days. In the meantime, we’re going to restore the money into the PayPal accounts of any customers in India who have initiated a recent withdrawal, so they know that the money is safe in their accounts. Customers will also be reimbursed for any withdrawal fee charges.

4.The PayPal reversal has left me with a negative balance. What shall I do?

If you bought something or transferred money out of your PayPal account to your bank account before we reversed the payment then you may be left with a negative balance.

If this was a payment for a purchase of goods or services, you should contact the sender and have him or her resend the payment as follows:

(a) click the Send Money tab, and

(b) select “purchase.”

If this was a personal payment, then the sender will need to find another payment method until we restore the service. We’re sorry about this.

If you can’t recover the funds from the sender, you can bring your PayPal balance current by logging in to the PayPal account and clicking the “Resolve Negative Balance” link on the Account Overview page.

5. My payment was reversed but it was not a personal payment. What happened?

Only personal payments should have been reversed. Customers who believe that their payments were reversed in error should request that the payment be sent again by following the steps above (click the Send Money tab and select “purchase.”)

The Reserve Bank of India (RBI) put a halt to all Paypal payments when they finally realized that Paypal was a acting as a cross border money transfer system due to a law passed in 2008, “Providers of cross-border money transfer service need prior authorization from the Reserve Bank under the Payment and Settlement Systems Act,”. The reasoning behind the law is that many cross-border transactions are considered remittances, which fall under additional regulation by the RBI.

At this point, Indian Paypal account holders cannot send or receive money through paypal, and even many Business account holders cannot withdraw into their Indian bank account. Paypal has indicated that it may takes months before payments get back on track in India, leaving very few payment options for freelancers and many businesses in India’s rappidly growing IT services industry.

What strikes me as simply baffling is how it took 2 years for the Indian government to realize that Paypal users in their country could transfer money to and from Paypal users in other countries, and why they would tackle this situation is such a disruptive manner. Seriously, Paypal has been in India for several years and nobody bothered to consider that the fastest growing payment mechanism in India might fall under this new law when it was being drafted?

Equally baffling is why Paypal didn’t completely suspend Payments when they were given the request on January 27th. Instead they reversed thousands of transactions that had already been submitted, allowed these recipients to forward the money they received as payments to other businesses. They also continued to allow transactions to be sent until after the 7th, 10 days after they stated that transactions had been halted.

The combination of gross under-sight by India’s financial regulatory systems, and Paypal’s gross negligence in adequately responding to a major operational casualty, caused one of the larger payment system implosions that we’ve seen. Most of the ancillary damage was completely avoidable, had Paypal responded immediately and adequately to RBI’s request. While I’m sure that Paypal will pull through unscathed as they have so many times before, I do believe that their position in the Indian payments market will be scarred for a long time.

Now, the question in the near future is whether Google Checkout can really stand on it’s own.

Google claims that there are enough consumers using and preferring Google Checkout, the system no longer needs to operate as a loss leader to function.

“Why have it as a loss leader if it’s doing OK?” he said. “We saw very healthy results after we decided to charge for the service.”

I think that Google Checkout is going to have a tough time keeping support without offering incentives for retailers to use it. We saw a massive drop when they stopped giving consumers incentives to use it. It simply doesn’t have the consumer support to make it sustainable for the merchants using it. In the past six months or so there’s been speculation of Google dropping the Google Checkout program. This may simply be Google way of letting the program die, especially since this change was never properly announced.

With Paypal stronger than ever and the emergence of Amazon’s payment service, Google Checkout will most likely need to find some new way to garner additional support, or be lost in the history of internet failures.

Way Systems created their own terminal instead of using a re-manufactured Siemens phone. While they technologically regressed in some areas, they made a better product that works for what it is designed to do, process credit cards. By designing from the ground up they were able to use a single keypad for PIN debit processing (Their old models had 2 keypads due to encryption requirements). New features include the ability to add additional processing applications. Once certified, the terminal will support check services and gift cards through some select 3rd party providers. There are also no longer any log in/out requirements to use the terminal, and it has the ability to install new firmware when it becomes available. The new terminal still works with existing Way Systems infrared printers, and can now be charged through a mini-USB port. It is now supported by Apriva and eProcessing Network which allows it to be used with just about every US processor.

This terminal should be available early 2009, and should be a vast improvement to existing Way Systems 1581 terminals. If you were looking at purchasing a Way terminal, it would probably be better to wait for the way5000. We expect it to be about the same price as the 1581.

