1. PayPal should allocate the majority of its investments into the merchant side of its platform as developing their ability to complete transactions in a safe and private method will allow customers to feel more comfortable using the PayPal service, thus increasing the overall transaction volume of the individual merchants—translating to higher revenue for PayPal. As described in the case, Website Payment Pro allowed smaller merchants to accept credit cards, which as described by the jewelry designer, adds legitimacy to their small business and increases overall transaction volume and average purchase size—especially as more consumers use credit cards to finance their purchases.
2. a) One strategy firms can use is to subsidize the network’s more price sensitive side and charge the side that increases its demand more strongly in response to the other side’s growth. This helps firms compete because allowing users to use this product for free would allow for the firm to grow a large user base, as creators are willing to create content on with the product knowing that the other users are willing and capable of freely gaining access to the product—as seen with Adobe.
b) Another technique is utilizing brand value through marquee users. Having extremely big buyers can attract participants to the platform—especially if they can establish a binding exclusive commitment from the marquee user to not associate with a competitor. Although this can be expensive, an exclusive assurance can help solidify an upcoming platform.
c) Another strategy is to deliberately exclude some users from the network—some platform providers should consider granting exclusive rights to a single user in each transaction category, and obtain a high commission for this allowance. This can help an up and coming platform gain profits early on, and may also help the platform survive an economic change due to more consistent yet slow business—which might not have occurred if there were multiple platforms vying for the same consumers’ business.
3. a) PayPal can utilize this strategy as a way to “kick start” consumers to use the PayPal platform. They began this practice by initially offering $10 to each new user’s account, which was seen as an incentive for merchants to accept PayPal payments and was increased to $1000 when the company sought to expand beyond simply eBay merchants, along with a bonus of 0.5% of every PayPal payment received by the new account for non-eBay items. Here, PayPal is not new to subsidizing or incentivizing its users on either side to ensure the growth of the platform, and should continue to offer timely motivating offerings as a way to solidify themselves as a strong player.
b) PayPal employed this strategy when they first expanded their transaction services with eBay, and gained popularity with their users. Although eBay had their own platform with Billpoint, this was not successful with most of the eBay users preferring PayPal. Establishing their presence with eBay users proved successful for PayPal, as eBay eventually acquired PayPal for $1.4 billion and shut down Billpoint. Thus, PayPal working with eBay (a marquee) early on in its life helped ensure a more secure future.
c) This strategy is likely not suitable for PayPal because excluding any type of user—either merchants or consumers—would not be beneficial to its success. Having a variety of merchants allows PayPal to have different tiers and types of users (business, small/mid, large accounts) on which they can earn different levels of commission (ex. 2.2% to 1.9%) by offering a variety of services. Furthermore, excluding consumers defeats the overall purpose of PayPal. They would want the most number of consumers in order to have high transaction volumes with a variety of merchants in order to support their growth while also increasing PayPal’s total revenue.
4. a) Square has allowed smaller, non-registered merchants (ex. produce seller at a farmer’s market) to accept credit card payments—as more consumers use credit cards to pay for purchases. Square’s leading strategy of creating an integrated hardware/software solution allowed the firm to easily enter and succeed in the merchant side of transactions. With a simple credit card reader that attaches to a compatible device (ex. iPad or iPhone), Square allows the device to become a point-of-sale system. As merely software, PayPal could not compete, allowing for the merchant friendly and easy to use Square to dominate with smaller merchants.
b) Perhaps the greatest strengths of Venmo is its social component and the fact that it is free to send and receive payments when using a debit card or linking a bank account. Furthermore, Venmo’s social component has made it especially popular with millennials and college students, and has allowed it to grow quickly—as users with Venmo typically ask others to download the app in order to facilitate quick, easy and free payments, which continues the expansion and growth of the app. Thus where PayPal is typically used between merchant-consumer sales, Venmo is used peer-to-peer (P2P) and the social nature of Venmo has allowed it to distinguish itself from PayPal’s offerings.
