Case: PayPal
Section 5 (2 pm), Group 7 MI021 Computers in Management, Fall 2007 Group Members: Ilgaz Arikan Evan Baskin-Evans Christopher Bradley Bradford Champion Daniel Kang
2 Consumers have certain objectives in mind when purchasing a good or service. While part of this search involves a frantic pursuit for the widest selection at the best price, there is also an active search for that service that will provide the greatest convenience. Most consumers that have made transactions in the recent past can inform you that this convenience can be found on the internet, which boasts qualities such as ease of access and minimal search costs. These benefits are the foundations of the e-commerce explosion of the last decade, a period that saw a majority of industries exploit this new technology. One such company that took advantage of the new scale in front of them in order to be a power player in their industry was PayPal. PayPal was founded in 1998 by Peter Thiel and Max Levchin as a result of the merger of their two start-ups, Confinity and X.com. Together, they molded a primitive online payment system that only required the registration of a valid e-mail address in order to conduct transactions between users. By 2002, the eBay Board of Governors had noticed that PayPal had quickly become a leader in the e-commerce industry had overtaken their own payment system, BillPoint, as the preferred payment system of their customer base. Soon after, eBay purchased PayPal for $1.5 billion and turned the company on its head in order to more efficiently meet the needs of its immediate consumer base. Currently, PayPal is headquartered in San Jose, California but has begun international expansion and also boasts major offices in Berlin, Dublin, Madrid, London, Milan, and Sydney. As a subsidiary of eBay, sixty percent of the transactions coordinated through PayPal are by eBay users. Recently, however, PayPal has reached agreements with Southwest Airlines and Northwest Airlines to operate and monitor their online ticket sales. In 2004, Apple, Inc.’s online music pioneer iTunes also began to use PayPal for the purchase of digital music and movies.i On soundclick.com, musicians can now make money selling their music if they have a PayPal account.ii Overall, the company boasts over 153 million active accounts worldwide. It is used in over 190 global markets and across seventeen different currencies. In the 2006 fiscal year, PayPal processed $11.6 billion in transactions, which represented six percent of all online purchases in the world.iii Clearly, it is an extremely important player in its industry. How does the service function? PayPal allows anyone with an email address to receive payment from a credit card or to pay a vendor directly out of their bank account. Customers are able to set up an account for free and are charged a very small fee for transactions involving the receipt of credit card payments.iv PayPal also acts like a bank account for users. The money that is left in the account accrues interest and members can order a PayPal debit card linked to their account for use anywhere Mastercard is accepted. This ease of access has made electronic transfers, especially those made by eBay users, extremely reliable and efficient. The underlying security blanket that drives reliability and efficiency is one of the firm’s most vital assets. In addition to its gratis services and its simple interface, it immediately attracted a great amount of users from the online auction juggernaut eBay as a result of its protectionist policies. Upon launch, PayPal’s main competitor was Citigroup’s platform, C2it. Though FDIC-insured, C2it neglected to provide insurance for account fraud, a quandary in itself, because it then became more beneficial for their consumers to simply use their Citi credit cards for transactions, where they were covered for any amount exceeding fifty dollars. PayPal provided fraud insurance from the get-go, a policy that obviously helped to attract the millions of loyal eBay users.v Its earliest security policy, named “Igor” by its creators at X.com, works in this fashion. Upon account set-up, users can request to be verified by X.com. Users may input information about a checking or savings account that they currently hold at a financial institution. X.com then will make two deposits into the account number that is given. If the
3 dates and value of each of the deposits can be correctly identified by the consumer, the account is considered verified. Therefore, X.com relies on the fact that user already has a legitimate established bank account. After verification, if a consumer were to pay a verified merchant without receiving the goods, the purchaser would be fully reimbursed for the missing goods. Also, if a seller receives a payment from a buyer, they can be reassured that it is a legitimate purchase.vi Soon after this initial system proved valuable, the firm evolved and began to offer internal account balances on debit accounts, adding an additional layer of security against fraud. In October 2005, eBay and PayPal jointly purchased the Payment Gateway assets from Verisign, Inc., which allows firms to provide digital authentication for purchases with certificates on their website. This past summer, PayPal has also created the Security Key, an electronic token that generates a unique code for users to input along their username and password each time logging on. It can be bought for a small one-time fee of five dollars and has already proved as a strong deterrent against phishing scams and the fraudulent purchase of goods with accounts. vii PayPal and eBay are also putting a lot of pressure on ISPs to block all e-mail from the firms that is not verifiably signed by them. Recently, Yahoo! joined forces with eBay and PayPal to better protect consumers against fraudulent e-mails. Yahoo! Mail will become the first Web mail service to block unsigned PayPal e-mails by using DomainKeys e-mail technology, which enables the determination of authenticity of electronic messages.viii All of these extra variables of security should help the firm continue to ease its way into the domestic and international markets. While PayPal is the premier firm for electronic payments, it still has to compete with the likes of powerhouses Citigroup, Amazon, and