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6 posts from February 2010

February 28, 2010

Paypal's Ed Eger on Reserves (Part II of II)

This is the second of a two-part series and is a first for eBay Strategies.  The first post, which you need to read first is HERE, is a head's up to sellers about what we've noticed at ChannelAdvisor that is happening to Paypal merchants on eBay and causing a good bit of frustration.

The second part, which you are reading, is a response to the first post from Paypal's Ed Eger.  As you can tell from the Paypal management page, Ed is an SVP and GM of the North American business, so this is pretty much straight from the horse's mouth.  I wanted to thank Ed for taking time out of his busy schedule to address these concerns here.

From the SeekingAlpha disclosure forward are Ed's response unaltered by me except for some layout changes caused going from a Word document to blog post format.

Seeking Alpha Disclosure -I am long Google and Amazon. eBay is a minority investor in ChannelAdvisor.


PayPal’s Ed Eger on Reserves  

PayPal is in business today to connect consumers and merchants all around the world, creating opportunities for people in their personal and professional lives.

It is with these values that we approach all of our customer relationships and it’s the key reason why we continue to offer an open platform, which easily onboards all types of merchants and gives near instant access to their funds – whether you’re a new entrepreneur or the largest retailer on the web.  We’re proud of this approach to payment services which is unique in the industry.     

The current severe global economic recession has impacted the ability for financial service companies to offer credit all over the world - credit required to run and sustain businesses.  However, in the face of these challenging economic times, PayPal has on-boarded more than one million new merchants and increased our total credit exposure by more than a third in the last year.  To the best of my knowledge, no major financial institution expanded credit to small and medium businesses at that rate.  In fact, most headlines talk about significant tightening of credit across our industry.

In order to maintain the strength of our business and keep our costs low, we’ve had to evolve some of the ways we manage merchant risk.  This does not mean we have unilaterally tightened credit across our entire merchant base.   Instead, we are selectively addressing a small fraction of the highest risk merchants in our portfolio—merchants who we believe may struggle to meet their commitments to their customers.  These targeted actions not only protect consumers from poor experiences but ultimately benefit our merchants by allowing PayPal to continue to extend credit when our competitors will not -- all while maintaining low and simple pricing.

In his blog, Scot Wingo refers to a new “reserves” policy, the holding of a minimum balance in merchants’ accounts when there is increased risk in their business.   To be clear, this requirement affects less than 1% of all of our merchants; it is truly a targeted and a rare occurrence within PayPal.  In fact, a merchant is only subject to a reserve if the business has shown strong evidence of highly risky behavior – for example, high chargeback rates or excessive refunds.  When high chargeback and refund rates occur at a merchant, their consumers lose confidence not just in that merchant, but in the entire ecosystem of merchants supported by PayPal.  Merchants who continue to deliver good customer experiences and maintain low chargeback and refund rates are unlikely to be subject to such reserves.  

Another element of our risk management policy is selectively delaying access to funds for some merchants (this practice is commonly referred to as “delayed settlements” in the industry and as “holds” in PayPal).  Because we believe that our near instant access to funds for the majority of our merchants is a key differentiator, we strive to ensure our hold rate is lower than most payment processors in the industry – only a small fraction of our merchants have holds placed on them, with an average hold time of less than 11 days.  The vast majority of our sellers get access to their funds immediately.  By comparison, other payment processors have policies such as 14 days delayed settlement on 100% of new sellers. 

I’m grateful for this opportunity to communicate how and why we work with our customers to manage risk.  We continuously listen to feedback from our sellers and other stakeholders such as Scot so that we may improve our service for our merchant customers.  And based on Scot’s feedback, we know that we need to do a better job communicating with our customers about our decisions and how we’ve implemented them.  This is a journey and we are firmly committed to being the best merchant partner in the industry – helping merchants grow, manage, and run their businesses – and in many instances their livelihoods.

I would love to hear from you. You can contact me at ed@paypal.com.

Beware of ‘the Paypal call’ and what to do today to mitigate large Paypal reserves. (Part I of II)

Stressed_guyThis is the first of a two-part series and is a first for eBay Strategies.  The first post, which you are reading, is a head's up to sellers about what we've noticed at ChannelAdvisor that is happening to Paypal merchants on eBay and causing a good bit of frustration.

