The Digital Skeptic: PayPal Robs Banks

CLEARWATER, Fla. ( MainStreet) -- The Home Depot ( HD) here on Gulf-to-Bay Boulevard is letting us hold up banks. Lot's of 'em. In broad daylight. In fact, we're doing it as we buy a socket wrench at the self-scan terminal during Memorial Weekend.

It turned out we could pay for some hardware to tune up our boat with either Visa ( V), American Express ( AXP), MasterCard ( MA) or -- wait for it -- PayPal. Not at HomeDepot.com, but at a real-life Home Depot.
Banks that think longer hours equals innovation are sure to be unsettled as PayPal moves from all-Internet to adding a bricks-and-mortar strategy.

"Today it's really hard to find an online retailer that does not accept PayPal," says David Marcus, president of the eBay ( EBAY)-owned, San Jose, Calif.-based transaction company, in a company-released video. He is clear that the next big score for his company is in traditional retail sales.

"The offline retail market is 17 times larger than the online opportunity," he says.

Get over it, banks; PayPal is busting it large into bricks-and-mortar retailing. It has spent the past year testing its checkout terminals at 2,000 Home Depot stores and last week announced -- break out your pencils -- that 15 other major retailers would support the system soon, including stores such as JCPenney ( JCP), Barnes & Noble ( BKS) and Toys 'R Us.

Based on what this service seems capable of in our testing, and statements from the company, the PayPal retail strategy strikes at the heart of the American financial network -- and our perpetually struggling U.S. banks.

Buckle up, bank investors: PayPal is looking more like a digital John Dillinger every day.

PayPal: The digital banking tommy gun
After TARP, the mortgage banking crises and the demise of Goldman and all the rest, it's a lot to ask a banking investor to think in terms of the threat of technological innovation. But click on PayPal's "In Store" page and you get a feel for the bank profit-killing gun PayPal is waving around.

Sign up and you will see that PayPal has managed to engineer a point-of-sale system that does away with traditional debit or credit cards. Never mind that deck of financial identity plastic. The PayPal retail product doesn't even need a smartphone -- just your phone number and an easy-to-remember PIN.

PayPal spokeswoman Heather Norton flatly declined to describe the actual transaction flow of the company's payment structure with Home Depot. She would say only that the PayPal payments system is not the traditional PayPal Debit MasterCard; it is a direct link to PayPal. No bank. No credit card company. Just PayPal and Home Depot married at the merchant-banking hip. The arrangement connects us consumers directly to our PayPal identity and its laundry list of free services, all of which are lucrative businesses for traditional banks and transaction companies. Bill pay: free. Electronic payments: free. Wire transfers: free. Sure, PayPal is not shy about charging for things. But it's a fraction of the endless nickel-and-diming we have found from traditional banks such as Wells Fargo ( WFC), Citi ( C) and Chase ( JPM).

Even deeper, PayPal becomes the gatekeeper between our account and the larger financial network. We can fund our PayPal account with a traditional bank account or Visa credit line card or any one of the other electronic funding methods. We can even top up our account with an international transfer.

PayPal, not surprisingly, is dressing up this incursion as a cooperative effort with banks. The company announced back in February that it has inked partnerships with more than 50 financial networks and 15,000 banks around the world, including Wilmington, Del.-based The Bancorp ( TBBK).

"There's no shortage of ideas on how we can work more closely with banks everywhere to continue to bring this type of innovation and value to their business, " the blog reads.

But considering it's only a matter of time before every retailer accepts the PayPal payments system -- remember that every store owner on the planet hates MasterCard, Visa and AmericanExpress -- how long will it be before we just don't have time to bother with a traditional bank?

Honestly, not long.

Banking makes the digital hit List.
And here we are, yet again, staring down the barrel of the grim big-think of the digital age. For all its huffing, puffing flag-waving and suits and degrees, the financial network is just that -- a network. One that moves digital information around just like the Internet or the phone system. And the same forces of commoditization that have squeezed profits out of publishing and telephony are hard at work in banking.

There has never, ever been an incumbent in an information-based economic sector -- we are talking music, news or even the legal profession -- that has not seen its profits vaporized when digital entrants show up.

And considering that PayPal is competing against a banking culture that considers free checking and staying open on Memorial Day to be innovation and service, state-coddled American financial institutions are ill-equipped for PayPal's ruthless kind of digital fight.

Banks are not doomed. But just like everybody else spiraling down the digital coil, the banking sector is on track to be much, much smaller.

And PayPal, which really is nothing more than the checkout table for an online flea market called eBay? It'll wind up being bigger than Bonnie and Clyde.

Additional Reporting by Anthony Mowl.

This commentary comes from an independent investor or market observer as part of TheStreet guest contributor program. The views expressed are those of the author and do not necessarily represent the views of TheStreet or its management.

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