Home Depot fights 'abusive' credit card fees with PayPal system

Computerworld - The Home Depot says its rollout of a PayPal in-store payment system to 1,976 U.S. stores in March has generally been a success, though it notes that the system still accounts for a very small percentage of overall transactions.

The retailer deployed the system in part to avoid what it calls "abusive" bank fees for credit card transactions.

Home Depot customers can use PayPal by simply typing their mobile phone number and a specific PayPal account PIN on an in-store terminal. A receipt for the purchase is sent to the customer's online PayPal account, which is accessible from a mobile phone.

PayPal is offering account holders a card with a magnetic stripe that can be swiped and read the same way credit cards are read. To date, however, more than 90% of customers use the mobile number and PIN to pay, Home Depot said.

The PayPal system is "fast, secure and convenient -- all at a lower transaction cost," said Home Depot spokesman Stephen Holmes. "We've said for years that there needs to be more competition ... to reduce abusive pricing practices on interchange fees" charged by banks issuing Visa, MasterCard and other credit cards.

Indeed, retailers for decades have complained about, and even filed lawsuits over, what they call onerous fees charged by banks to merchants for credit card and debit card transactions. The fees generally range from 1.5% to 12% of a transaction depending on the size of a store or retail chain, according to analysts.

The fees are imposed by the many banks nationwide that provide the credit to their customers. The credit card companies mainly set up IT and processing systems for the cards on behalf of the banks.

"Retailers are so frustrated by these fees," said Avivah Litan, a Gartner analyst. "[The fees] keep going up, even though the volume of transactions has increased. Prices are theoretically supposed to go down as the volume goes up."

Litan believes PayPal and other forms of mobile payments will be a disruptive technology that provides a quiet reform to the economics of the credit card industry.

PayPal still secures its payments with credit and debit cards issued by banks, but it also encourages its customers to top off their accounts directly from their savings and checking accounts so that customers keep a money balance with PayPal rather than with a traditional bank, Litan noted.

"I think companies like PayPal are going to eat a lot of the U.S. mobile payment market share. Banks have reason to worry," Litan said.

In similar fashion, Google's Google Wallet, the ISIS mobile payment consortium of three wireless carriers, and even Apple's App Store could begin encouraging customers to use mobile phones to charge purchases that would be paid to wireless carriers or directly to Google or Apple, analysts said.

In effect, the wireless carriers, Google and Apple could become quasi-banks that charge retailers lower transaction fees than the banks do, while offering customers greater convenience, analysts said. Litan predicted that the change will come gradually, and will prove to be significant in the long run.

"I think the card companies are going to lose at least 15% of the potential market to these mobile alternatives in the next two to five years," she said. "In 10 years, non-credit-card mobile payments, I think, will make up around 25% of total mobile payments."

Litan said the move is already well underway, with credit card alternatives like PayPal now in use at major retailer chains like The Home Depot, Abercrombie & Fitch and Joseph A. Bank.

Litan also cited disruptive technology developed by Square, which sells stamp-size card readers that can be plugged into a mobile device to process a transaction. The technology has been a hit with about 1 million small retailers, such as artists at craft fairs, she said, noting that the vendor charges such users just 2.75% per swipe for all major credit cards.

Square still relies on the traditional credit card system and the cards themselves, but the company has negotiated lower rates with banks to make the new technology attractive, Litan said.

More traditional credit transaction fees can be much higher, with small businesses paying up to 12%, she said. Those high fees are why some small businesses, like independent hair salons, won't allow their customers to use credit or debit cards, she noted.

Home Depot expects to see the benefits of PayPal in-store payments over time.

"This is still very new, so PayPal still accounts for a very small percentage of our overall payment transactions, but we believe it has the potential to make a greater impact over time," Holmes said.

He wouldn't disclose Home Depot's average interchange fee paid to banks or the fees it pays PayPal.

For its part, eBay-owned PayPal has seen a big surge in its mobile commerce transactions, predicting in January that its mobile payment volume for 2012 will hit $10 billion, up from $4 billion in 2011, which was far above its original prediction of $1.5 billion for that year.

One bright spot in the PayPal deployment at Home Depot was how smoothly the payment terminals and systems were integrated with Home Depot's IT infrastructure, said Holmes, noting that employees of PayPal and Home Depot worked cooperatively on the project.

"Both of our IT teams did a fantastic job on this," he said. "It's technology, so there are going to be wrinkles to iron out, but we were very pleased with the testing and rollout. Because we developed this together, the implementation went very smoothly for a first-time solution. As a matter of fact, our pilot only ran for a few weeks before we expanded to all 1,976 stores."

Matt Hamblen covers mobile and wireless, smartphones and other handhelds, and wireless networking for Computerworld. Follow Matt on Twitter at @matthamblen, or subscribe to Matt's RSS feed . His email address is mhamblen@computerworld.com.

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