At Discourse.net, Prof. Michael Froomkin responded to Tuesday’s post about efforts to entice consumers to use PayPal instead of credit cards for their Internet shopping. Froomkin’s basic argument is the same as the one made in the comments to the original post: credit cards are more advantageous to consumers than PayPal, primarily because credit cards offer more protection to those who are dissatisfied with the goods they have purchased. The comments to Froomkin’s post discuss whether PayPal or credit cards are better for consumers, and what the loss of interchange fees means for credit card companies.
To clarify my first post, payment intermediaries (whether a credit card company, PayPal or something else ) make consumers and merchants better off. Indeed, it’s hard to imagine Web commerce existing without them. What I find interesting is how payment providers solve the chicken-or-the-egg problem that I referenced in my initial post; or in other words, why some payment options flop while others become widespread.
Right now merchants are offering consumers immediate benefits for a decision to use PayPal instead of a credit card. I’ll bet that many holiday shoppers will be unable to resist offers of free shipping or discounts from the retail price. Of course, consumers may regret their decision to use PayPal (and to make the purchase in the first instance) if they are unhappy and neither PayPal nor the merchant responds positively to their complaints. But if PayPal is going to take off as a real competitor to credit cards, consumers are going to have to use PayPal more than once; that is, it is going to have to become their preferred form of payment. Unless that happens, merchants who have changed their Web payment technology to accommodate PayPal have made a bad bet.
All of this means that how PayPal responds to the criticism of its buyer protection program will go a long way toward determining whether PayPal really takes off, or whether it remains a service that most consumers associate with eBay and not with “traditional” Web retailers.