The battle for Guest Checkout

Is the juice worth the squeeze?

Key insights in this post

• Big payments companies are competing to streamline Guest Checkout

  • Within walled gardens, like Shop Pay in Shopify and Link within Stripe merchants

  • Broadly, like EWS’s Paze & PayPal’s Fastlane

  • Incumbents like PayPal Wallet, Apple Pay, & Google Pay

• They offer effectively the same benefits to merchants:

  • Streamlined checkout, including transfer of shipping details

  • Lower fraud via consumer authentication

  • Lower PCI risk via card tokens

  • Low/no incremental cost of acceptance for the above benefits

• They differ primarily on how many consumers they serve and how many cards they hold from those consumers

  • Paze has the most consumers and cards given ownership by major card issuers

  • Apple Pay, Google Pay and PayPal wallets have lots of consumers but generally few cards per consumer; Fastlane benefits from PayPal’s large base

  • Shop Pay and Link have the fewest customers and cards, but control walled gardens where they are prioritized

• Monetization is usually indirect (e.g., engagement), except Apple Pay, who is paid by card issuers

• Guest Checkout TAM is large, but the SOM for each competitor if far lower; in particular, Paze & Fastlane may be competing over <10% of the market:

  • Amazon (~35%) allows none of these experiences and is mostly card-on-file

  • Shopify (~10%) favors Shop Pay

  • Stripe (~10%?) will prioritize Link at its merchants

  • Other walled gardens (~15%+) limit the open territory (e.g., Walmart, eBay, Apple.com, etc.)

  • In-app (~50%) is captured by the OS-driven wallets, Apple Pay & Google Pay

• While Paze & PayPal have the strongest assets they also face limits

  • Most of Paze’s initial clients also accept Apple Pay, PayPal, and Google Pay

  • Fastlane may face limits at other acquirers given they compete with Braintree

  • Paze is the only competitor that isn’t global and it doesn’t yet include Citi cards (~10% share) or American Express cards (~20% share)

• Conclusion: the market is a small share of eCommerce and fragmented. Each competitor’s fiefdom may not be big enough to sustain a business – particularly with only indirect revenues.

Introduction

Big payments companies are competing to streamline Guest Checkout. Traditional Guest Checkout requires a consumer to type in their email, card number and shipping details. As we all know that is annoying, error prone, and fraud prone.

Historically, only PayPal wallet helped with this, but it had other downsides. It required a password and took the consumer off the merchant’s site. Further, accepting PayPal required a parallel settlement mechanism and MDR. This was addressed by Apple Pay & Google Pay which were on-site, authenticated, tokenized – and importantly, free to the merchant. But they weren’t universal, each ruled within its own user base.

New competitors have joined the fray with features that distinguish them and limit them:

• Within a walled garden (but trying to move off-garden)

  • Shop Pay is Shopify’s on-site solution that hold payment credentials gathered in one interaction and reuses them for subsequent transactions at any Shopify merchant

  • Link by Stripe is serves Stripe’s clients off Shopify. Note that Stripe is the actual acquirer for Shopify

• Open market services

  • PayPal’s FastLane uses the data on file from PayPal Wallet users. Fastlane is a form filler that authenticates the consumer and then transfers card tokens and shipping details to the merchant. The tokens are processed like any other card transaction

  • EWS’s Paze gets its card and shipping data from Bank issuers. It authenticates via the same credentials used for online and mobile banking

All these solutions link the consumer’s identity to their email – the one piece of data customers still need to enter. The provider links email to a customer profile to populate checkout. This clearly reduces checkout friction which, in theory, decreases cart abandonment, and increases conversion. The providers also validate identity in the background to avoid fraud.

These services compete with Apple Pay & Google Pay to serve customers who don’t want to type in card details and shipping data on each transaction. These services may authenticate the customer via biometrics or passwords but similarly populate checkout with card tokens and shipping details. PayPal Wallet differs primarily because it doesn’t send native cards but instead acts like a payment method itself – with its own settlement mechanism.

Most surveys say that Guest Checkout accounts for as much as 30% of eCommerce, so the market may be huge. But can it support all these competitors? And if most of these services are free, is the model sustainable?

This post will explore those questions.

Who are the competitors?

PayPal Wallet is really the incumbent in this space. It may account for as much as 20% of US eCommerce spend outside Amazon, or ~10% overall. The newer competitors start with a consumer base they gather from another venue:

These don’t all work the same way. Some pass a card token to the merchant while others form-fill the actual card number. PayPal Fastlane differs from PayPal Wallet by being on site and passing a card token rather than settling on the PayPal network.

Paze is from the same bank consortium that sponsors Zelle. It is free because the Issuers want to recover the consumer engagement, particularly from Apple Pay & PayPal:

• Apple Pay: The issuers avoid Apple’s Pay fees of 15bps

• PayPal: The issuers avoid PayPal steering to ACH or PayPal balances and away from cards

Both Apple & PayPal also offer lending products that that compete with cards. PayPal has its own service and Apple partners with Affirm.

Strengths and weaknesses

These competitors differentiate on scale, authentication, and integration method:

Scale

What venues do they target? All aspire to serve all merchants but that is unrealistic. Some of these providers start in walled gardens (e.g., Shop Pay on Shopify) while others target all merchants right away. Their prospects vary. For example, Link will likely succeed at merchants that use Stripe as their acquirer, but face resistance at merchants using other acquirers.

• Customers served. Paze & Fastlane have the greatest consumer reach. Apple only serves IOS customers which leaves half the US market out

• Cards per customer. Paze likely has the most cards for each consumer – but is notably lacking Amex cards and Citi cards – collectively over 20% of the market. Most consumers don’t load all their cards into a digital wallet. Some keep their cobrands or PLCCs “on file” at the sponsoring merchant’s site

Authentication

The merchants prioritize lower checkout friction, but they also value lower fraud. Guest Checkout is the source of most fraud because merchants can’t fully authenticate one-time or occasional customers. All the providers have recurring relationships with their consumers and can therefore authenticate them better

These wallets identify the consumer through their email, but need to confirm that email is really the wallet owner. This is typically done with a one-time password, but other methods are used as well – including biometrics on a smart phone or laptop

When I was at JPM, I found Apple Pay fraud online was tiny due to their biometric authentication. The limited fraud cases were in the original provisioning: If a fraudster could load a stolen card into their own Apple Pay it would still authenticate. When issuers moved to tougher provisioning methods, that fraud dimished.

Integration & Data

Some of these wallets are form-fillers while others have API connections to the merchant. Some are hybrids. Form-fillers, like Google Pay, may not have a formal integration and therefore must generate their own demand.

Summary

The Table below summarizes some of the differences among these providers:

While they differ on the margins, they all provide pretty much the same benefits to the merchants: Less Friction & lower fraud. Those with major consumers and cards need fewer first-time consumers to authenticate and therefore have a modest advantage.

How big is Guest Checkout?

Every consumer survey says that about 30% of their eCommerce activity by value is Guest Checkout. But that can’t possibly be true!

Amazon accounts for ~35%+ of eCommerce and they are mostly card-on-file via Prime – and they don’t allow any wallets on their sites. If ~65% of eCommerce is off-Amazon, and Guest Checkout accounts for 30% of total eCommerce, it would have to account for almost half of non-Amazon eCommerce.

I ran my own survey on this subject for a consulting project and got the same 30% result. Then I had a brainstorm. I reran the survey with a slightly different structure: First we asked how much of a consumer’s eCommerce was on Amazon (Result: ~50%) – which has tiny guest checkout and no wallets; then we asked: for their non-Amazon shopping, how much was Guest Checkout? The answer came back 30%! I concluded that Amazon Prime is so engrained in people’s shopping habits that they don’t even think of it as eCommerce anymore. It’s a separate category to them.

If you buy this logic, then Guest Checkout accounts for only ~20% of eCommerce value:

• 0% on Amazon at ~35% of eCommerce

• 30% off Amazon at ~65% of ecommerce

But even that overstates the opportunity for third-parties like Paze & Fastlane.

• Shopify accounts for ~10% of eCommerce and steers to Shop Pay

• Walmart accounts for 8% of eCommerce and prioritizes its “One” solution.

• Apple.com is a top 10 eCommerce merchant with 4% share and steers to Apple Pay

• Stripe prioritizes Link off-Shopify at its acquiring clients

Plenty of large eCommerce merchants have card-on-file volume – where consumers establish accounts due to recurring shopping. In particular, merchants with PLCC & Cobrand cards report very high shares of their traffic is paid for on those cards

Some “open space” merchants have partial solutions. For example, eBay still has 4% share of eCommerce with an onsite solution from Adyen, but still accepts PayPal Wallet, Apple Pay, and Google Pay. eBay is very unlikely to accept ShopPay because its parent is a direct competitor. They are unlikely to accept Fastlane given the contentious history with PayPal. The question is whether they feel the need to add Paze. Etsy & Wix have similar setups. As you start peeling away these fiefdoms, the open territory shrinks further.

Another split is between browser-based eCommerce and in-App mobile commerce. Most of the discussion above is about browser-based commerce, but just under half of eCommerce actually happens in-app – where Apple Pay & Google Pay have a big advantage. It isn’t disqualifying for the others, but they are disadvantaged.

These observations are summarized in the Graphic below:

~20% is eCommerce value is outside the biggest walled gardens. However almost half of that is in-app, where the OS-based solutions are much better positioned. That suggests that the open territory could be south of 10%, yet, that is where all these solutions compete.

The walled gardens are also higher growth than the open territory – generally above 10% when US eCommerce overall is growing at ~5%. So, the walled gardens are shrinking the truly open share.

It is not all bad news: Select sites are 100% guest checkout. I once interviewed two high-end electronics retailers who didn’t want the PCI risk from card-on-file and didn’t get enough repeat business to warrant the overheads. They preferred Guest Checkout and encouraged all wallets. Those kinds of retailers should jump at these solutions and indeed, New Egg (not a company I interviewed), is an early adopter of Paze.

The conclusion is that the TAM is indeed very large, but the SOM is much smaller and the SAM is even smaller for most competitors.

Who wins where

The graphic demonstrates that the “open territory” is a fraction of total eCommerce. Since so many small merchants concentrate their eCommerce on Shopify, Amazon Marketplace, and Walmart.com, that open space is really for mid-sized to large merchants who operate independent eCommerce sites lack proprietary solutions.

This is confirmed by the Paze merchant directory. They list 32 merchants, with the biggest being Fanatics, Newegg, & Sephora. The list includes 5 newspapers & 6 gifting services. I also see 3 jewelers, where authentication may be key.

A quick survey showed that all but 6 of the 32 also take Apple Pay and all but 11 also take PayPal. Google Pay shows up less often, but since it can act as a form-filler from Chrome it is present even when not mentioned. None of these merchants listed Shop Pay or Link but two of them listed Cash App Pay and one even listed Amazon Pay. Typically, the sites with no wallets were subscription-focused and need a persistent payment credential like card on file or recurring ACH.

It is also worth pointing out that virtually all these 32 Paze clients had BNPL options. BNPL diverts volume from native cards and from wallets. PayPal, Apple Pay and Shop Pay have their own BNPL solutions, so their customers have no need to divert. Some card issuers now allow cardholders to structure repayments as installments as well. But, if Paze wants to claw back engagement from Apple Pay & PayPal, it might need to emphasize these features.

Within the available space Paze has an advantage in having more consumers with more cards. They are also owned by banks with big acquirers: JPM, BAC, & USB. PNC & Wells also have acquiring through partnerships with Fiserv. Fiserv has referral relationships with so many issuing and acquiring banks, that it will likely become a Paze-first supporter – it won’t discourage Fastlane, but it may not promote it either. It certainly won’t promote Link and Shop Pay as both are processed by Stripe.

Notably, announced Fastlane partners include Adyen & Global Payments – who are competitors to Stripe but also to PayPal’s own Braintree. Other partners are Shopify competitors like Big Commerce. Nuvei partnered with Paze, likely for similar reasons. So another source of market fragmentation is that acquirers may avoid Link while Shopping Cart vendors avoid Shop Pay. Bank acquirers will avoid Fastlane given the banks’ historical rivalry with PayPal. Braintree will complicate PayPals relationships with acquirers for Fastlane.

The other big difference between the competitors is global footprint. Paze is a US-only solution while all the others are global. If a global merchant wants consistency across its footprint, Paze won’t fill the bill. In fact, this is where Link & Fastlane will likely do best as both parents are global and eCommerce-focused..

Conclusions

In summary, the TAM here is not 30% of eCommerce as the consumer surveys suggest: it is well under 10%:

• The in-browser open space …

• … at mid-sized merchants …

• … less merchants with partial proprietary solutions (e.g., eBay)

Within this TAM, the market is further fragmented by acquiring solution. All are agnostic relative to Paze but some may discriminate against Fastlane, Shop Pay and Link.

Apple Pay & Google Pay further erode the TAM for any of the newcomers. Personally, I do most of my non-Amazon eCommerce on a Mac or an iPad and I always use Apple Pay when it is available. Both devices have Touch ID for security and use the card I keep in Apple Wallet for my in-app and in-person (NFC) purchases. It would be hard to get my business unless Apple Pay is not available. And from a merchant perspective it is free and low-fraud. In contrast, my wife, an Apple Pay NFC fanatic, generally uses Google Pay in eCommerce because it pops up every time in Chrome.

It is not quite clear how PayPal Wallet fits into all this. They may be a share donor to all these solutions, particularly Apple Pay. PayPal Wallet is a payment method rather than a checkout experience. Several of these providers accept PayPal Wallet within their experience. It has a big customer base and lots of cards, but processes off-site and charges a card-like MDR. It is rarely the default option for checkout as it once was on eBay. It did however just partner with Wix, a smaller Shopify Competitor, to be the on-site champion within Wix Payments.

When I had access to JPM data I could see the relative growth of PayPal versus Apple Pay and it wasn’t even close – and this was 2019. It wasn’t that PayPal was losing volume, but that Apple Pay was absorbing most of the new volume. In most eCommerce venues where both were integrated, Apple Pay had overtaken PayPal share and was growing 2x+ as fast despite representing only half of our customers. And that was before all these new solutions were available.

I don’t see Fastlane changing this. And it will be even harder if PayPal introduces incremental Fastlane fees from today’s free environment.

The primary issues in this market are that all these new solutions solve the same problems in roughly the same way:

• Trigger via email, which the customer has to enter anyway

• Authenticate the consumer, limiting fraud

• Use card tokens, limiting PCI exposure

• Auto-populate shipping details, increasing conversion

• For now, they are all free (i.e., no incremental cost beyond normal acquiring)

Where they differ is the going-in customer base and card base, the integration overheads, and any channel conflicts based on who their parents are. In general, Paze is the most neutral. The others face challenges:

• Link may be unwelcome when the merchant uses an acquirer other than Stripe

• Shop Pay may be unwelcome in ecosystems that compete with Shopify

• FastLane may be unwelcome where PayPal is not accepted or because they eventually want to impose fees. Braintree may also cause challenges

• Apple Pay may be unwelcome because some of their consumer-side privacy protections limit the data a merchant can see (including email for marketing)

• Google Pay may be unwelcome because it may harvest data

Of course, Paze is also the least global, which may impact uptake at the largest merchants. It is also missing cards representing 30% of spend (Citi, Amex). Paze wins only in the truly open space while the other solutions win in their walled gardens or, for the OS-wallets, for in-app transactions/mobile commerce.

The real question is, is all the effort going into this worth it?