You can purchase the way5000 terminal from our main website.

While I personally think that this could be scrutinized as an anti competitive acquisition, especially considering Paypal’s monopoly over non-credit-card online payments, this should make Bill Me Later easier for smaller businesses t use. Until recently, Bill Me Later required ecommerce merchants to be processing in the seven figures per year, far out of reach for many smaller sites that could have greatly benefited from Bill Me Later.

It would probably be six months to a year before any reasonable integration with Paypal happens, but the acquisition is supposed to go through by 2009.

From a usability perspective this makes perfect sense, and has been one of the biggest hurdles for Paypal to overcome as a 3rd part processor.

However, I can foresee some major customer issues in regards to seller protection.

Right now, Paypal effectively removes traditional buyer and seller protection for credit card transactions by resolving disputes within the Paypalsystem instead of through the credit card chargeback system. This works explicitly because both the buyer and the seller are registered users of Paypal. Paypal has control over the entire transaction process, and has absolute power over both user’s accounts. Sellers currently have some piece of mind that their buyers have gone through a registration and verification process, albeit very limited. When the buyer is no longer required to maintain a Paypal account, a huge avenue for fraud opens up. The seller remains bound to Paypal’s dispute process, but the buyer is not. In this case the card issuing bank would take full control over the dispute, and unlike a traditional merchant account, the seller does not have a relationship with Visa or MasterCard. Paypal will become a liaison between the card issuing bank and the seller in the event of a chargeback, wherein the problem lies. Anyone who has tried to work with Paypal during an account hold or a dispute knows that yelling at a wall is more effective than trying to communicate with Paypal. Judging by Paypal’s already horrible customer service reputation, they are potentially adding an enormous workload on their plate in the form of chargeback handling. This could very well be a disaster in the making.

This is obviously an attempt to compete with more traditional Payment Gateways that have seamless API integration with websites (Authorize.net, Paypal’s Verisign, etc.). While this has the potential to improve Paypal conversions, I would be hesitant in enabling this feature in a Paypal account until more is disclosed about how non-account holder chargebacks will be handled.

I have blogged about GCO in the past, on more than one occasion, and I have held mixed feelings about it in several areas. We’ve now been using it for about a year and a half, and it is now becoming clear where Google Checkout it headed, nowhere.

Initially, Google gave coupons and incentives to consumers and business owners. These helped push GCO usage past Paypal for a short period of time, but now that the incentives are gone, GCO is going with them. For us GCO topped at about 10% of all online purchases, but has since dropped to about 1.2 – 1.5% (“Generous estimate!”). Paypal has slowly, but steadily increased all the while.

Despite the difficulty in integrating GCO with a website, I still think that it is an excellent alternative payment method, assuming that there are still going to be people who want to use it. From a shoppers perspective, one you have a GCO account, it is much faster than paying with a credit card or paypal, but there has never been a solid reason to use it. As we all know, it is consumers that drive services, and not businesses. I think that unless Google finds a way to make many more shoppers want to pay with GCO, there is never going to be a wide adoption of it. Paypal was driven by eBay until it was big enough to stand on it’s own. Google needs it’s own eBay to really make GCO popular.

While I can’t do anything to get your money back, I have been in this situation more times than anyone I know and I have a bit of knowledge about how the system works. Prevention is always the best bet but sometimes account freezes are completely unexpected or unavoidable.

The first thing you need to realize is that Paypal freezes funds on the same grounds as Visa and Mastercard, and they can hold your funds for 180 days from the date of the transaction (Paypal will hold for 180 days from the date of your account freeze). Unless your funds are frozen for fraud or for some legal reason, you should get your money back after 180 days (worst case scenario). If you committed fraud, or obtained the money illegally, don’t count on getting any of it back, ever!

Why Paypal limit’s accounts:
Paypal is financially liable for funds that you accept, so if they feel your account may cause problems for them or other customers, they will freeze your account. Paypal has an automated system as well as a human managed system for fraud control. If they hold funds, it is because something with your account set off an alarm and either automatically or after human review, they decided that it is in Paypal’s or Paypal’s customer’s best interest to put a hold on your account. It nothing personal, and most of the time it was probably a computer that froze the account based on some fraud algorithm.

