Dec
8
A Short History of PayPal
Filed Under PayPal
PayPal was founded in 1999 as a Dot Com startup intended to “allow people to transfer money securely from one Palm Pilot to another.”1 The service soon morphed into a method to allow people to transfer money from computer to computer, using e-mail. Burning venture capital in order to create a market, PayPal offered a $10.00 bounty for every new member referred.
In early 2000, eBay users had taken notice of PayPal and were clamoring to use the service to conduct their auction payment transactions. The founders of PayPal hadn’t given online auctions much consideration when they conceptualized their market but were willing to entertain any possible revenue stream. eBay was just the platform that PayPal needed to transform from a big idea to a reality that surpassed its founder’s wildest expectations.
Before PayPal, payments were the most inefficient part of the online auction transaction. Sellers had to expose themselves to fraud by accepting personal checks (often waiting up to two weeks for the check to clear), pay expensive credit card processing fees, or force the buyer to purchase a money order.
Additionally, mailing the payment added a week or more to the transaction time. Online payment systems like PayPal transformed the online auction market, making it much more efficient. Consequently, PayPal grew at a meteoric pace — 7 to 10 percent a day in early 2000. This kind of growth made the executives at eBay sit up and take notice.
eBay’s Initial Concern about Online Payment Systems
With the swift and substantial impact of PayPal, Meg Whitman and the executives at eBay began to explore integrating online payments into the online auction site’s platform. They spent the better part of a year attempting to develop a system organically. They had three major concerns as they cautiously embarked on the project.
First, contrary to most dot com’s at the time, eBay’s corporate attitude towards capital was, “Spend it like it’s yours.” Aside from limiting their sock-puppet Super Bowl advertising budget, this philosophy translated into an expectation that any business venture, including eBay Payments, would need to break-even in short order. The second concern was the substantial risk of fraud. Transferring money over the internet was not for the faint of heart. To mitigate this risk, eBay unsuccessfully attempted to recruit Bank of America and Citibank to collaborate on the project. Finally, eBay was concerned that venturing into online payment systems was beyond their core competency of running internet auctions. Focusing on this capability exclusively propelled them past internet giants Yahoo! and Amazon.com, who had substantial traffic but were exploring a myriad of online revenue models.
eBay scrapped the project after concluding that it presented too much risk and was outside of their core competency. After Amazon.com acquired Accept, another online payment service, for use on their own auction site, eBay began rethinking their decision.
eBay Launches BillPoint
With renewed enthusiasm for fielding an online payment system, eBay purchased BillPoint in mid-1999. BillPoint was still in its infancy and had yet to deploy an operational product, however Wells Fargo agreed to collaborate on the development in exchange for a 35% share. Unfortunately for eBay, it took nearly a year to launch the service. “While BillPoint was now ready to start registering users, PayPal was already well on its way to signing its millionth customer.”2 Despite eBay’s integration of BillPoint into its platform, they could not dent PayPal’s market share. While BillPoint started charging a fee from day one, PayPal was still free and giving away cash for new members.
By mid-2001, the competition for market share in the online payments business was heating up. The dot com bubble had burst; investors had sobered up and were expecting some returns from the surviving companies. PayPal was forced to start charging fees. eBay lowered BillPoint’s fees to nominally match PayPal’s and changed their terms of service to discourage auction sellers from promoting PayPal in their listings. Although PayPal was the dominant player, eBay owned the pool hall in which PayPal competed and profited. Regarding the race to dominate the online payment market, eBay’s CEO Meg Whitman resolutely stated, “This isn’t a sprint, it’s a marathon.”3
eBay Acquires PayPal
Fast-forward 12 months to mid-2002… PayPal launched the first successful dot com initial public offering since the internet stock bubble burst and accounted for payments on 25% of all eBay auctions. By this time, executives at eBay truly comprehended the value of electronic payments to their core business. Speeding up the transaction time and mitigating risk for both the buyer and seller would further increase their user base and average number of listings — resulting in continued revenue growth.
Unfortunately for eBay, BillPoint was losing 10 - 15 million dollars per year, while PayPal was approaching profitability. By July 2002, Meg Whitman grew tired of the marathon and announced that eBay was acquiring PayPal for 1.5 billion dollars. By early 2003, eBay closed BillPoint and fully integrated PayPal into their auction platform.
Synergy
Integrating PayPal as eBay’s online payment system has had a synergistic effect on the company’s bottom line. Electronic payments have improved the market efficiency of their online market venue. Through PayPal, bidders have several options for which to pay for their purchase: credit card, debit card, bank transfer, PayPal cash balances, and now a buyer line of credit. The sellers receive payments faster, facilitating faster transactions, and both buyer and seller are afforded significant protection from fraud. This increased efficiency resulted a substantial expansion in registered users and auction listings. Consequently, eBay saw a marked increase in listing fees, final value fees, and with the acquisition of PayPal, electronic payment transaction fees. This synergy produced exponential revenue growth for a number of years.
Present Situation4
In the fourth quarter of 2004, PayPal payments accounted for 74% of the transactions on eBay. Off eBay, PayPal has developed a substantial niche market among small web business owners and, in 2004, handled the payments for 9% of the total U.S. e-commerce transactions and 5% globally. This year, PayPal is on track to generate the company nearly one billion dollars in revenue, justifying eBay’s purchase price.
Future Outlook
PayPal dominates eBay’s strategy for sustained revenue growth. PayPal is expanding globally to capitalize on internal expansion of the auction site and off-eBay transactions. More significantly, eBay hopes to expand its share of the $300 billion internet merchant market. Already popular with the small internet business owner, PayPal is aggressively marketing itself to mid-sized web businesses this year. Early successes include Apple’s iTunes and Overstock.com. eBay plans to pursue the large market segment in 2006. With 72 million accounts (more than American Express), lower merchant fees and reduced fraud than traditional consumer credit cards; PayPal is an attractive payment option that many internet retailers are seriously considering. PayPal has dabbled in the credit card market and has a viable shot at rivaling Visa and MasterCard someday if they choose to pursue this business thread.
1 Adam Cohen, The Perfect Store, Little, Brown, & Company, Boston 2002, 227. 2 Cohen, 230.
3 Cohen, 231.
4 eBay 2004 Annual Report, http://investor.ebay.com/, accessed 11 April 2005.
Fortunately, unlike Paypal, Visa and MasterCard do not freeze funds arbitrarily. Paypal’s relationship with its users is a love-hate relationship. Most users are there only because Paypal holds the largest chunk of the online payment pie. But too many users are victims of Paypal’s “limited access” policies.
The start up of paypal is amazing–but can someone do the same today?
Of course…..though I doubt as fast.