The kids aren't into PayPal as Apple rules mobile-pay buzz

Mobile payments are having a heyday. Apple Pay has been splashed across the news and 20-somethings are paying for taxis with their smartphones. Yet one stalwart risks being left out of the conversation: PayPal.

The key to mobile payments is ease of use - wave a smartphone or tap a button to transfer funds. No need to hit the ATM for cash or write a check and wait for it to be deposited. The less the customer has to think about it, the better, which is why companies like Stripe Inc., and potentially Apple Inc.'s new technology to pay with the swipe of a smartphone, are taking off.

That's part of the reason PayPal is getting spun off from eBay Inc., giving the business more flexibility to innovate and become the method of choice to replace your wallet. Once known as the groundbreaking startup founded by the likes of Peter Thiel, Elon Musk and Max Levchin before it was purchased by eBay in 2002, PayPal is now facing new competitors from Square Inc. to Apple Pay, which will be introduced in the U.S. this month.

"If you're below 30, PayPal's not relevant," Gene Munster, an analyst at Piper Jaffray Cos., said in an interview. "With consumer awareness, Apple is out there overnight. That's a piece PayPal is desperately struggling with."

A key ingredient will be changing the perception among younger, smartphone-tethered customers like Arielle Gurin, a 22- year-old student at the University of Maryland, who says PayPal is "outdated already."

"I know you have to have it for like eBay, or you can use it for Amazon," she said. "But I feel like it's not big anymore."

Mobile Attempts

While the Web-payments pioneer has more than 152 million active registered accounts, the de facto focus for payments has become the smartphone, a market that PayPal had already tried to break into without much success. The company had the Beacon check-out device for retailers and restaurants that triggered a customer's PayPal app on their phone, but people just weren't using it - so much so that former CEO David Marcus had said that 2014 was the year for campaigning to lure consumers.

Representatives for PayPal didn't respond to requests for comment.

PayPal has gone after consumers with advertising at events like the Governors Ball music festival in New York, a three-day event where people flock to see shows from OutKast, The Strokes and Skrillex. The payment company had tried to get concertgoers to download its app to pay for food - an attempt thwarted by weak network connections.

Market Growth

In-store payments via smartphone is a revenue opportunity worth fighting for, even if that means reversing course after vowing earlier this year to keep eBay and PayPal together. The mobile payments market is potentially huge, with eMarketer projecting it to total $118 billion in the U.S. by 2018, up from $3.5 billion this year.

While PayPal may be a go-to for secure e-commerce transactions online, Davis Meiering, an undergraduate student at the NYU Stern School of Business, said it's not what he turns to on his phone, whether it's for payments between friends or in stores.

"I don't use the PayPal app on my phone," Meiering, 20, said. "I only ever use it online."

Marcus, who had helped turn around PayPal by boosting active accounts more than 30 percent to almost 150 million during his tenure, left in June for Facebook Inc. It was an exit that eBay CEO John Donahoe called "unexpected." Dan Schulman, an executive from American Express Co., is joining PayPal and will take over as CEO after the split.

Apple Pay

Now, the separation of the companies next year may help PayPal keep up with the pace of innovation and competitiveness in the mobile payments industry, eBay said in a statement.

"As an independent company, its strategic flexibility and opportunity to capitalize on this opportunity has never been higher," Donahoe said on a conference call this week. "PayPal is uniquely positioned as this landscape really begins to emerge in interesting ways."

An independent PayPal would have more latitude to forge alliances with retailers and other financial firms as Google Inc. and Apple seek to turn their products - Google Wallet and Apple Pay - into tools for digital payments.

Gaining a foothold in mobile payments will pose a challenge, given the control Google and Apple already have over smartphone operating systems, Ben Schachter, an analyst at Macquarie Securities USA Inc., said in a note. Square Inc., started by Twitter Inc. co-founder Jack Dorsey, has made headway in signing up many small merchants to use the company's card reader and a smartphone or tablet to process payments.

'Tough Road'

"To stay relevant over the next five years, they have a tough road ahead of them," Munster said of PayPal.

Apple accelerated its move into mobile payments with partnerships - aligning with financial companies like Citigroup Inc. and American Express, as well as merchants such as McDonald's Corp. and Whole Foods Market Inc. Instead of working with PayPal on the development of its payments system, Apple struck a deal with Stripe. To make a payment, a person swipes an iPhone at the checkout counter and confirms the transaction by using the fingerprint scanner on their iPhone.

The advantage it has over PayPal is that the payments system is integrated directly into the iPhone 6 and iPhone 6 Plus. The Cupertino, California-based tech giant already sold 10 million of the new devices in their debut weekend alone.

Some analysts, including Donald Fandetti at Citigroup, expect merchants to be eager to sign up. That would hand Apple Pay an immediate advantage in an area where PayPal has struggled to gain traction - with in-store purchases.

Apple's Advantage

"Competitors will be forced to counter Apple's smartphone advantage," Fandetti wrote in a Sept. 23 note. "We see good merchant and consumer adoption over time."

One thing becoming an independent company could help is other businesses' willingness to work with PayPal, Praveen Menon and Paul Sweeney, analysts with Bloomberg Intelligence, wrote in a note this week.

"PayPal's ownership by eBay may have made other e-commerce merchants or technology companies reluctant to work closely with the unit, as evidenced by recent announcements by Apple and Twitter to partner with upstart payment rival Stripe," they wrote.

Another place PayPal could turn to for inspiration is in- house. Venmo, a peer-to-peer payments startup, was added to the fold when eBay bought Venmo's parent company, Braintree Payment Solutions LLC, last year. Venmo has inundated millennials' smartphones, letting users download a mobile-payment app that can connect to bank and credit-card accounts, enabling them to pass funds between friends with just a few clicks on their phone.

Venmo Inspiration

Gurin, the student in Maryland, says she tries to persuade everyone she knows to use Venmo because of its convenience for passing money between friends, say for a shared restaurant bill. When it comes to checking out at a store, Gurin says it's hard to top the convenience of her credit card.

"Everything's about saving time," she said. "If there's something that can shave off seconds then I can see that happening."