Internet Payment Processing for Online Businesses

Internet-payments monolith PayPal (responsible for about $5.5 billion of eBay’s $14 billion net revenues in 2012) recently acquired Braintree, an internet payment-solutions provider, for $800 million in cash. [1, 2] This is bad news for entrepreneurs and developers in the online economy.

Online Payment Processing Market
Software for processing payments on the internet enables much of e-commerce, and thus much of online business, today. It is a fast-growing and highly fragmented industry. PayPal’s parent company eBay was responsible for about 24% of revenues for online payment processing software in the United States in 2012, far and away the largest market share. [3] Several other big companies are active in the space, including Visa, through its subsidiary, and Google, through its Google Checkout product, but both of these have low single-digit market share.

Logistical Difficulties in Payments
Payments is a tricky space for several logistical reasons. The most significant are the regulatory and industry hurdles that have to be cleared in order to enter the market. Established payments companies, including those in the payment-card industry, have encouraged and established rules that raise the barriers to entry for online payments. In most cases, these rules are designed to protect users’ data and financial security. But such rules—ranging from the compliance guidelines established by the payment-card industry (PCI), known as the data security standard (DSS), to money-transmitting licensure requirements imposed by state governments—create significant burdens on small new entrants and have allowed the dominant players to remain on top.

New Startups Improve Online Payments
Several young companies have braved the hurdle over the last few years to enter online payments. The new entrants have all distinguished themselves by the ease with which they enable online businesses to engage the complicated payments ecosystem. Most frequently, this means the creation of a simple three-step process: 1) a website sends the user a script from an internet-payments software company, 2) the script creates a direct connection between the user and the company whenever payments need to be processed, 3) the company reports those payments to the website. In this way, the website itself is never privy to any of the user’s financial information. Not only does this add a layer of safety and security for the user, but it means that the website does not need to worry about the licensing and compliance requirements for payments processing. Many other additional features can then supplement this basic offering, including interfaces for reviewing and refunding charges; keeping track of customers and their orders; or implementing subscriptions, discounts, and coupons.

These companies, such as Braintree, Stripe, WePay, and Recurly (for recurring payments), operate to make payments easy for online businesses to integrate and seamless for customers to use. Pricing is nearly identical between the companies, and each has tried to distinguish itself in some way—Stripe with ease of use, WePay with fraud prevention, Recurly with subscription billing—because attracting users (businesses) is such a challenge. Braintree has distinguished itself with excellent customer service. Paypal’s president noted in an interview about the acquisition that “[Braintree’s] obsession with removing friction for next-generation commerce matched our own.”[4] The deep irony here is that PayPal is notorious, to the extent it even has functionality available to compete with these younger companies, for having outdated, inefficient, and expensive interfaces coupled with terrible customer service.

Shifting Between Providers
Up-front development costs and small variations in product make it hard to convince websites to switch services once they have implemented a payments processing solution. Many of the websites that these companies serve are websites that were developed after the companies were founded, suggesting that the switching costs away from a service, even one as reviled as PayPal, are a significant barrier. This is an important factor in online payments, because businesses do not receive notable network effects for using a particular payments company. In that way, the market exhibits a large first-mover advantage: once a website has been coded to integrate with a particular payments company, it is costly to change that decision.

Looking Forward
Braintree will certainly be able to take advantage of the additional resources and regulatory benefits that come from PayPal’s existing presence in online-payments processing and other payments markets. But it remains to be seen whether PayPal will allow Braintree to continue innovating. That would be the best outcome the online-payments community could hope for, and younger competitors such as Stripe will continue to push to keep the industry moving forward. But PayPal’s track record on innovation over the past few years is lackluster at best. There is a real risk that Braintree, which has played a significant role in the recent revolution in internet-payments provision for online business, will be dragged into a similar stasis now that it is part of the dominant market player. For this reason, entrepreneurs and developers should be worried about the implications of this acquisition.

[1] Form 10-K 2012. eBay, Inc. <>

[2] “EBay’s PayPal Acquires Payments Gateway Braintree For $800M In Cash.” TechCrunch. Sept. 26, 2013. <>

[3] “Online Payment Processing Software Developers in the US.” IBISWorld Industry Report OD4521. July 2012.

[4] “EBay Buys Braintree, a Payments Start-Up.” New York Times. Sept. 26, 2013. <>