The second part, which you will find here is a response from the management at Paypal.  The timing worked out such that I was able to let some folks at eBay know this was coming and they offered to address the concerns.  I felt this added a lot of value, but didn't want to change the original post as it would be too lengthy and confusing if they were combined.  Thus I have split it into a two-part series.

The Paypal Call

Like many financial institutions today, Paypal appears to be significantly tightening up on credit.  This actually started about a year ago in isolated cases and appears to be accelerating in 2010.  The way it works is there is some kind of a trigger that causes a seller to come onto the radar of Paypal's risk team.

I have no idea what the triggers are, but best guesses based on anecdotal evidence we have seen:

  • Any kind of bad credit report or flag on your personal/corporate credit report by bill collectors
  • Significant increase/decrease in sales in a short window
  • Increase in returns, charge-backs, Paypal claims

Whatever the reason, the call is usually directly from the Paypal risk department, but sometimes initiated by a Paypal account manager.

The call usually goes something like this: “We have identified an increase of financial risk in your business and want to gather some details about your business to assess the risk."

 From here typically things go very deep and very much into the inner workings of your company and you have to produce:

  • Complete financials for the last 3-5 years
  • Details on inventory levels, cash balances
  • Detailed reasons and explanations for all returns for the last couple of years
  • Sources of inventory (this is a painful one)
  • Frequently these discussions go into the financials of the principle of the business.

As you can imagine, this is quite a burden for operating businesses of any size and can be extremely distracting for smaller businesses and feel very uncomfortable.  I've had several sellers jokingly call this the Paypal colonoscopy.

Once completed, a ‘verdict’ is rendered within a week or two.

The typical verdict we’ve seen is Paypal putting a reserve on the seller’s account – usually in the 5% range, but we've seen it as high as 20%.  We’ve even heard stories of Paypal ratcheting these up as sellers meet the criteria (e.g. starting at 5%, then walking up to 15% in 5% increments), which I don't don't understand, but we are hearing more of. 

What’s a Paypal Reserve?

Essentially, Paypal puts a lock on X% of transactions moving through your account (regardless of channel BTW) as an ‘insurance policy’ so that should you go out of business, they have some funds to cover the inevitable charge-backs that Paypal will have to fund if left holding the bag.

Let’s say you are a $300,000/m Paypal user with $150k/m coming from on-eBay Paypal and $150k/m from Paypal on your off-eBay website.  After going through the Paypal risk process, you are given a 10% reserve.  10% * $300k/m = $30k.  That reserve amount will automatically be a minimum that you have to keep in your Paypal account that you effectively can’t touch.

For many sellers, having a considerable amount of cash restricted with a very short time line (weeks) can be very problematic to cash flow and in some cases devastating.

In fact, White Elephant Media, one of the largest media sellers left on eBay recently went out of business due to this exact problem.  You can read their story in intimate detail here.

The Paypal reserve problem has also received some press in BusinessWeek and has been covered on the Paypal blog and eBay’s blog.

Like any financial institution, Paypal has the right to limit their risk, the goal of this post isn’t to dispute the policy, but to a) shed light on it and b) warn sellers that it is probably coming and most importantly c) give you some options to manage YOUR risk so your business isn’t pushed over a cliff if you are hit with a reserve.

What you can do today to mitigate probable Paypal reserves?

Unfortunately, we haven’t heard of any sellers being able to fight this process, so our recommendation is to go ahead and do your own ‘stress test’.  Ask yourself: “What would it mean to my business if I had a 10% Paypal reserve?”  If that is a business-ending scenario or otherwise problematic for you, it’s best to get in front of this now before the call, vs. scrambling after.   

Here are our top recommendations to be proactive instead of reactive:

  • Establish relationships with at least two more payment processors (usually credit card / merchant processors)
    • Typically they have substantially smaller reserves than we see Paypal implementing now.
       
    • Two relationships will give you one extra level of protection against any surprises if you move your Paypal business to the processors and that increase in sales trips any risk flags with them.
       
