1-1

internet
business models
text and cases

PayPal

Steven Young ELC498

2005 UMFK.

1-2

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.

1-3

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.

1-4

Mission and Vision

Paypals Mission is to Build the webs most convenient, secure, cost-effective payment solution. PayPals Vision is To become a global standard for online payments.

2005 UMFK.

1-5

History
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 onefifth 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.

2005 UMFK.

1-6

Relative Placement Within the Industry

PayPal is the leading provider of payment services in the small business market.

2005 UMFK.

1-7

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.

1-8

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.

1-9

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.

1-10

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.

1-11

Measures of Success
Number of Global User Accounts (millions)
100 90 80 70 60 50 40 30 20 10 0
Pa yP al Fa rg o eu ts ch eB an k D Ex pr es s is co ve r a m er ic W el ls Ba rc la ys

Number in Millions

er ic an

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.

Am

Ba nk

of A

1-12

Value Proposition
PayPal offers:
No monthly fees No setup fees No gateway fees

2005 UMFK.

1-13

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.
2005 UMFK.

1-14

Analysis
Economies of scale High Networks effects Low for consumer, high for merchants Customer acquisition costs (eBay Low Customer retention rate High
2005 UMFK.

1-15

GBF
After identification of this need (both for customers and merchants) it was important to Get it Right Fast.

2005 UMFK.

1-16

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.