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Retailers that want to accept PayPal in their bricks-and-mortar locations should have an easier time doing so after deals struck between the online payments company and terminal manufacturers. In the latest agreement, retailers with VeriFone point-of-sale terminals will be able to utilize software upgrades and tool kits to facilitate the acceptance of PayPal.

This deal follows earlier agreements that PayPal signed with Ingenico and Equinox, but the VeriFone deal is particularly important as nearly 80 percent of the largest U.S. retailers use VeriFone terminals. Now, nearly all the largest retail chains will be able to accept in-store PayPal payments.

Fifteen large retailers announced they would launch PayPal payments inside their stores this year, and, according to PayPal vice president of retail and prepaid services Don Kingsborough, 20 additional retailers are expected to accept PayPal by the end of 2012.

Prior to these agreements, retailers seeking to add PayPal payment often had to make a series of adjustments to their POS terminals and internal payments networks. Adding PayPal is more complicated than just adding another credit card to a terminal; most customers don’t even use a card — many pay by giving their phone number at checkout and entering a PIN.

Once a customer has been identified, the information goes back to PayPal, where each customer has a digital wallet with coupons, discounts and payment vehicles, as well as a preferred priority list of the type of payment instrument to be used. Customers can debit from an account they hold directly with PayPal, debit a bank account or charge to an existing card.

Customers can also use their cell phones or personal computers to prepay before picking the item up. This option is popular with customers who want to have gifts or heavy items shipped, Kingsborough says.

Arrangements such as that with VeriFone should make it easier for retailers to accommodate PayPal. “They have software solutions developed that run across a retailer’s payments platform,” Kingsborough says. “That will reduce the time and cost retailers have to invest to accept PayPal.”

Start small, end big
PayPal’s plan is to reach out to the very large retail chains first; once a significant number are onboard, PayPal will begin to work with the payment processors, merchant acquirers and independent sales organizations that represent smaller retail chains and independents.

“We want to start with the largest retailers that have the largest presence in communities,” Kingsborough says. “We want to be represented by retailers that have the most frequent traffic — the gasoline stations, drug stores and food stores that customers visit frequently in a week. Then the consumers will get a sense that they can use PayPal in stores, and start to expect to be able to use PayPal wherever they shop.”

Among the retailers that have announced deals to use VeriFone terminals to accept PayPal are Advanced Auto Parts, Aéropostale, American Eagle Outfitters, Guitar Center, Jamba Juice, Office Depot and Rooms To Go.

For the most part, retailers are not talking much about their decisions to accept PayPal. A Toys “R” Us spokesperson notes that select Toys “R” Us and Babies “R” Us locations will begin accepting PayPal this fall. “We’re always looking for ways to make shopping more convenient for our customers, and this service, which allows them to pay for their purchases in-store by simply entering their phone number and a PIN, is another means by which we can do that,” the spokesperson says. “As we get closer to the launch of this test we will be able to share further details on this initiative.”

Some retailers are implementing PayPal in stages. Kingsborough says The Home Depot began with a 44-store test to see if enough customers would use PayPal to justify the cost of upgrading all its stores. After a few months, the pilot proved successful enough that the chain began to roll out the payment option to all its stores nationally.

Part of PayPal’s allure is the large number of consumers that have signed up for it: The company has 113 million active registered accounts — a large base that many retailers want to reach.

Devilish details
For VeriFone, the deal with PayPal represents an opportunity to expand its business beyond credit card-accepting terminals.

“Historically, we think of the POS terminal [as] a device that you swipe cards on that has a small screen that shows the amount of purchase,” says David Talach, vice president of strategic partner development for VeriFone. “But that notion is gone and the business is changing.”

Three years ago, the traditional credit card terminal changed to include touchscreen, signature capture and multi-media receipts. Today, POS terminals are looking to incorporate new payment options, near field communications (NFC), electronic wallets and other payment-related issues associated with using mobile devices.

The PayPal deal takes VeriFone closer to its goal of broader payment options and advanced technologies by moving beyond the card-centric world to “in-the-cloud” payments made via smartphones, Talach says. It will also make it easier for retailers with VeriFone terminals to implement additional payment options: Instead of a major overhaul of traditional terminals, retailers can use software retrofits and tool kits from VeriFone.

The encryption used to provide the necessary security on a telephone number and PIN transaction is different than the traditional triple DES encryptions used by credit and debit card payments. “Rather than piggyback on the DES encryption, which was designed for card payment, we have developed an alternative form of encryption that is designed specifically for this application,” Talach says.

VeriFone expects to work with other emerging and established companies to expand into new payment options, particularly those relating to mobile and advanced payment systems. “We want to provide a level playing field for all payment companies,” Talach says. “Our main goal is to provide options for retailers so that they can choose how they want to accept payments and we can facilitate their goals. There is going to be a rush of innovation into retail stores and we want to be able to facilitate that.”