As Aurora Fashions becomes the first UK retailer to roll out PayPal in store, Retail Week’s content partner StorefrontBacktalk looks at the payment provider’s strategy in the US.

PayPal has rolled out mobile payments at Aurora Fashions

PayPal’s strategy for its retail mobile payments program is clearly a two-tier approach. For large chains—the existing Home Depot rollout plus imminent deployments from JCPenney, Abercrombie & Fitch, Toys”R”Us, Foot Locker and Barnes & Noble, in addition to 10 others—the mobile services will be simple, identical to the phone-number-and-PIN system that Home Depot is using.

The more interesting PayPal mobile capabilities, such as displaying a headshot to confirm customer identity and alerting the store as soon as a registered customer walks in, are only being offered for much smaller retailers, typically one-location boutiques.

At one level, this makes perfect sense. It would be hugely disruptive for chains such as JCPenney to completely redo their POS environment to accommodate the new PayPal approach, which has heavily borrowed from Square, which itself has Visa as a very small minority investor. But small shops can much more easily replace their POS system with a tablet or whatever their mobile company provides and let PayPal functionality go as far as they want to take it.

On the other hand, this is a bit jarring, to see boutique shops—which until recently were being dragged to move from paper ledgers to QuickBooks or from electronic cash registers to POS systems—offering shoppers much more sophisticated mobile payments systems than Abercrombie & Fitch and Footlocker.

PayPal’s very public strategy—to try and get as much in-store acceptance of its payments system as quickly as possible—is clear. But what is more interesting is its tactic, a very aggressive and personal handholding approach that is unlikely to be sustainable. For the initial retailers, though, it was a welcome change of pace.

Gary Merry, executive VP for stores and IT at Joseph A Bank Clothiers, said he is happy with PayPal’s help. “We’ve done these integrations before, I don’t want to say with who, and it was really a challenge,” whereas with PayPal, “they did whatever it took to get the job done.”

Verifone, which is also partnering with PayPal, has been working with its customers (who constitute the majority of the major chains involved) on integrating PayPal. “PayPal has been on every single technical status call” with all of its customers, said Paul Rasori, Verifone’s senior VP of global marketing.

Thus far, PayPal seems to have played this one almost perfectly. Not only has it gotten into an impressive list of Who’s Who among the largest retail chains—plus quite a few smaller merchants, courtesy of multiple POS and mobile services vendor deals on the low end—but it has taken the opportunity to make nice with the large chains.

That’s crucial, because this is only the very beginning. Getting into JCPenney and Home Depot is great, but two huge hurdles are next. First, getting customers to participate, which has yet to happen meaningfully with Home Depot. Second, getting many of the large chains to start using higher end mobile capabilities from PayPal.

If no one moves beyond phone number and PIN, it could deliver to PayPal a small boost in transactions, likely grabbed from Visa, MasterCard and American Express.

The big payoff, though, requires the use of something approaching a full digital wallet, a vision PayPal rolled out last November. At the time, its vision of a mobile wallet was strikingly similar to what Google Wallet had announced months earlier. Both plans also closely resemble ISIS’s announced goals.

But the two most prominent NFC trials—from Google and ISIS—have disappointed and not lived up to the hype. More critically, some are now starting to seriously question how viable near field communication (NFC) trials are. Given that PayPal is not relying on NFC, its barebones approach is open to any mobile phone.

Many have been awaiting Apple’s decision on whether it will support NFC in its next iPhones and iPads. Some, though, have been pushing iPhones to use the high-end functionality without NFC. Jason Richelson, CEO of POS vendor ShopKeep (another PayPal partner), said that he has given up waiting for Apple. “I just don’t see Apple getting into payments,” Richelson said, adding that the check-in functionality of PayPal can be accomplished on iPhones by leveraging geolocation. He has also found ways to use the iPhone’s camera to communicate with the iPads his retailers use as a POS system.

The biggest weapon that PayPal has, of course, is its huge base of 110 million active accounts. Warren Kornblum, the chief strategic officer at Rooms To Go (another of the chains PayPal announced), said that he wasn’t expecting any customer who wasn’t already a PayPal user to try the system in his stores.

ShopKeep’s Richelson echoed that comment. “I thought it would be hard to get our customers to set up PayPal accounts, but it turns out that they already had them,” he said. “PayPal has been awakened by Square and others out there who have been trying to get into payments. This multi-tier approach is the right approach for them.”

This is all well and good for PayPal, but what are the benefits for retailers? There have been a lot of subsidies going around, with PayPal covering the costs of Home Depot and its partners and PayPal seeing to it that the major chains have little to no out-of-pocket costs associated with these trials. That makes the trial hard to say “no” to.

But that’s temporary. For this to work, retailers need to either see increased basket size from the mobile programs or see that it’s luring customers from rival chains that don’t offer the mobile functionality. It’s hard to see how the entry-level phone-number-and-PIN trials will do that. Only the full mobile wallet packages—with integrated CRM programs, customized discounts, accelerated shopping, ability to switch payments from card to card, check-in points, etc.—would seem to be able to do anything lasting. Hence, the major chains must either upgrade or this simply won’t work.

That said, once in place, there’s little incentive for a chain to remove it. If it’s not upgraded, though, the result may be similar.

With the small merchants, the functionality enables a customer to alert a store before she arrives and to receive customized promotions. Rather than a customer acquisition program, some have described it as a retention tool, because customers who use it and like it tend to want to keep using it. Bingo: an IT reason to keep shopping at that same store.

There is also a security concern. Some in the PayPal community have argued that the smaller amount of data requested by the PayPal low-end mobile trials makes it safer, because a data breach would capture less useful information.

The bigger security issue, though, is that the system only requires two pieces of information to complete a purchase: phone number and 4-digit PIN. Mobile phone numbers are often widely shared today, so that piece is rarely a secret.

The key, then, is the 4-digit PIN, which could easily be seen by someone watching over a customer’s shoulder. If it’s learned, there’s no physical item needed. Thefts could happen, and the thief would be long gone before a customer would even learn of the theft. And if that PayPal account is tied into a bank account—like any debit card, it doesn’t enjoy the protection of zero-liability programs—customers could have to engage in a huge amount of unpleasantness.

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