When the auction site eBay acquired the payment processing service PayPal for $1.5 billion in 2002, nobody was confused about which company was the brightest light. Back then, eBay, especially in the United States, was the better known brand--the place people bought and sold things online. PayPal was seen as a means to that end: a service that allowed ordinary people to accept electronic payments for the things they sold. But almost a decade later, PayPal’s star is shining the brightest. While eBay has struggled against Amazon.com and more specialized retail sites, PayPal has established itself as the payment service of first resort for a new generation of online entrepreneurs.

“PayPal is widely considered eBay’s superstar as more companies adopt it to process payments,⁠”⁠ wrote Verne G. Kopytoff, on the New York Times⁠’⁠ “⁠Bits⁠”⁠ blog. He noted that this year, PayPal is expected to account for half of eBay’s revenue. PayPal has also gone global: 94 million active accounts in 190 markets, with the ability to handle 24 different currencies.

Japan is one of those markets, but here, PayPal is a late entry, announcing its Japanese push only in 2010. The delay might well be due to the fact that eBay has not had a Japanese presence. Japan is the first country PayPal has entered on its own, rather than building on eBay’s foundation. "We're very, very new, we have a very small share of the market, so we still see great opportunities for Japan," said Andrew Pipolo, head of PayPal's Japanese operations, at a Tokyo press conference last July.

So what should Japanese Web Site Experts know about PayPal? Two words stand out: PayPal X. Announced in 2009, PayPal X is the company’s development platform--a set of APIs you can use to create a custom checkout service from within your website. While PayPal’s retail operation has its critics, its efforts on behalf of PayPal X have earned praise from developers and outside observers. The highest complement may have been paid by some of PayPal’s competitors--credit card companies who have since created APIs of their own.

“Open development platforms have been among the biggest trends of the last 10 plus years,⁠”⁠ said Bill Day, a writer and technology evangelist who regularly posts on the PayPal X DevZone site. But until PayPal X, there had not been a “⁠well-documented, widely available payment system, a one-stop shop for putting payments into your app. PayPal is very seriously attempting to build that one-stop shop and they are doing it in a very open, community-oriented way. They’ve hosted development conferences. They repeatedly seek developer feedback.⁠”⁠ Day, who once worked for Sun Microsystems, says that PayPal’s approach reminds him of the one Sun took years ago with Java. “⁠PayPal has built a lot of trust. Of course, PayPal has a lot to benefit here too, and that’s fine as long as developers see benefits for themselves as well. They are willing to go along and help PayPal build this platform out as long as they see it is as a two-way street.”

Adaptive Payments API

PayPal officially announced the opening of its payment platform to third-party developers on July 23, 2009. The launch included a new developer website with the appropriately geeky URL “⁠x.com,⁠”⁠ which features the mandatory mix of blogs, forums, and documentation. PayPal has also staged two developer conferences, each associated with a developer contest. Developers I spoke with have credited the company with providing responsive, detailed support, and the company restructured its fees to make its service more enticing to a wider variety of online business models

The technical flagship for the PayPal X platform is the Adaptive Payments API, which joined a potpourri of legacy developer tools. This overlap of new and old can lead to confusion. Bill Day noted that, for example, PayPal has offered two overlapping technologies: Mobile Express Checkout and Mobile Checkout. The first is the new one. “⁠If you are starting from scratch, make sure you understand what is in the new platform,⁠”⁠ Day said. “⁠Adaptive Payments is certainly a big piece of that―there are a number of things you can do with it that you can’t do any other way.”

Among other things, Adaptive payments allows developers to control the flow of money between a single payer and one or more recipients. An application using the platform may be part of a website, a widget on a social networking site, or an app on a mobile phone. In a typical PayPal transaction, there is one payer and one receiver, and that’s the end of the story. But developers can also create more complex payment dispersal schemes. For example, a shopping cart application might send payments directly to up to six other parties (“⁠parallel⁠”⁠ payments⁠”) or to a primary receiver who then splits the funds among up to five receivers (“⁠chained payments⁠”). Parallel and chained payments could be useful for a website where multiple suppliers are all represented, such as a music site where the composer and musicians are to be paid.

