The introduction of Apple Pay did wake up a few folks in San Jose. So much so that eBay announced plans to split up eBay and PayPal – a major and sudden reversal of strategy. Did Apple’s announcement relegate PayPal’s efforts at the point-of-sale (POS) to a nice experiment that once-upon-a-time seemed promising? How come that the payments attacker of the last decade left its own flank so exposed? Why didn’t the company learn from being out-innovated by Square, Stripe, Klarna and others?

First, can PayPal still keep pace with innovation in its industry?

Over the last few years we have seen very little true innovation from PayPal. Blindsided by Square, PayPal took more than two years to launch Here, a me too offering whose take-up has been so lacklustre that it might as well be called Where? In 2011 in an effort to bring in ‘mobile talent’ PayPal bought Zong for $240M from David Marcus, the previous PayPal CEO now at Facebook. With only Marcus-acolyte Hill Ferguson remaining as Head of Product this probably ranks among the more expensive talent acquisition plays. And then a year ago the company forked out another $800M, this time to buy Braintree and according to eBay CEO John Donahoe to ‘add complementary talent and technology that we believe will help accelerate PayPal’s global leadership in mobile payments’. Has anyone seen the acceleration?

Moreover, by focusing on Here, PayPal has deployed its apparently constrained capacity to innovate on the wrong target. After all, who would you go after – a niche operator whose importance and potential is limited to just one segment of the US market, or a potential competitor with 800 million cards on file (more than five times PayPal’s active user base)?

Second, is Paypal actually relevant at the POS?

According to Don Kingsborough, PayPal’s VP responsible for its POS business ‘in-store payment is ours to lose’. Sadly, that indeed seems to have happened. Its in-store card launched in a much touted partnership with Discover is on life support.

PayPal’s POS efforts with for example Home Depot transferred its online proposition onto the POS. PayPal’s online value propositions are ‘sell more’ to the merchant and ‘safe, simple, and secure’ to the consumer. It is a big stretch to argue that Wallgreens would sell more toothpaste because PayPal is now accepted at the POS. Admittedly there are some cross-channel CRM benefits but in most cases these will be too thin.

For PayPal’s users none of the online benefits of the service apply at the POS. ‘Safe and secure’ is just not that relevant at the POS where consumers have pulled out their cards for decades without problems. Moreover, PayPal’s large number of active accounts notwithstanding it has deep relationships only with a small subset. The vast majority of PayPal accountholders wouldn’t even think of using it at the POS unless there was a very very good reason to do so. And PayPal has not given them that, so far.

Third, is PayPal prisoner to its own business model?

PayPal earns money by charging the retailers card-like rates and then substituting card funding with much cheaper bank funding on the back – all while keeping fraud costs under control. The company has done a phenomenal job resulting in terrific growth and very attractive margins. These margins are not tenable at the POS – and certainly not in markets where interchange is much lower than in the USA.

If PayPal wants a non-dilutive POS business it must displace the card networks. Without the card networks on its side, PayPal is forced to come up with complicated ways to bypass the existing infrastructure. This requires cumbersome custom integrations and clunky user experiences. As Walmart noted: “the added complexity does not justify accepting PayPal at the POS”.

Fourth, has PayPal become hubristic?

Ex-CEO Marcus dismissed NFC as a technology looking for a problem to solve and as an abbreviation for Not For Commerce. In a reaction to the Apple Pay launch a senior PayPal spokesperson pointed out that ‘payments are difficult’ and that Apple Pay isn’t solving any real problems. A few days later the company took out full page ads taking a cheap swipe at Apple’s recent icloud hacks, unleashing a tweetstorm from early PayPal leader Keith Rabois including “eBay which had 145 MILLION accounts compromised recently is running ad campaigns against Apple which had a handful of accounts compromised”. Notably absent were substantive reactions that explained PayPal’s proposition at the POS relative to Apple Pay.

Would any of the above have been different if PayPal had split from eBay a couple of years ago? I doubt it – as none of the above has much to do with demands by eBay marketplaces or an interfering eBay Inc HQ. Rather, it has to do with PayPal’s own quality and speed of innovation and decision making. Perhaps it was a tell-tale sign when early in David Marcus’ tenure the removal of cubicle partition walls was heralded as a sign of unlocked innovation and increased metabolic rate.

Having now missed the boat on Square, Stripe, Klarna, Apple and with its own POS efforts so far lacking impact, PayPal’s incoming CEO Dan Schulman has some important questions to ask his team. All the more because Apple won’t stop at the POS. What will PayPal’s answer be when we can check out online with Apple Pay – simply by filling in our phone number or email and pressing our thumb on the iPhone’s fingerprint sensor?