PayPal

PayPal is an e-commerce business allowing payments and money transfers to be made through the Internet. Online money transfers serve as electronic alternatives to traditional paper methods such as checks and money orders.

A PayPal account can be funded with an electronic debit from a bank account or by a credit card. The recipient of a PayPal transfer can either request a check from PayPal, establish their own PayPal deposit account or request a transfer to their bank account.

PayPal performs payment processing for online vendors, auction sites, and other commercial users, for which it charges a fee. It may also charge a fee for receiving money, proportional to the amount received. The fees depend on the currency used, the payment option used, the country of the sender, the country of the recipient, the amount sent and the recipient's account type. In addition, eBay purchases made by credit card through PayPal may incur extra fees if the buyer and seller use different currencies.

On October 3, 2002, PayPal became a wholly-owned subsidiary of eBay. Its corporate headquarters are in San Jose, California, United States at eBay's North First Street satellite office campus. The company also has significant operations in Omaha, Nebraska; Scottsdale, Arizona; and Austin, Texas in the U.S., Chennai, Dublin, Kleinmachnow (near Berlin) and Tel-Aviv. As of July 2007, across Europe, PayPal also operates as a Luxembourg-based bank.

On March 17, 2010, PayPal entered into an agreement with China UnionPay (CUP), China's bankcard association, to allow Chinese consumers to use PayPal to shop online. PayPal is planning to expand its workforce in Asia to 2,000 by the end of the year 2010.

Between December 4–9, 2010, PayPal services were disrupted due to denial-of-service attacks organized by Anonymous in retaliation for PayPal's decision to freeze the account of WikiLeaks citing terms of use violations over the publication of leaked US diplomatic cables.

History

Beginnings

The current incarnation of PayPal is the result of a March 2000 merger between Confinity and X.com. Confinity was founded in December 1998 by Max Levchin, Peter Thiel, Luke Nosek, and Ken Howery, initially as a Palm Pilot payments and cryptography company. X.com was founded by Elon Musk in March 1999, initially as an Internet financial services company. Both Confinity and X.com launched their websites in late 1999. Both companies were located on University Avenue in Palo Alto. Confinity's website was initially focused on reconciling beamed payments from Palm Pilots with email payments as a feature and X.com's website initially featured financial services with email payments as a feature.

At Confinity, many of the initial recruits were alumni of The Stanford Review, also founded by Peter Thiel, and most early engineers hailed from the University of Illinois at Urbana-Champaign, recruited by Max Levchin. On the X.com side, Elon Musk recruited a wide range of technical and business personnel, including many that were critical to the combined company's success, such as Amy Klement, Sal Giambanco, Roelof Botha of Sequoia Capital, Sanjay Bhargava and Jeremy Stoppelman.

To block potentially fraudulent access by automated systems, PayPal used a system (see CAPTCHA) of making the user enter numbers from a blurry picture, which they coined the Gausebeck-Levchin test.

eBay watched the rise in volume of its online payments and realized the fit of an online payment system with online auctions. eBay purchased Billpoint in May 1999, prior to the existence of PayPal. eBay made Billpoint its official payment system, dubbing it "eBay Payments," but cut the functionality of Billpoint by narrowing it to only payments made for eBay auctions. For this reason, PayPal was listed in many more auctions than Billpoint. In February 2000, the PayPal service had an average of approximately 200,000 daily auctions while Billpoint (in beta) had only 4,000 auctions. By April 2000, more than 1,000,000 auctions promoted the PayPal service. PayPal was able to turn the corner and become the first dot-com to IPO after the September 11 attacks.

Acquisition by eBay

In October 2002, PayPal was acquired by eBay for $1.5 billion. PayPal had previously been the payment method of choice by more than fifty percent of eBay users, and the service competed with eBay's subsidiary Billpoint, Citibank's c2it, whose service was closed in late 2003, and Yahoo!'s PayDirect, whose service was closed in late 2004. Western Union announced the December 2005 shut down of their BidPay service but subsequently sold it in 2006 to CyberSource Corporation. BidPay subsequently ceased operations on December 31, 2007. Some competitors which offer some of PayPal's services, such as Google Checkout, Wirecard, and Moneybookers remain in business, despite the fact that eBay now requires everyone on its Australian and United Kingdom sites to offer PayPal. Eventually eBay moderated its position, and mandated that sellers on eBay Australia offer PayPal as one of the (but not necessarily the only) payment methods. These accepted payment methods include bank deposit, cheques and money orders, escrow, and credit cards (processed by other than PayPal).

In January 2008, PayPal agreed to acquire Fraud Sciences, a privately-held Israeli start-up company with expertise in online risk tools, for $169 million, in order to enhance eBay and PayPal's proprietary fraud management systems and accelerate the development of improved fraud detection tools. In November 2008, the company acquired Bill Me Later, an online payments company offering transactional credit at over 1000 online merchants in the US.

PayPal's total payment volume, the total value of transactions, was US$ 60 billion in 2008, an increase of 27 percent over the previous year, and US$ 71 billion in 2009, an increase of 19 percent over the previous year. The company continues to focus on international growth and growth of its Merchant Services division, providing e-payments for retailers off eBay.