  • Take actions to minimize your Paypal volume off-eBay
    • Consider eliminating Paypal or at least demoting it on your e-commerce site - at a minimum have a plan to scale it back very quickly if you need to.
       
    • In our experience, you will not have a substantial increase in abandoned carts or decrease in conversion rates.
       
  • Avoid Paypal credit card processing
    • Remember the Paypal reserve applies to all of your volume flowing through Paypal.  As best we can tell this includes Verisign (owned by Paypal) and Paypal Website Payments Pro.  In these cases you aren’t even getting the benefit of access to Paypals user base and you should definitely look at a more traditional processor.
       
  • Prepare a plan for what you would do if you wanted to stop taking Paypal on-eBay
    • At ChannelAdvisor, for example, we support a myriad of non-Paypal affiliate gateways such as Authorize.net, Optimal payments and Cybersource that are SMB/e-commerce friendly and have MUCH lower reserves than we see with Paypal.  Also, behind the scenes, eBay has done a lot to make credit cards an ‘on par’ payment option with Paypal.  For example, the Paypal logo is no longer plastered throughout the site and ‘accepts Paypal’ is not a factor in BestMatch/search.  We've seen some folks test turning off/not launching with Paypal and not suffering from it interestingly enough. In fact, eBay's new Buyer Protection program is NOT exclusive to Paypal.
    • Run some tests to see if there is a material impact to your sales, perhaps on a smaller test ID vs. your main ID.
       
    • NOTE – we don’t recommend making this change until you are hit with a reserve and as an absolute last step if the reserves are significantly negatively impacting your business.  But it’s important to have a plan and have everything ‘wired’ correctly should things come to this.
       

After taking these steps, if you are hit with a Paypal reserve, you now can play offense vs. defense AND you have lowered your risk BEFORE the call.  Also, you can say on the verdict call: "I'm sorry, Mr/Ms. Paypal risk person that you have decided to hit me with a 10% reserve.  Because of that, tomorrow I am going to turn off Paypal on my $X/m e-commerce site and my $x/m eBay seller ID and going with .  I'll let my TSAM and my Paypal account manager know later today.  Based on what I'm seeing today, this won't really bother the Paypal risk person, but if enough large sellers do this, the message will be heard loud and clear that there are other options out there and Paypal needs to remember that.

Going back to our $300k/m example business, before the Paypal reserve, if the seller had switched Paypal on their off-eBay site with a credit card processor.  When they were hit with the 10% reserve, only $150k (the on-eBay portion) would be in the reserve which would be $15k vs. the ‘all Paypal’ $30k.  Then, if that $15k is too much, you can get to effectively $0 (or whatever your credit card processor requires) by turning off Paypal for your eBay sales as well.

Paypal's new 'high risk bar' isn't just for existing eBay sellers - large merchants also in the cross hairs

Small and medium size sellers can take heart that in our experience, Paypal is now even either turning away many large brand name merchants or not allowing them to start with Paypal at all.  This policy is now creating a very high hurdle rate to get new diamond merchants onto eBay that are eager to sell their branded, secondary marketplace goods.

What’s this mean for Paypal and eBay?

As you can imagine, there are a couple of interesting unintended consequences that are coming out of the more aggressive reserve stance Paypal is taking.

Positives:

•    Presumably these actions will reduce the amount of overall reserves that Paypal needs and diminish Paypals risk of being left out to dry on charge-backs from defunct customers.  eBay reports this number in the 'Provision for Transaction and Loan Loss' number that includes not only Paypal write-offs, but BML, eBay MP protection programs, etc. so it's hard to tease out specifically if this new program is moving the needle, but notice that it is ticking up 10% y/y which could be the driver behind the new Paypal desire to limit risk: (Note this diagram is from eBay's Q4 results conference call)

Provision_diagram
  

Negatives:

  • You can tell from the advice above, that in our experience, the reserves are actually causing the unintended consequence of sellers taking Paypal off their off-eBay site or diminishing it substantially.  Paypal generally doesn’t seem concerned by this and admits it is a way to ‘manage down’ the reserve.
  • This trend is increasing and e are seeing more and more retailers consider selling on eBay without Paypal as well.  While they are impacting a small number of sellers, they are typically eBay’s largest sellers. Over time this could cause a downward trend on Paypal’s coverage of eBay GMV.
  • We’ve heard several sellers say that ‘Paypal’s risk department is the new Trust and Safety’ – a reference to the Gestapo like tactics that T+S took back in the 07/08 time-frame that killed many an eBay business by shooting first and asking questions later.  So Paypal is frequently reversing places with eBay as the new ‘sales prevention’ arm of eBay that is making life harder for merchants, not easier.

