Industry Committee on Nov. 21st, 2011

[Mike Lake, Conservative, Edmonton—Mill Woods—Beaumont, AB]

We talk a lot about convergence in other ways. In your world is there any convergence with traditional forms of payment? For example, PayPal started as an online transactor. Is there a way that one day I may walk into an Apple store or a Best Buy to buy one of RIM's fine products, for example, and use my PayPal account to make that purchase?

[Darrell MacMullin]

Yes. We have made it public that we have every intention of making PayPal available any time, anywhere, and any way. If that means paying at a bricks-and-mortar retailer at the point of sale, or it means buying through your television set, through your Xbox, or through your car, we're running a number of different tests with different retailers as well as different technology companies to enable PayPal to facilitate those transactions in different ways.

What was the first part of your question?

[Mike Lake, Conservative, Edmonton—Mill Woods—Beaumont, AB]

That was basically it.

[Darrell MacMullin]

In terms of being able to enable merchants, probably the biggest challenges these merchants have is “Oh, great, another technology, more infrastructure costs. How do I deal with that?”

The reality is that one thing that we've made very clear is that we are not dictating any particular technology for anyone to embrace. We've taken a very ubiquitous stance, where we're not saying we're endorsing NFC and this operating system, or this handset. In fact, we figured out ways to be able to leverage existing infrastructure in a completely new way, thus not bearing any additional cost for merchants.

One of our most popular products for small and medium-sized businesses is a product called Website Payments Standard, which is a very basic payment button that you put on your website allowing you to enable payments on your website very quickly. We were able to flip the switch last week, and for the hundreds of thousands of Canadian merchants who have that product, we've now created a mobile version. So rather than them trying to bear the cost and figure out how to get their website to look good on an iPhone or a BlackBerry, we've actually enabled that for them. So now they have mobile checkouts from PayPal, and we bore all the cost on that.

We haven't pushed any cost down to the merchants. We just think it's the right thing to do for our merchants.

[Mike Lake, Conservative, Edmonton—Mill Woods—Beaumont, AB]

Thank you.

[The Chair, Conservative, David Sweet]

Thank you, Mr. Lake.

Now on to Mr. Thibeault for seven minutes.

[Glenn Thibeault, NDP, Sudbury, ON]

Thank you, Mr. Chair. Thank you witnesses for being here today.

Mr. Kelly, I think I'll start with you. We're starting to truly see the emergence of mobile payments, with everyone putting something on their phone. I think we've heard at this committee from some of the witnesses that in about 18 to 36 months, mobile payment is going to be common practice.

With that, we're starting to hear of other transaction fees. For example, when I asked Visa, Visa said they couldn't tell us if they're going to put any other type of transaction fee on a mobile payment. MasterCard came out and said they won't. Google Wallet says there are other ways of them generating revenue.

At some point I think small and medium-sized businesses are hitting that tipping point as to how long they can keep absorbing the little, tiny fees—and here I'm citing some of the witnesses—before breaking their backs, and therefore not being able to expand their businesses and hire employees, but God forbid, shutting their doors.

What are you hearing from your members in relation to mobile payments and what's coming?

[Dan Kelly]

We're hearing lots. We did a fairly intensive survey to prepare for the payments task force. One of the smartest things that's happened is when Minister Flaherty put together that group to look at the future of the payments industry as a whole. It was very timely. But you're quite right, the time is ticking very quickly and we need to start making some decisions as to how this is going to happen.

My members are regulated to the point that if they offer a cup of coffee to their customers, they have to pass through a whole bunch of government inspectors—and yet there's this huge section of the economy in the payments industry has had virtually no regulation. It's effectively been the wild west.

We have promoted and have seen a voluntary code of conduct adopted, which we feel is working. There are flexibilities within that code to make mobile payments work, but we do need to move quickly.

The payments task force is looking at this. We're part of it, so we're at the table. They've been taking the views of small and medium-sized businesses seriously.

The point that has been made with some of the provisions of the code of conduct that disallow the idea of co-badging—that of having, say, an Interac capacity and a VISA or MasterCard debit capacity on the same card, or perhaps even a PayPal initiative along those lines—is whether that means, if it's applied to the mobile payment technology, that you have to carry four cellphones with one type of payment on each.