Another Adaptive Payments feature getting developer attention is preapprovals. These are billing agreements between a seller and buyer--which can be useful before a transaction has taken place. The two parties agree on an amount, but the funds transfer doesn’t take place until a numeric key is processed by the API.

Other API operations include the ability to:

• Embed the payment function within the application as a JavaScript lightbox or a moveable minibrowser window.
• Accept “⁠guest payments⁠”--credit card payments via customers who don’t have a PayPal account.
• Refund all or part of a payment.
• Convert currencies.
• Get shipping address information.
• Determine funding sources for a specified payment.

PayPal has also produced mobile libraries for iOS (versions 3.x and 4.x) and Android (version 1.5 and higher).

Early adaptors create “micro-marketplaces”

To get an idea of how developers are using PayPal X, I spoke with some of the winners of the PayPal X Developer Challenge. What’s striking about this small sample is that none of them are in a conventional retail e-commerce business--selling stuff online. Instead, each has created a “⁠micro-marketplace⁠”⁠ of its own in which customers exchange goods or invest in people. One site has created a marketplace to fund small online merchants, another to fund iOS application developers, and another to others that provide an exchange for person-to-person renting and exchanging gift cards.

Appbackr: person-to-person funding

Trevor Cornwell, founder and CEO of the company appbackr inc., is a veteran entrepreneur, and is now in the business of funding other entrepreneurs. Appbackr is a wholesale digital marketplace. A developer sells an app on the appbackr marketplace. Appbackr purchases some of these applications in bulk, then receives a portion of the profits, via PayPal, as the application gets sold. This automatic distribution of funds to multiple parties is a key feature of the Adaptive Payments API.

“The Adaptive Payments API is brilliant,⁠”⁠ Cornwell says. “⁠There is a lot of excitement around disruptive business models, and one of the best ways to destruct a business model is to be able to take it apart and then put it back together again. The PayPal X platform does exactly that because it allows one payment to be distributed to many, either concurrently or in parallel.⁠”⁠ Today, says Cornwell, the e-commerce follows a consignment model. “⁠You take your wares to a store, and hope that they sell. That approach works well for big companies with multiple revenue streams, but for smaller developer shops it is not as appealing because it puts all of the risk and burden on them. Our model is the first cut at simplifying the process for the developer and ultimately allowing him to get to more marketplaces at the right price.”

Cornwell said that PayPal’s approach is a winner because it allows the developer to control the distribution of funds directly. “⁠That’s significant from a development standpoint, from an accounting standpoint, and from a custodial standpoint,⁠”⁠ he says, while PayPal acts more as a pipeline than a third-party, and the developer is in full charge of the valves. “⁠With PayPal, the money flows naturally. The buyer has confidence that the money will go to the intended parties. We, as the distributor of funds, don’t have to worry about accepting the money, doing the accounting, and then distributing it. It is all happens at the point of sale.”

Cornwell also likes PayPal’s fraud detection system. “⁠You have confidence that bad actors are probably going to be screened out before you do business with them. And if the transaction does go through, there is a very skilled layer on the back end to protect you. That creates a confidence between buyer and seller. With most any business model, you have to provision 20 percent or more for charge-backs. Our charge-backs are negligible because PayPal does such a good job.”

In developing the application, appbackr opted for Adaptive Payment’s chain payments, rather than parallel payments--although either could have been used. Money paid by the purchaser flows directly to the developer, and then to appbackr. “⁠That allows both us and the developer to get quickly paid. But we can also dynamically tweak that flow. We can code the app so that, for example, if you are purchasing at least $25,000 worth of the goods, you get a discount. The API enables us to do that dynamically in the back end. The nice thing is that you can’t go wrong, because PayPal won’t let you. They look at what you are doing, and they have to approve you for the API. We had to deliver a schema of what we were creating, and they evaluated it.”

