Meet WePay, the Startup That’s Been Trying to Ice PayPal

Monday night, employees of the 2-year-old online payment service WePay fashioned a 600-pound block of ice that read, “PayPal Freezes Your Accounts.”

Tuesday morning, they rolled it in front of San Francisco’s Moscone Center, set it down, and ran as fast they could, pushing the pallet they’d brought along with them.

They didn’t get far before a security guard caught them by the shirtsleeves, insisting they pick up the giant slab and move it along. But their work was already done. Numerous outlets had picked up the story, embarrassing PayPal, which has long drawn criticism for freezing users’ funds for up to 21 days, and that was holding a developers conference at the center at the time.

More importantly, the move attracted attention to WePay, a 15-person, Palo Alto, Calif.-based startup that helps people collect money for group purchases, and that itself has collected $9.2 million in financing from A-list backers, including Highland Capital Partners, August Capital, Ron Conway, YouTube cofounder Steven Chen and PayPal cofounder Max Levchin.

Levchin has said he was drawn to the startup because it’s exploring a niche that PayPal doesn’t “do well.”

That doesn’t appear to be changing. Though PayPal has invited developers to create new businesses using its payments system and at least one – PayitSquare —  has produced a service similar to WePay, PayPal is “not planning to expand our existing functionality in [the group buying] area,” PayPal spokesman Anuj Nayar told me yesterday afternoon.

And why would it when there are far more lucrative markets to chase? Earlier this week, for example, PayPal unveiled a new micropayments service for digital goods that’s being integrated with a number of sites, including Facebook — off which hundreds of millions of dollars are transacted every year.

The partnership should prove an enormous boon to PayPal, which already saw more than $71 billion transacted across its platform last year, via more than 100 million transactions each month. Roughly $2 billion of those transactions came from digital goods, like music downloads, but even before its deal with Facebook, PayPal was on track to make closer to $4 billion off digital goods transactions this year.

In stark contrast, WePay, which launched publicly in April and has been signing up 500 groups a week, reached $1 million in transactions in August. Those numbers are good and bad news for WePay. While they’re not big enough for PayPal to focus on WePay, it’s not yet clear that the market WePay is targeting, or the model it’s using, will become terribly profitable.

The company’s revenue comes from 3.5% transaction fees on credit card transactions and it charges 50 cents for every transaction paid with a bank account. It also offers prepaid Visa cards to users, making money off the interchange fees (the company doesn’t disclose what percentage of customers use them), and it makes money off float, though 25-year-old CEO Bill Clerico is quick to add that float is “not a big revenue driver because interest rates are so low.”

For now, Clerico suggests that the team is content to limit its ambitions, making sure every user experience is as good as possible rather than trying to supercharge revenue. Instead of focusing on profitable social games, for example, WePay is focusing on partnerships with auctions, merchants, ticketing platforms and sports leagues. For example, it partnered with Major League Soccer to offer up to 44% off playoff tickets for users who enlist 10 friends to come to matches this coming weekend.

Such arrangements increase the average order size for merchants, and customers get a discount. WePay creates a separate account for the purchase, so that everyone involved can pay into the account, as well as to see what’s still owed (and who the deadbeats are).

In the meantime, WePay is doing everything in its power to endear itself to new customers. It publishes content at its blog every day to build a community and help readers better understand how to take advantage of its offerings. In addition to an online customer support forum and employees who answer service calls and engage in live chat with users, WePay also brings customers into its office every week to watch them use the application and when necessary, adjust it.

Clerico said the exercise was “painful at first. Things that seem so obvious to us, people don’t understand.”  Now, however, he says the team has begun to think like WePay’s customers, something that he doesn’t think has every been true of PayPal.

“Let’s put it this way,” he says. “My mom can use WePay. She can’t use PayPal. It’s had 10 years [to improve its user experience] and it hasn’t improved a bit.”