Those kind of things can be resolved. There are infrastructure changes that can be made to comply with the code of conduct and still allow the adoption of mobile technologies. But you're quite right that many small businesses are afraid of this because they've seen the abuse that VISA and MasterCard have imposed on small and medium-sized firms over the last number of years.

We're very open to and interested in how this is all going to roll out. We think it is possible. The code is our best defence. We need to make sure that the code continues to be a living document to make that happen.

[Glenn Thibeault, NDP, Sudbury, ON]

I agree that it has to be a living document because the technology that we're seeing—and here I'd like to get a question to Mr. Kee in a bit—and the apps we're seeing for iPads and the software that's coming out is fantastic.

Mr. Kelly, again, I come from an urban area in northern Ontario and there are many small and medium-sized enterprises 20 minutes outside of my community. So in a city of 160,000 people, you go 20 minutes outside and you can't get broadband.

What type of impact do you feel the lack of broadband and lack of affordability to get into the e-commerce and mobile payment world will have on small and medium-sized enterprises?

[Dan Kelly]

It's huge. Broadband—and I think other presenters have said this—is fundamental to making any of this work. We need to make sure that if you're at a gas station, you're not going to have somebody dialing up on some sort of connection to check whether or not your payment is valid. That just can't work.

We need to have inexpensive broadband across the country to make this happen, but on top of that we need to make sure that the payments players do not do what they've done on the credit card side to date.

[Glenn Thibeault, NDP, Sudbury, ON]

Mr. Kee, you mentioned that Canada is this fantastic place for entertainment software, not only entertainment software but also software in general.

I think if you look at RIM apps or Apple apps, or whatever, to purchase something like this, there's something new coming out on a daily basis by some great software designer. But I think the worry is that I can make it in my basement, put it in the apps world and people will buy it, and all of a sudden I'm charging the small and medium-sized businesses a portion of the proceeds.

Is there any type of regulation or scrutiny of the software developers when they put apps up for sale?

[Jason Kee]

It depends a lot on the specific platform. In fact, this is one of the fantastic things that we've seen developing.

We've seen a proliferation of these platforms, such as the App World for RIM, the App Store for Apple, and the Android marketplace for Android-based devices, all of which are subject to their own philosophies and each of which has benefits and drawbacks.

What happens, for example, if you submit an app to the App Store is that it goes through a pretty rigorous quality assurance process, so that when it finally makes it into the App Store and you can purchase it, you can basically be assured that it's going to work, and so forth. The drawbacks of that is it means that Apple acts as the gatekeeper. It has a series of policies that it can implement and there are circumstances where it won't let apps through, which has led to some complaints.

The Android, on the other hand, is a much more open marketplace and, as a consequence, it's a bit more like the wild west. Essentially the apps that make it into the Android marketplace don't go through this kind of vetting process, so as a consumer buying the app, you're frankly taking a bigger chance, because you don't know if it is going to work or not. However, my understanding is that Google has policies in place that you can get a refund or a return, if things aren't properly functioning.

[Glenn Thibeault, NDP, Sudbury, ON]

It's like buyer beware then, if I'm buying a software app to buy whatever, because I'm getting hit with extra fees on top of that. There's no real scrutiny. It's buyer beware when you go to these sites.

[Jason Kee]

Yes. It is important to note that the way these sites essentially operate is by word of mouth very quickly and by reporting. What drives the sales of apps is the fact that people will comment on the apps and rate them.

We call “vapourware” any app that's been produced and is out there but doesn't mean anything and doesn't work. Essentially, the first couple of buyers will quickly realize that, and will tell others not to buy it under any circumstances. Even worse it could end up being malware, which also happens.

There are unscrupulous folks in these open stores who will abuse the system and tell others to buy the next “Mildly Upset Birds” app, which actually turns out to be a virus that's transmitting all your personal information from your phone. But that will quickly get caught and be pulled down.

[The Chair, Conservative, David Sweet]

Sorry to interrupt you there, but your time has elapsed.

Now I'll go to Madam Gallant for seven minutes, please.

[Cheryl Gallant, Conservative, Renfrew—Nipissing—Pembroke, ON]

Thank you, Mr. Chair, and through you, to our witnesses.

