PayPal Launches Digital Gift Store With Only One Client: Apple

Why that may not matter in the race toward the digital wallet

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Aidan Crawley / Bloomberg via Getty Images

Payments giant PayPal is hoping to coax holiday shoppers’ gift card spending out of brick and mortar stores and into its digital wallet instead. Here’s the catch: only if it’s an Apple iTunes gift card.

The eBay-owned company rolled out a digital gift store exclusively with Apple on Tuesday, allowing PayPal customers to purchase iTunes gift cards ranging from $25 to $100 by linking directly to users’ PayPal accounts. The launch comes just one week after PayPal announced it would accept prepaid gift cards—including Visa, American Express, MasterCard or Discover—and a month after it shared its app had gift card capabilities.

The strategy is intended to help PayPal boost payments by tapping into the rising mobile market. The race to develop a widely-used digital wallet has goaded companies into trying to process the most consumer transactions possible, says Matt Davies, director of the Gift Card Network and head of a gift card consulting firm. The goal is to create a secure app where customers can manage gift cards, check balances and send others digital gifts, according to Patrick Gauthier, PayPal‘s head of emerging retail services.

But with Apple as sole client, what makes it different than simply purchasing from the iTunes store? Gauthier tells TIME the platform is adding more merchants—including physical retailers—in early 2014. The initial partnership with iTunes seemed “natural,” due to Apple’s major presence in the digital market with music, movies and apps. “If you going to pick one you’re going to pick one that has the farthest reach,” says Dan Schatt, formerly general manager of financial innovations at PayPal and an industry expert.

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PayPal also wants to help retailers lure shoppers through targeted advertising. One way that might work:  reminding users they have unused cards or if they have a remaining balance, Gauthier says. “There’s a huge market for gift cards and PayPal couldn’t ignore it anymore,” says Adil Moussa, a payment industry expert.

In fact, 80% of holiday shoppers will purchase gift cards this season, reaching an estimated $29.8 billion in spending, according to the National Retail Federation. Consumers will spend an average of $163.16 on gift cards, a 4% increase over last year’s $156.86 and the highest amount in 11 years. Meanwhile the NRF’s first 2013 holiday survey in October said six in 10 people said they’d like to receive gift cards this year, the seventh year in a row gift cards have topped holiday wish lists.

Gift card recipients tend to spend more money than they receive on a gift card because they consider it “found money.” If a shopper receives a $20 card they’re more likely to spend $40, and if the transaction is through PayPal, the payment giant makes its money on the entire sale. Schatt says the key to PayPal’s success is ensuring the digital wallet integrates more than just payment methods but also the coupons and promotions that Gauthier envisions, as well as driving incremental sales for retailers. PayPal now represents 40% of eBay’s annual revenue.

PayPal faces steep competition. Google, Visa, and a raft of others are also hoping to make digital wallets a reality.  Schatt thinks it’s a matter of developing a digital wallet as close to a physical wallet as possible, recreating the personal experience of walking into a store that already knows what you want. “Mobile payments are just starting to gain acceptance within the retail and consumer population, and every company in the mobile wallet space wants to be the first player to gain major adoption,” says Davies. “Apple is a major player in the mobile phone space, and Paypal is a major player in the payments space. The question is how successful their partnership will be to the general population.”