Two developers, one in the U.S., the other in Delhi, built the app using PHP and MySQL. They created a working prototype in just 45 days--fast enough to enter the Developer Challenge. The company went into live beta in October, and at this writing, with the completed application were slated for this spring, about a year after the company was formed.

Rentalic: person-to-person renting

Appbackr was one of the two first-place winners of the 2010 PayPal Developer Challenge. The other was Rentalic, which used the PayPal X platform to create a rental marketplace service. The company “⁠helps the people who need stuff connect with the people who have stuff." Rentalic’s founder is one of those American success stories. Born in Sri Lanka and now living in the San Francisco Bay Area, Punsri Abeywickrema is now the owner and proud operator of a California-based website.

“When we first went into development, PayPal was the only payment system that was making an API available to do the thing we wanted to do: namely, create a tailor-made payment system that helps enable person-to-person renting,⁠”⁠ he said. “⁠This is ecommerce, but a specific kind of ecommerce, because it requires an additional layer of trust.⁠”⁠ In the Rentalic business model, two people meet, exchange an item, then meet again and exchange it back. In the first case, the condition of the item must be as advertised. In the second case, the condition must be the same. People being what they are, this is a scenario ripe for disputes, and Abeywickrema knew from the outset that dispute resolution was imperative.

That’s one place where the API came in. “⁠People said there was no way were they were going to pay a single cent until they could actually see in person what they were renting--because they didn’t want to go through the trouble of applying for a refund.⁠”⁠ Meanwhile, the owners didn’t want to go through the process without knowing a prospective renter had the funds to pay. “⁠For the longest time, we couldn’t figure out a solution that would first guarantee that the borrower has money, but not put through the payment transaction until the two parties meet. Then PayPal opened up the APIs and we said “⁠yes, now we can finally do this.⁠”⁠

Abeywickrema came up with scheme that uses the PayPal Adaptive Payments operation for preapproval, thereby ensuring that funds are available both for the renter’s fee and the deposit. The application then creates a unique 15-digit identification number that unlocks the payment. “⁠We give you, the borrower, the key, which you take with you to the meeting. If you like the quality of item, then the owner can use the key to process the transaction, either going online or by phone using our own interactive voice response system.

Abeywickrema developed the application using the Ruby library. “⁠We had a steep learning curve, but once of we got the hang of it, development was pretty fast: about two to three weeks of work to test and get the whole thing working. Having the platforms opening up the APIs gives huge, huge flexibility to the developer community. I see much innovation happening in the next few years in the payment space because of this. Now everybody is jumping on the bandwagon―MasterCard and Visa included―because they see that this open approach as the way to go.”

Kabbage: credit evaluation program in six months

Appbackr connects app developers with investors. Rentalic connects loaners with renters. Kabbage connects online merchants with funders. As its website puts it, “⁠we recognize that online merchants have a more difficult time obtaining the funding they need to grow their businesses and we built a solution to meet their needs. These merchants demand the attention of a financial services partner that understands the unique challenges and opportunities facing online sellers.”

Kabbage has automated much of the process. Customers agree to an automatic billing agreement, and then get funded immediately. The process for new customers averages about eight minutes. “⁠We look at how long they’ve been operating online, their transaction volume, chargeback and reversal rates,⁠”⁠ said Robert Frohwein, Kabbage founder and CEO. “⁠There are more than 200 data elements involved in e-commerce transactions, and we think that many of them will be predictive as we move forward. We already have a great risk model, but we think it will be that much better as we pour in more data and tie that to repayments by our customers.”