First of all, what are the PayPal advantages over the vendor providing their own fields for the credit card information?

[Darrell MacMullin]

Sorry.

[Cheryl Gallant, Conservative, Renfrew—Nipissing—Pembroke, ON]

When we construct a website, we can just develop our own fields, so that customers can plug in their own information from their credit card. What is the advantage?

[Darrell MacMullin]

I guess what you're talking about is the advantage that PayPal brings from optimizing the checkout.

We've studied this for years now. The average shopping cart abandonment rate, as we call it, meaning the number of people who browse and search on a website, drop things into the shopping cart, and actually complete their purchase is about 50% to 53%. It hasn't changed much in years.

One of the big barriers that we've seen at a lot of different checkouts is having to register for the website, having to enter billing and shipping information. The average time it takes is 15 minutes, and it's a lot of inconvenience to go through that hassle.

We've created something called PayPal Express Checkout. This came from our own customers who said that we had their information already and asked us why they couldn't only click once, log into their Paypal account, complete the purchase, and be done. Your billing and shipping information is already verified and validated and passed over to the merchant, so you can complete that purchase significantly faster.

Completion rates, on average, have gone up from the low 50s to 72% to 73% when PayPal is enabled. We're helping sites that are driving traffic to their website to convert those browsing the site into buyers just by streamlining the checkout process.

That gets even more complicated when you're talking about mobile phones. Sitting there and entering all that information on your phone can be very cost prohibitive. Cineplex Entertainment is a great example, where you can browse movie theatre show times. Now you can pick the movie, the theatre, and the time you want and pay with PayPal in one click. Your tickets are then brought up to your phone right there, and then you can walk into the theatre.

[Cheryl Gallant, Conservative, Renfrew—Nipissing—Pembroke, ON]

Great.

When vendors are constructing their websites, they get the webmaster to put the content in the inventory. Do you then plug and play the PayPal component?

[Darrell MacMullin]

It's a good example.

We see three customers. We have consumers, merchants, and the developer community, everybody from independent developers to shopping cart providers and e-commerce platform builders. It's what we've done. We've worked very diligently with the e-commerce providers, whether it's on shopping cart technology or for e-commerce platforms.

We've created a very rich set of APIs that have allowed all of these cart partners to pre-integrate PayPal into their checkout and shopping flows. In order for merchants to enable PayPal or optimize their website, they simply set up their PayPal account, and then in the administrative part of their shopping cart technology, they just link their PayPal account to their e-commerce website and they can have their checkout optimized automatically. They don't have to figure out how to do all of the coding themselves.

[Cheryl Gallant, Conservative, Renfrew—Nipissing—Pembroke, ON]

Does the bank charge the merchant a fee for accepting deposits electronically?

[Darrell MacMullin]

Any transaction, regardless of the funding source.... Keep in mind that when a PayPal transaction can happen, you can actually do one transaction from multiple funding sources. Maybe I have a $50 cash balance sitting in my PayPal account, and I see a pair of jeans for $100 that I want to buy. I may use the $50 from my cash balance and then use the rest as a bank transfer or a credit card payment.

As merchants, they don't need to understand or know how the transaction gets divided by funding type. As I mentioned earlier, PayPal is providing a flat rate regardless of the funding type and funding source.

[Cheryl Gallant, Conservative, Renfrew—Nipissing—Pembroke, ON]

I understand that part, but aside from credit card fees they have to pay per transaction, when a merchant deals with PayPal, is there a fee that has to be paid on every deposit that comes into his bank account?

[Darrell MacMullin]

When a merchant is receiving funds via PayPal, those funds are deposited in his PayPal account. You can maintain that entire balance in your PayPal account and reuse it, or you can withdraw and settle those funds out to your bank account. This can be done on a daily basis. It's called an auto sweep functionality. We do not charge merchants for the ability to withdraw their money into a bank account, and they can do that on a regular basis. It comes in as a deposit that their bank, as far as I know, should not be charging for.

I've never heard of any fees from banks for accepting donations from PayPal. I've never heard of that, but I'd be happy to get a formal answer for you afterwards. I can investigate it for you.