Apple’s IPhone Pay System Casts Shadow on PayPal Spinoff

When Apple Inc. decided to develop a payments system so people could use iPhones to buy items at a store instead of swiping debit or credit cards, the company bypassed EBay Inc.’s PayPal.

Apple instead chose startup Stripe Inc. to help with the development of its service. The Cupertino, California-based company then bolstered its move with a barrage of partnerships, including with banking giant Citigroup Inc. and heavyweights such as American Express Co. and First Data Corp.

The decisions underscored the new pressures facing PayPal, a Web-payments pioneer that EBay purchased in 2002 to smooth transactions on its marketplace. Apple Pay will barrel into the fast-growing U.S. mobile-payments market this month, adding to a field of competitors including Google Inc., Square Inc. and Inc.

Apple Pay and some of the other services stand out against PayPal for a key reason. Right out of the gate, Apple Pay is ready for consumers to make transactions with their mobile devices at different merchants. That mobile-ready aspect is an area where PayPal, which has roots as a facilitator of payments through websites, hasn’t been as dominant. EBay has made acquisitions to help speed the transition, including paying $800 million for mobile-payments startup Braintree last year.

Apple Pay

Apple, which sold 150 million iPhones last year, has said Apple Pay will work with its new iPhone 6 and iPhone 6 Plus. The handsets come equipped with technology called near field communication that employs a short-range wireless signal to transmit data from the device to a store’s payment terminal. 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.

Apart from credit-card companies and large U.S. banks, Apple’s partners on Pay also include merchants such as McDonald’s Corp., Whole Foods Market Inc. and Walgreen Co.

“They set out to do something from day one with substantial scale,” James Anderson, senior vice president at MasterCard Inc., said last month when Apple announced the new system. “There is going to be competition for sure.”

Trudy Muller, a spokeswoman for Apple, declined to comment.

EBay Chief Executive Officer John Donahoe said he decided to split the company into two independent entities, partly so that PayPal can more nimbly respond to the changing payments market. He had previously resisted such efforts, including one mounted by activist investor Carl Icahn earlier this year, arguing the two companies were better together.

“The companies are more focused,” Donahoe said in an interview yesterday. “I think that allows them to compete and gives them flexibility in a more focused, targeted way. PayPal can now form strategic relationships over the next year.”

More Opportunity

Mobile payments in the U.S. are projected to total $118 billion by 2018, up from $3.5 billion this year, according to EMarketer Inc.

“No one is dominant at this point, although that might change as Apple Pay rolls out to a rabid fan base early next year,” said Drew Sievers, managing partner at Operative Capital and former CEO of MFoundry Inc., a company that worked with Starbucks Corp. to build its smartphone-payments system.

PayPal has outgrown its roots as a payment system for EBay shoppers and should be run separately to face off against new challengers, Denee Carrington, an analyst at Forrester Research, said in a statement.

“PayPal needs speed and flexibility to effectively defend and grow its business without worrying about whether it is helping a competitor to EBay,” Carrington said.

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