Frohwein said that PayPal’s original fee structure of three to four percent would not have worked with Kabbage’s business model--and the company had planned to process transactions using a PayPal competitor: ACH Payments. “⁠But when PayPal announced new business-to-business pricing last year of 50 cents a transaction, that looked a lot more competitive. At that point, it made immediate sense for us to work with them, and they’ve been a great partner going forward.⁠”⁠

Kabbage uses both eBay and PayPal APIs to look at transaction data, seller ratings, and other data that can open a window on a company’s reputation and prospects. “⁠We utilize a large percentage of PayPal’s API base made available through PayPal X,⁠”⁠ said Mike Clark, Kabbage’s vice president of technology. “⁠We are primarily looking to verify identity, as well as judge risk, by looking at transactions. We are also delivering funds and receiving payments automatically via the Adaptive Payments API.⁠”⁠

Kabbage started building its app using SOAP right after the 2009 platform introduction. “⁠We were trying to make calls with Microsoft Visual Studio 2010, which was in beta,⁠”⁠ said Clark. “⁠That meant we had a new Microsoft framework calling a new PayPal framework. It was rough getting started, and we found many pain points that had not been uncovered by others. But now, the Adaptive Payments documentation is much fuller, and there’s a lot more people on the forums answering the kinds of questions I had a year ago.⁠”⁠

After the development team got going, it took just a month or so to incorporate the PayPal API connectors. “⁠Basically, two guys--myself and another developer--cranked out the entire platform in six months,⁠”⁠ Clark said. That’s an impressive timeframe for building a credit evaluation system, even with some third-party technology used. Kabbage launched a beta version in June 2010, with a much improved post-beta version in October. “⁠We continue to release new features and are learning a lot from our customers.⁠”⁠ Clark’s advice: “⁠Things are much easier if you use PayPal’s software development kit, which eliminates the need to master the additional Adaptive Payment APIs. If you use your own, it’s not technically difficult, but it is painstaking.”

Plastic Jungle: Money transfers in seconds

Plastic Jungle bills itself as the Web's largest secured gift card exchange. People with gift cards redeemable at one store can exchange them for gift cards redeemable somewhere else. The site was launched in 2007 and has had three rounds of venture funding. “⁠PayPal X provided just the right APIs for us to securely and instantly load money into a consumer’s PayPal account,⁠”⁠ said Ashmit Bhattacharya, the company’s chief technology officer.

A customer first submits the card’s retailer, the card number, and, sometimes, a secure PIN number. Plastic Jungle then uses that information to obtain the balance on the card, then uses its own algorithms to make a purchase offer. If the customer accepts, he or she provides some additional demographic data, including a home address. “⁠The reason we do that is that the PayPal X platform has still not extended address information exchange between partners,⁠”⁠ Bhattacharya said. “⁠We use this additional information as part of our fraud prevention efforts. An approval message is then sent, with post-processing, which takes just a few milliseconds. We then post back the agreed upon amount to the customer’s PayPal account.

“We leverage two parts of the PayPal X platform, Adaptive Accounts and Adaptive Payments. Adaptive Accounts API gives us verified status, that is, a handle on the status of the customer account. And we leverage Adaptive Payments, to do the actual funds transfer from our account to the consumer’s PayPal account.⁠”⁠ What difference did the APIs make? “⁠We could have pushed money into consumer's accounts using the traditional PayPal mechanisms. But the instant aspect of the transaction--the ability to load money so quickly--wouldn’t exist without the Adaptive Payments API set. Typically, the money is transferred to customer accounts within 10 to 15 seconds.⁠”⁠

Plastic Jungle has also used the Facebook Credits API, as well, enabling the company to load money into a customer’s Facebook account. “⁠We also have a two-step mechanism for exchanging for Amazon.com gift cards. But here, the process is not as easy. “⁠We continue to hope that Amazon opens up its API set, as it would allow us to deliver the code directly to the consumer’s Amazon account, rather than what we have today, where Amazon first receives a code, then applies it,⁠”⁠ Bhattacharya said.