5. a) Platform envelopment occurs when one platform provider enters another’s market and combines its functionality with the other’s in order to create a multi-platform bundle with increased functionality and typically a lower price point. Here, the stand-alone platform often cannot compete because it cannot afford to cut the price on the product or create a similar multi-functional bundle.
b) Apple’s new Apple Pay Cash is a threat of envelopment for PayPal/Venmo because it combines the P2P function of Venmo with its Apple Pay service and makes it easily accessible through iMessage for consumers to quickly pay their friends. This bundling of services: payment of items via credit card through Apple Pay, P2P payments through Apple Pay Cash and the storing the virtual balance in Wallet threatens PayPal/Venmo standing in these transaction services. However, one disadvantage for consumers is that Apple Pay Cash only works for customers with an iOS device, thereby leaving out an entire segment of the market—Android users. This is an area that PayPal/Venmo can capitalize on, perhaps by creating a similar functional bundle for Android users that facilitates PayPal’s quick cardless transactions with merchants and also incorporates its Venmo services. Furthermore, Venmo has the social component of adding a quick memo regarding the purpose of the transaction (ex. $10 for cab ride) that helps users track their payments—something that Apple has yet to add other than looking through past text messages.
c) I would argue that P2P payments are likely to be dominated by very few, but strong, platforms in the market because “homing” costs for users would then become expensive and excessive. Although in this case users would likely not have multiple devices, having to operate multiple applications that have personal financial information would be inconvenient, unappealing and risky for consumers, as they would likely not feel comfortable having this private information present on so many platforms. Thus, I argue that Apple Pay/Apple Pay Cash and PayPal/Venmo will continue to be the popular and strongest players in the P2P payment markets for iOS and Android users, respectively.
6. a) Because Bitcoin can be sent both online and offline (via email, text), this feature would allow PayPal to greatly widen its user base—especially to developing countries. In many African nations, mobile phones have allowed citizens to connect to financial institutions and much more without needing to build expensive infrastructure—which is a trend that PayPal can capitalize on by accepting Bitcoin.
b) Because Bitcoin is valued according demand, this causes fluctuations in its valuation. These fluctuations can cause Bitcoin accepting sites to constantly change prices to meet this demand—which can be difficult to deal with in the consumer/merchant marketplace especially when it comes to issuing refunds for a product. If an item was bought for 3 BTC and is later returned, but the valuation of Bitcoin has changed, what value of BTC should be returned? This conundrum could disrupt the way PayPal runs.
c) Perhaps waiting until Bitcoin reaches its cap of 21 million, will be more beneficial for PayPal because there will be a more constant valuation of the cryptocurrency. This way merchants and consumers will have greater consistency with payments, and refunds as needed—leading to smoother operations for PayPal. Delaying this implementation would allow PayPal to still reach a greater number of users (both merchants and consumers) but avoid the uncertainty relating to the valuation of Bitcoin at any given time.
7. By incorporating and actively developing blockchain technology into its payment infrastructure, PayPal could more closely monitor user and merchant transactions—ensuring that they payment methods (credit card, bitcoin, bank account) are actually valid and that they actually belong to the user who claims possession of them. This would increase privacy, accountability and allow for more immutable transactions between the two parties, with PayPal overseeing entire process as an intermediary. Furthermore, incorporating blockchain technology would allow PayPal users to make and receive payments both nationally and internationally—a feature that would be useful for smaller, typically poorer communities.
However, by serving as a central financial intermediary, PayPal would likely have to incorporate additional fees and charge commissions (ex. an additional 2% or $0.75 per transaction) on its users (merchants and/or consumers) to account for this additional technology and transaction monitoring. These additional charges to users might make them less inclined to use PayPal/Venmo for their purchases, thereby decreasing the usage of the PayPal service, reducing their exposure, and diminishing their total revenues. Thus, it is understandable why this technology may not be compatible with PayPal’s vision as it would create a barrier and exclude price sensitive merchants and consumers from using their product.
8. a) There is a high level of complexity involved with scaling Blockchain technology to a large number of users that could eventually lead its collapse. This leaves the entire system open to DDoS attacks, and challenges regarding the overall size of the Blockchain and total bandwidth (TPS) transactions per second.
b) Other areas that pose challenges include the rising cryptocurrency fee costs, the hyper-volatility of cryptocurrency, including the limited supply and how it varies with demand—which relies on attitudes and perspectives of its users. Lastly, in relation to strategic challenges, PoW (proof of work) can result in cryptocurrency mining centralization, which with PoS (point of sale) would allow attackers to maintain parallel block chains without having to face the high costs to actually do the work behind it.
These challenges, both technical and business/strategy, affect the sustainability, confidence and security of cryptocurrencies that are created and executed around the world.