Business today

Currently, PayPal operates in 190 markets, and it manages more than 232 million accounts, more than 87 million of them active. PayPal allows customers to send, receive, and hold funds in 24 currencies worldwide. These currencies are the Australian dollar, Brazilian real, Canadian dollar, Chinese renminbi yuan (only available for some Chinese accounts, see below), Euro, pound sterling, Japanese yen, Czech koruna, Danish krone, Hong Kong dollar, Hungarian forint, Israeli new sheqel, Malaysian Ringgit, Mexican peso, New Zealand dollar,Norwegian krone, Philippine Peso, Polish zloty, Singapore dollar, Swedish krona, Swiss franc, New Taiwan Dollar, Thai Baht and U.S. dollar. PayPal operates locally in 21 countries.

Residents in 194 markets can use PayPal in their local markets to send money online.

PayPal revenues for Q1 2009 were $643 million, up 11 percent year over year. 42 percent of revenues in q1 2009 were from international markets. PayPal's Total Payment Volume (TPV), the total value of transactions in Q1 2009 was nearly $16 billion, up 10 percent year over year.

In 2008, PayPal's TPV off eBay exceeded volume on eBay for the first time. PayPal's Total Payment Volume in 2008 was $60 billion representing nearly 9 percent of global e-commerce and 15 percent of US e-commerce.

At an analyst day on March 11, 2009, eBay CEO, John Donahoe announced that PayPal could be a larger driver of revenue than the eBay marketplaces business. RIM announced that PayPal will be the only payment mechanism for its Blackberry App World, which launched on April 1, 2009.

PayPal launched Student Accounts for teens in August 2009 allowing parents to set up a student account, transfer money into it, and obtain a debit card for student use. The program provides tools to teach teens how to spend money wisely and take responsibility for their actions.

In November 2009 PayPal opened its platform, allowing other services to get access to its code and to use its infrastructure in order to enable peer-to-peer online transactions.

Although PayPal's corporate headquarters are located in San Jose, PayPal's operations center is located near Omaha, Nebraska, where the company employs more than 2,000 people as of 2007. PayPal's European headquarters are in Luxembourg and international headquarters in Singapore. The company also recently opened a technology center in Scottsdale, Arizona, and Chennai, India.

PayPal business model evolution

PayPal’s success in terms of users and volumes was the product of a three-phase strategy described by eBay CEO Meg Whitman: “First, PayPal focused on expanding its service among eBay users in the U.S. Second, we began expanding PayPal to eBay’s international sites. And third, we started to build PayPal’s business off eBay”.

Phase-1

In the first phase, payments volumes were coming mostly from eBay auction web-site. The system was very attractive to auction sellers, most of which were individuals or small businesses that were unable to accept credit card, and for consumers as well. In fact, many sellers could not qualify for a credit card “merchant account” because they lacked a commercial credit history. The service also appealed to auction buyers because they could fund PayPal accounts using credit cards or bank account balances, without divulging credit card numbers to unknown sellers. PayPal employed an aggressive marketing campaign to accelerate its growth, depositing $10 in new users’ PayPal accounts (+$10 for each new user they referred).

Phase-2

The biggest challenge in 2000 remained PayPal’s unsustainable business model. Initially, PayPal offered its service free of charge, planning to earn interest on funds in users’ PayPal accounts (i.e., the “float”). However, most recipients withdrew their funds immediately. Furthermore, a large majority of senders funded their payments using credit cards, which cost PayPal roughly 2% of payment value, rather than relying on electronic transfers from bank accounts, which were much less costly.

In order to boost its user base over eBay, both in US and internationally, PayPal decided to lever some of the ever existing concerns of sellers and buyers dealing with the virtual world, simplifying and easing the procedures regarding litigations, frauds and liabilities (transaction losses borne by PayPal also included the cost of buyer and seller protection programs. In fact, when merchants went bankrupt—not rare events in online retailing—PayPal was liable for any outstanding chargebacks related to credit card-funded PayPal payments. As with credit cards, buyers were protected against unauthorized use of their PayPal accounts. In addition, eBay buyers using PayPal received up to $1,000 in fraud protection (with a limit of three refunds per year) for items never delivered or materially misrepresented, but only if the seller had high eBay feedback ratings. Finally, subject to a $5,000 annual cap, merchants with business accounts qualified for seller protection against losses due to chargebacks, provided that they complied with reimbursement policies (e.g., retaining traceable proof of shipping to a confirmed address or requiring a signature receipt for items valued over $250).

Phase-3

After fine-tuning PayPal’s business model and increasing its domestic and international penetration on eBay, PayPal started its' off-eBay strategy. Strong growth in active users growth by adding users across multiple platforms, despite the slowdown in on-eBay growth and low-single-digit user growth on the eBay site. A late 2003 reorganization created a new business unit within PayPal—Merchant Services—to provide payment solutions to small and large e-commerce merchants outside the eBay auction community. Starting in the second half of 2004, PayPal Merchant Services unveiled several initiatives to enroll online merchants outside the eBay auction community, including:

• Lowering its transaction fee for high-volume merchants from 2.2% to 1.9% (while increasing the monthly transaction volume required to qualify for the lowest fee to $100,000)
• Encouraging its users to recruit non-eBay merchants by increasing its referral bonus to a maximum of $1,000 (versus the previous $100 cap)
• Persuading credit card gateway providers, including CyberSource and Retail Decisions USA, to include PayPal among their offerings to online merchants.
• Hiring a new sales force to acquire large merchants such as Dell, Apple's iTunes, and Yahoo! Stores, which hosted thousands of online merchants
• Reducing fees for online music purchases and other “micropayments”
• Launching PayPal Mobile, which allowed users to make payments using text messaging on their cell phones