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internet
business models
text and cases
PayPal
Steven Young ELC498
© 2005 UMFK.
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Overview
PayPal:
– was founded in 1998, and owned by the eBay
Company since 2002
– Allows individuals or businesses to make or
receive online payments.
– Utilizes existing infrastructures such as bank
accounts, credit, and debit cards along with
security systems to enable secure and
immediate electronic payments.
– Is an alternative to “traditional” credit card
transactions, and offers the assurance that
third-party transactions allow.
© 2005 UMFK.
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Description of the Industry or
market segment
• The market segment in which this business
belongs according to our text book is the
Online Market Maker since it provides the
“infrastructure to enable and enhance
transactions” (Eisemann text), acting as
intermediaries which serve multiple
participants.
© 2005 UMFK.
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Mission and Vision
• Paypal’s Mission is to “Build the web’s most
convenient, secure, cost-effective payment
solution.
• PayPal’s Vision is “To become a global
standard for online payments.”
© 2005 UMFK.
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History
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The company, originally called Field Link, was founded by Max Levchin, an online security specialist,
and Peter Thiel, a hedge fund manager in 1998. Levchin and Thiel joined forces, received $3 million
in funding from the Nokia Corporation for this venture, which offered encryption software for
handhelds.
Launched PayPal in October of 1999 with six employees.
Between January and August 2000, PayPal surged from 12,000 accounts to 2.7 million.
June 2000, PayPal introduced accounts for businesses. By the end of 2001, more than one-fifth of
PayPal's 12.8 million accounts were business accounts.
July 2000 approximately 2 million eBay listings accepted PayPal payments, five times as many as
BillPoint Inc., eBay's payment service. By the following October, PayPal was being used to pay for 25
percent of all eBay transactions.The company had grown to 500 employees who were processing
over 120,000 transactions, worth in total about $6 million, every day.
In 2002 PayPal purchased by eBay, the operator of its main competitor, Billpoint for $1.5 billion in
eBay stock, which gave eBay more control, and increased the profit made from each transaction
from 7 to 10 percent. eBay subsequently closed its Billpoint operation, and announced that PayPal
cease to be available for online gambling. EBay elected to let PayPal continue to operate in the area
of online pornography, which unlike gambling, was legal.
In 2003, PayPal discontinued the offer of its services on adult-content websites, citing high fraud
rates. By this time PayPal successfully addressed many of its customer service problems.
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Relative Placement Within the
Industry
PayPal is the leading provider of payment
services in the small business market.
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Management
Matthew J. Bannick - Senior Vice President
Mary M. Hentges - Vice President, Finance
Alex E. Kazim - Vice President, Marketing
Scott Thompson - Senior Vice President, Chief
Technical Officer
Salvatore J. Giambanco - Vice President, Human
Resources and Administration
John D. Muller - Head of Legal Department
Amy E. Rowe - Vice President, Production
Ken A. Miller - Director
Ryan D. Downs - Vice President, Operations
© 2005 UMFK.
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Competition
Western Union launched MoneyZap in 2000, which had a fee
structure similar to PayPal
Citibank, in partnership with AOL and Microsoft, introduced
c2it. c2it charged higher fees than PayPal, at $2 per
transaction, and was unable to cut into PayPal's customer
base.
eBay had also attempted challenge PayPal with Billpoint Inc.,
but
By the end of 2001, PayPal was firmly in the lead of the online
payments market, holding a 65 percent share market.
© 2005 UMFK.
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Challenges faced by the
Company
PayPal may be considered as a bank in certain
jurisdictions, and therefore may be forced to
configure its business activities accordingly.
Essential for PayPal to be in control of fraud
problems to avoid negative security perception
with customers.
Potential competing offerings by credit card
companies may increase to get a piece of the
PayPal pie.
Google getting into the fray with a yet-to-bereleased product.
© 2005 UMFK.
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Value Proposition
Offer innovative electronic payment system
utilizing email, bank account information,
credit card information, and a proprietary
fraud protection system to facilitate
ecommerce transactions.
© 2005 UMFK.
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Measures of Success
Number of Global User Accounts (millions)
100
Number in Millions
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Paypal has grown approximately 6 fold from 2001 to 2005
(projected to year end), currently representing over $26B in total
payment volume by over 87 Million users globally
© 2005 UMFK.
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Value Proposition
PayPal offers:
• No monthly fees
• No setup fees
• No gateway fees
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Value Proposition
• Free eBay and merchant tools.
• Excellent functionality and antifraud systems
at no extra cost, and only charging fees when
transaction is completed, financial
confidentiality is strictly maintained.
• Facilitating repeat use by customers by
retaining key information.
• Providing documentation and tracking of
transactions.
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Analysis
Economies of scale
• High
Networks effects
• Low for consumer, high for merchants
Customer acquisition costs (eBay
• Low
Customer retention rate
• High
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GBF
After identification of this need (both for
customers and merchants) it was important
to Get it Right Fast.
© 2005 UMFK.
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Questions for the Audience
• Would you as a customer feel more secure in
paying for a product with a “regular” internet
credit card transaction, or PayPal?
• Do you feel that as a merchant, offering PayPal
would increase sales?
• Is fraud more or less common with PayPal or
other forms of electronic money transaction?
• Is is important for eBay to offer PayPal to its
customers?
© 2005 UMFK.