None of the above negatives seem to have impacted Paypal's growth rates off-eBay or eBay penetration, so maybe the quantity of sellers impacted are small enough that it will stay under the radar.  However, at the rate we are seeing this increasingly come up, I suspect within a year that may change.  I think we'll see this show up in the off-eBay (merchant services) y/y growth rate as that's what most sellers are turning off immediately when they get the call.  We'll keep a close eye on that going forward.

Is this 'really' just Paypal risk management?

Since most of these individual seller recommendations don’t really make sense for a company (eBay corp)  that owns both the eBay marketplace and the payment system, Paypal, many sellers ask why the two companies are starting to drift apart.  Why would eBay marketplaces make it easier to take credit cards and why would Paypal seemingly not really be alarmed when customers are turning off Paypal from their e-commerce sites? Why would eBay roll out a buyer protection program that isn't just Paypal?

Admittedly this doesn’t make any sense to us either.  We’ve heard speculation from Wall St. that these are all steps towards a potential Paypal spin out to unlock shareholder value.  Most of these rumors are probably far from reality and we’re probably just seeing two large relatively independent corporate entities, that while under one umbrella, focusing on different and divergent (ebay – GMV, Paypal – lower risk) goals.

What do you think?

Let us know your Paypal stories (have a reserve? fought a reserve? turned off Paypal?) in comments and share your insights about why eBay and Paypal seem to be drifting apart.

Remember to check out Paypal's thoughts in Part II.

SeekingAlpha disclosure - I am long Google and Amazon. eBay is a minority investor in ChannelAdvisor where I am CEO.

February 23, 2010

Two upcoming events: eBay Fee Changes Webinar (Customers only) and Catalyst show

We have two (well three technically) events coming up I wanted to alert everyone to:

  1. eBay Webinar - Tomorrow, Wednesday Feb 24th we are holding a customer-only webinar on some different strategies around the eBay changes that are rolling out in late March / April.  We'll spend the most time on the fee changes and that they mean, but also hit on eBay Motors topics (fitment!!!) as well as the much discussed eTRS program / DSRs, etc.  Customers can go to www.channeladvisor.com/webinars and then login to your account to get the details.  We'll have a lengthy Q+A with many experts from CA so come with your questions and if you have any strategies to contribute, bring those too!
  2. Catalyst - every year we host an intimate (under 500 attendees) conference that highlights an area of e-commerce we don't think gets a big enough spotlight and one we are obviously very passionate about - e-commerce channels.  We do two of these - one in the UK (London) and one in the US (Research Triangle area of NC):
    1. Catalyst UK - This year Catalyst UK is April 12-13 at the Brewery (woo!) in downtown London.  You'll be able to have two days of intensive learning with talks from eBay, Google, Amazon, Dell and many other channels and retailers.
    2. Catalyst USA - We moved the US back a little this year to May 3-5 and will be at the prestigious Washington Duke Inn.  We have a great line up of speakers and topics this year including Bing, eBay, shopping.com and more and lots of great retailers like Crocs, 
      Toolup, eBags and more.
       

Catalyst fills up every year, so be sure to reserve your spot today.  I'm sure some past attendees will chime in on the comments, but we receive feedback from many e-commerce companies of all sizes that are looking to take things to the next level on Search, Comparison Shopping and Marketplaces and they find Catalyst is, well, a catalyst for their business growth a year later.  We always have a good mix of existing customers and general retailers that come each year. One thing you can count on - this is not a ChannelAdvisor sales event, in fact we do little to no selling of ChannelAdvisor and step aside and let the industry knowledge flow.