Some reasons an account may be frozen:

• Increase in transaction volume (IE: More Transactions).
• Increase in single transaction amount (IE: Larger Transaction).
• Increase in disputes from customers.
• Increase in refunds to your customers (with our without any disputes).
• If a certain percentage of your transactions are disputed over a period of time.
• If fraud was reported against your account.
• Logging-in from multiple IP addresses (* Speculation).
• Withdrawing over a certain threshold amount (** Speculation).

In my experience Paypal most often holds funds when a business processes many more transactions, or when they process much larger transactions that previously in their account. Also when a business sees an increase in disputes or refunds it is often an indication that something is not right. I have no idea of the thresholds that Paypal uses to freeze accounts or how often a human is the person who presses the button, but most of this goes along the lines of credit card processing risk management.

* – The IP address theory I have heard many times, but I have never seen anything official from Paypal. I also haven’t witnessed it on a US paypal account, so it may be an international problem, or a problem with people logging in from restricted or close-to restricted countries. I’ve heard three IP’s is what it is based on, but I’ve personally logged into more than one account from at least 20 IP’s and have never had any problem. The other thought which seems most likely is when an account is accessed in a completely different area than normal (IE: Login from Russia, when the business is in California).

** – My large withdrawal theory is based on the fact that I have had an account held three times on different accounts, and the hold occurred almost immediately after I made a large withdrawal from the account. My guess is that this threshold is at most $5,000 per day, which would be on par with some long standing Federal Reserve regulations. It is may be less than $5,000 or it may vary depending on your history, but I’m 99% sure that it does exist.

Now if your account gets frozen:
The first thing you will get is an email from paypal stating that your account has been frozen. You probably already get ten spam versions of these messages every day, so most likely you will actually learn that your account is frozen when you log-in one day. Anyway, when you log-in to your paypal account you will get a big nasty screen stating that your account has been frozen, and that you need to visit the resolution center to clear up the issue.

In the resolution center, you will have a list of the steps that you need to complete to get your account limitation lifted. You will also have a summary of what you can and cannot do with your account in a limited status. This status varies depending on why your account is being held, and for how long it has been on hold. As for requirements, Paypal will normally have you fax documents to them, and they may be additional steps that you have to do within paypal. The internal steps will normally be confirming a bank account, or credit card.

Commonly Requested Documentation:

• Proof of business existence (Utility bills, DBA registration, Tax license).
• Proof of shipping (Tracking Numbers).
• Proof of person (Drivers license, Social Security Card, Passport etc.).
• Proof of products (Normally your supplier’s name and phone number).

After you fax Paypal the information, you have to wait for their response. They will typically send you an email the next day stating that they received your information. You will receive another email a few days later stating the results. The email will either announce that your account limitation has been lifted, or that they are unable to lift the limitation. If you account remains frozen, they will either ask you to provide more information, or they will tell you to wait 180 days to get your money back. In either case you can call paypal directly and talk to a customer service rep. In most cases they won’t be able to do anything for you, but they may be able to give you other options if you don’t have some documentation that is requested. I can’t stress enough, not to act aggressively with whoever you email or talk to at Paypal. This is the same with any Risk Management situation, yelling at the person on the other end will guarantee a 180 day hold of your money. Yes you’re pissed, but be nice until they hold your money anyway, then complain away!

If you can provide all of the documentation that Paypal requests and you were not reported for fraud or illegal activity there is a good chance of getting your account freed-up. However, Paypal will not always unfreeze an account even if you are doing legitimate business and you provided them with the proper information. It’s unfortunate but is simply a risk of using Paypal at the current time.

Recommendation on not getting your account frozen:
Risk is all about consistency. You could be accepting a million dollars a month, and as long as your business was consistent, and you didn’t get a lot of returns, there wouldn’t be any problem. When changes occur, especially large changes, red flags go up all over the place. New accounts are also at a much higher risk of getting frozen, as most fraud occurs very quickly after an account is opened.

If you have an average transaction size of $50, you should probably expect your account to get frozen if you take $5,000 on a single transaction. The same thing goes for volume. If you consistently do $1,000 – $2,000 per month, and suddenly you start processing $50,000, you should expect your account to get frozen.

My advice is to slowly ramp up sales (This obviously isn’t always possible), and initially specify an amount in the estimated monthly volume and transaction size higher than what you actually expect to do. Make frequent lower amount withdrawals, and try not to keep a lot of money in your account. Be especially careful of making large withdrawals in a single day.

If you have any related experiences or comments, please feel free to share. However, this thread is not Flame Paypal, so any ‘Paypal Sucks’ or related comments will not be posted.