And there’s the paradox. PayPal has not always been seen as the most a customer-friendly business. Its customer service phone number is so cunningly hidden on its site that I couldn’t find it. Out on the greater Web, one angry site is dedicated to dissing the service, and PayPal’s parent company, eBay, has been outflanked by Amazon.com, one of the most customer-friendly retailers on the Web. But with its open platform, PayPal has turned developers into believers, set the industry standard for payment APIs, and delivered on its promise to be “⁠the future of money.⁠”⁠ Memo to eBay: the folks behind PayPal X have figured something out.

Sidebar - Bill Day: “A critical component of the Web programming stack”

As a contributor to the PayPal X DevZone blog, Bill Day has found a good perch from which to watch platform developments. Here’s more from our conversation:

I’ve spoken with some advanced platform developers. What’s the reaction of people who are less far along?

In the last year, I’ve tried to explore every nook and cranny of the platform--and while the x.com site has lots of documentation, I’ve seen some criticism that there are so many parts. PayPal has tried to build a system with the community that addresses payments anywhere you would need them. But as they have done so, certain components are older technology and certain components are shiny and brand new, and at times there have been inconsistencies or areas that were confusing to understand. And there has been criticism that the documentation and the how tos and tutorials were not all up to the same level. This is why myself and others are involved in writing for the site. We are trying to fill in some gaps so that when newcomers look at the platform, they can see each of the major pieces and how they fit together and how to start using them.

From my perspective, that’s the biggest issue. Developers had told tell me that they know the documentation is there, but finding the right thing that they need to solve their problem quickly has been the sticking point.

What do you suggest for developers new to the platform?

If you are starting from scratch, make sure you understand what is in the “⁠new⁠”⁠ platform―what are the consistent ways of doing things. Adaptive Payments is certainly a big piece of that―there are a number of things you can do with it that you couldn’t do with any previous PayPal technology. There are other areas where you may not need the flexibility of Adaptive Payments, and you can use a simpler approach with some of the older, but still good, technologies. That might be the case if you are just embedding payment technologies into a Web application. But in general, if a person is coming to this new or is building a new application, Adaptive Payments in the place to start. It makes sense. In a lot of places it will map to their problem, and in many cases may be the only way to go.

People seem to be forging brand new kinds of payments using Adaptive Payments.

I think that’s one of the brilliant things about Adaptive Payments. What if you gave people the tools to move money around in a secure way? Could we enable completely new businesses that no one has thought of before? To me, that’s what Adaptive Payments is about. PayPal is giving you this flexible toolkit, and they’ve made a point of saying that developers will have a lot of ideas that they, PayPal, has never thought of--and will try to make Adaptive Payments flexible enough so you can turn those ideas into working applications.

Have you seen any evidence that PayPal has has been adding onto the APIs?

There have been some tweaks, including at least one round of smaller changes that seem based on developer feedback. So yes, they are iterating and updating the platform, with updates made every month or two. They are going to a lot of third party developers and conferences. Every two weeks or so Google will have one, Yahoo! will have a developer event, and some are local, some in Boston, New York City, London. They are actively trying to go where the developers are rather than expect the developers to come to them. They are walking the walk of trying to engage with the community, wherever it is.

Where do you think this is all headed?

I think PayPal has succeeded in becoming an ever more critical component of the Web programming stack. They are becoming the default piece if a developer wants to include payments of any kind. That’s the first place you go, the first place you think of. They are getting themselves into position where they are the gatekeeper for money flowing in and out of applications. For me, or any third party developer, that means you will need to understand their platform, because they will be processing so many of the Web’s transactions.

A few years ago, a lot of Web builders put off discussing payments, saying they will worry about that later. Now that has reversed, with many developers are saying right up front that they have to think about what kind of payment is the client going to be interested in accepting--and putting those considerations into the design from the beginning.