I look forward to seeing everyone there and learning more about 

Monsoon acquired by Amazon competitor

Over on Amazon Strategies, we have the complete story of the acquisition of Monsoon by Alibris.  Monsoon has some eBay sellers as customers and has exhibited at eBay Lives and is a certified provider in the eBay world, although they are mostly know for their Amazon support.  If interested, head on over and read the details.

February 18, 2010

Google's new VP of Commerce

The e-commerce World is buzzing with a related change in the senior ranks of eBay and Google.  Stephanie Tilenius was the General Manager for all of eBay North America and announced her departure September of last year (2009).    Stephanie has laid low since then, but popped up back on the radar in a big way this week as the new 'VP of Commerce' at Google which is a newly created position.

When asked what she's going to be doing at Google, she states:

"...overseeing development of digital content and commerce in the cloud, plus she’s responsible for everything commerce-related, including product search and payments. This means she’ll be in charge of Google Checkout, the online payments system that rivals eBay’s PayPal. With all the new devices coming out for consumers, she says, there’s huge opportunity for innovation in mobile and local commerce."

At ChannelAdvisor we have the opportunity to work with most of the senior management teams of eBay, PayPal and Google.  We've known Stephanie since she was on the PayPal side of things and worked directly with her on PayPal Express Checkout.  When she made the move to the eBay/marketplace side of the house, we worked even more closely with her.  In fact, Stephanie was one of our keynotes at last year's Catalyst event. 

Knowing Stephanie for many years, I am really encouraged by this move on a couple of levels and discouraged on others. Let's look at it from the eBay and Google perspectives.

What does this mean for eBay?

This is not good for eBay.  You have one of their most senior execs that not only has the PayPal off-eBay (merchant services) playbook in their head, but also the marketplace business in their head as well.  The only worse defection I can imagine would be the PayPal CEO going to Amazon payments or Lorrie Norrington or John Donahoe doing the same.

You have to ask yourself why they would allow this to happen in today's World of non-competes and what-not.

What does this mean for Google?

To date Google's e-commerce efforts have been a second-thought at best.  Google checkout came out of the gate strong, but seemed to lose support internally as other Adword related areas of the company required more attention.  The Doubleclick acquisition and focus on display advertising took Google's thoughts even further from the world of e-commerce.

This wouldn't be so bad if it weren't for Microsoft.  According to the January comscore data, Bing continues to take share from weaker rivals (Yahoo!, AOL, ASK), and also for the first time, Google.  I believe the secret to their success is Bing Cashback and first forecasted that as a potentially fruitful strategy back in June of 08.

So I view this as an (admittedly early) signal that Google is finally realizing they have a gaping strategic hole in their lack of a cohesive e-commerce / retail vision and they have found one of a handful of people that could really help them take it to the next level.  It would still be a moderately positive signal if they created the position and put someone from say, the AdWords team on there.  It's extremely positive to me that they realized their internal shortcomings and lack of insight and experience in the world of e-commerce and tapped someone outside the company to fill those holes.

Stephanie has an uphill battle, but think of the assets she can bring to bear:

  • 65% search market share (US - higher in other geos)
  • Dominant position in mobile (android, apps and search)
  • Google product search - already one of the top CSEs by traffic and definitely has wide retail adoption
  • Google checkout - Has some good technical underpinnings, but lost strategically
  • Other google assets - billions of dollars, millions of advertisers and of course an army of brilliant engineers.

What next?

Once Stephanie gets her sea legs, we'll try and get an interview for the blog and certainly will keep you posted on any happenings in the world of Google's e-commerce efforts.  It will also be interesting to see if we have any more eBay/Google flare ups from this high-profile departure.

You can read more about Stephanie's career moves here:

SeekingAlpha disclosure- I am long Google and Amazon.  eBay is an investor in ChannelAdvisor, where I am CEO.

February 11, 2010

Webinar today. A brief note that I'm hosting an open webinar today at 2pm ET - "Annual e-commerce review..." We'll be going over some 09 results and insights, looking at 2010 and beyond and giving retailers of all sizes some strategies for search, comparison shopping, marketplaces (eBay, Amazon, etc.), social and mobile!

We'll also be disclosing the January ChannelAdvisor Same Store Sales to get an early read on what 2010 will look like for e-commerce.

I hope you are able to join, you can sign up here: