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PayPal's Grown-Up Growth Outlook

SAN FRANCISCO -- In case you didn't notice, PayPal has grown up.

While it's still the friendly, person-to-person payment system favored by eBay users and small online retailers, the company is also going after the world's largest retailers. Mega brands, including Wal-Mart and Adobe, were invited to a breakfast meeting today to hear JupiterResearch's projections for e-commerce and online payments.

JupiterResearch analyst Patti Freeman Evans presented the results of a survey conducted by Jupiter on behalf of PayPal. She warned that e-commerce growth will slow, and merchants need to prepare.

PayPal itself is preparing by going after larger and larger online retailers. For example, it's heavily promoted its payment option on sites operated by Ritz Interactive, an e-commerce network that operates sites selling equipment and supplies for photography, boating, golf and consumer electronics.

The front page of RitzCamera.com prominently features a display ad offering 10 percent off in-stock items for PayPal users; over the holiday season, the discount was 20 percent. PayPal paid the difference.

The result was an incremental growth of from 4 to 6 percent in PayPal's share of sales, according to Andre Brysha, chief marketing officer for Ritz Interactive. The payment system was responsible for about 10 percent of all transactions on the network in 2007.

Cliff Hopkins, senior director of marketing for PayPal, said the eBay-owned payments platform, had 57 million active user accounts and a 16 percent growth rate in the last quarter of 2007, with most of the growth coming from eBay.

"Now as we expand off eBay and get more ubiquity, there's an opportunity for consumers that may not know PayPal to encounter it," he told InternetNews.com.

The company typically does promotions such as the one with Ritz Interactive around normal retailing cycles, such as back to school or the holidays. Its message to merchants is that PayPal increases consumer choice while easing fears about sending credit card numbers over the Internet.

PayPal lured executives to the breakfast with the opportunity to hear Jupiter's research on Internet sales. The short version: They can no longer coast on sizzling growth. Especially with uncertainty about the economy.

Arturo Perez-Reyes, a professor of e-commerce at UC Berkeley's Haas School of Business, thinks we're clearly heading into a recession. "The dollar is in free fall, [and the country is carrying] enormous personal and national debt."

Add to that a stall in Internet penetration, with growth mostly among the least affluent Americans, and you have an increasingly difficult environment for merchants.

U.Ss online retail spending will increase by 19 percent in 2008, and experience an annual growth rate of 10 percent through 2012, Evans said. "Growth will slow in 2012, she said. "By then, we'll see online retail in the United States enter into a period of maturity."

This slowdown was evident in the 2007 holiday season. Online retail sales for 2007 holiday reached $39 billion. Actual growth slowed to 20 percent, a steady decrease in growth from 31 percent in 2003, she said.

What about teens, who've grown up with the Internet? Won't they buy everything online? Evidently not, according to Evans. Jupiter Research has tracked several cohorts into early adulthood without seeing an increase in online spending. "Our sense is that they will shift more dollars online, but they won't create a spike in online sales. They're not going to save the day," she said.

"The things that are helping [sales] are the fundamentals: multiple product pictures, being able to calculate the shipping cost, and save things in my shopping cart for later."

Consumer interest in alternative payment methods is growing, Jupiter found. And merchants are offering these, such as Bill Me Later, Google Checkout, Western Union and private label payment types, but mostly at the shopping cart stage.

She said offering an alternative payment option is an opportunity for promotion and differentiating a merchant from others. While free shipping offers predominated in the last holiday season, none seemed to offer alternative payments.

PayPal far outstrips other alternative payment methods in terms of consumer preference, Jupiter found. PayPal was preferred by 23 percent of online customers, as opposed to 4 percent for BillMeLater and 1 percent for Google Checkout.

Security was the biggest driver of alternative payment usage, with 37 percent of survey respondents citing this. The next biggest driver, at 36 percent, was having no other payment option; for example, wanting to buy an auction item from a merchant that only accepted PayPal.

About 55 percent of online shoppers think about payments before checkout. Therefore, posting payment options, return policies and privacy should be prominently featured throughout the site to create a trusted environment, Evans said.

She warned the audience, "Prepare yourselves to start implementing and developing strategies to take you through a more mature, competitive environment down the road. Preparing for that means creating a bonded relationship with customer and offering consumers the options they're looking for."

And that goes for PayPal, too.