Western Union.ix In all, there are approximately thirty major competitors, but none appear to have the tools to surpass PayPal and its seemingly sustainable competitive advantage. This past summer, Amazon.com launched its Amazon Payment Services program, which allows sellers on its extended network to collect payments directly from buyers.x Google also recently launched a similar platform in the second quarter of 2006 called Google Checkout, which is another method of storing personal identification information for the purpose of one-click shopping. Although these two firms have very strong brand names, it was PayPal who actually first offered the integrated solution for the storage of information on a central website, which was the original appeal for larger clients.xi In addition, these established companies cannot keep up with the resource that PayPal has in eBay, which accounts for 135 million users and payment transfers for the at least twenty-nine million listed items at any given time.xii They monitor approximately 1.3 million transactions per day, which accounts for nearly two-thirds of all online auctions and acts as a very reliable source of reliable revenue.xiii As the service continues to expand beyond eBay and its domestic vendors towards new online merchants and new global markets, its total processed sales are expected to inflate by 22% from its 2005 figures. It is also anticipated that forty percent of all U.S. households will make at least one online purchase per year by 2009, which will provide an additional boost for the already dominant firm.xiv In order to sustain this dominance that it has over the industry, PayPal must manage its assets in order to give the firm a sustainable advantage that has the ability to keep the competition at bay. PayPal runs its servers on a Linux system, which uses its multiple servers as building blocks when performing significant tasks. This differs from the standard IBM or Cisco based system, which requires multiple processors and therefore a greater amount of program translation and time. The Linux system allows PayPal to undergo daily site maintenance and
4 surveillance without sacrificing any of the efficiency that its customer base is accustomed to. eBay CTO Scott Thomson, who recently became the official head of PayPal, had initial qualms about the use of open-source software but has come to realize its advantages. “We don’t just bring the site down,” he says, “we just allocate a higher portion of the [servers] to running batch processes, and we crunch through that data in three hours every night.”xv PayPal has also sought to enhance its services to provide options that are solely in the dreams of tech giants Google and Amazon. For years, PayPal has offered accruing interest on money stored on its internal accounts at rates that hover around four percent. These rates are much more attractive than the rates offered by most commercial banks. Recently, PayPal also received a banking license from the Luxembourg Bank Authority, which grants its European clients significantly more freedom. These consumers have the ability to use their online PayPal accounts like a standard checking or savings account. It allows clients to use their PayPal credit cards to make purchases on websites from popular online vendors such as Amazon.com, which do not accept traditional PayPal accounts as an acceptable form of payment. While PayPal cannot obtain a similar license in the United States due to restrictions arising from affiliations with existing banking entities and credit card agencies, it is currently exploiting the benefit of a partnership with MasterCard. Beginning in July 2007, the firm launched a new feature in which it provides its customer base with one-time use credit card numbers that may be used for online purchases wherever MasterCard is acceptedxvi. It is able to do this by offering its customers digital Verisign tokens that continuously generate new MasterCard numbers every few minutes for a one-time fee of merely five dollars. With this technology and infrastructure that seems inimitable for the time being, PayPal can rest assuredly at the top of its niche. What’s in store for PayPal in the immediate future? The plans are for much of the same thing. Due to the fact that PayPal was a pioneer in its industry and avoided the fast-follower problem, they hold many advantages over their competitors. They continue to experience dramatic network effects, since the process becomes more valuable as more people create accounts and can provide immediate payments to an extraordinary amount of global markets. If anything, though, PayPal must remain cautious about the obstacles being thrown their way via foreign firms in other markets. Wirecard Bank AG, headquartered in Germany, has stepped up as a legitimate threat. They are working in conjunction with MasterCard to create a system that allows people to send and receive money transfers over the internet.xvii In addition, moneybookers.com, a company based in the United Kingdom, has launched a service that allows any business or individual with a valid e-mail to send and receive money transfers.xviii At the current time, these start-ups may not have a large following or any semblance of international prestige, but since they are based in different markets, they are not subject to the same regulations as PayPal and can potentially exploit that advantage. Therefore, PayPal needs to continue to move swiftly into fledgling international markets if they do not want potentially risk loss to foreign competitors. If they can accomplish this task with the same efficiency that has been their standard since launch, PayPal should remain at the top of its industry.
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Bibliography
Dwight, Valle, “Who’s your buddy? PayPal,” Ecommerce-Guide, 7 August 2006, (Retrieved Oct. 7, 2007, from: http://www.ecommerce-guide.com/essentials/paypal/article.php/3624961) Mimoso, Michael S., “PayPal security measures help stamp out fraud,” Information Security Magazine, 1 May 2007, (Retrieved Oct. 5, 2007, from: http://searchsecurity.techtarget.com/qna/0,289202,sid14_gci1253360,00.html) Roberts, Paul F., “PayPal CTO: Security, mobility to spur growth,” InfoWorld, 13 June 2007, (Retrieved Oct. 5, 2007, from: http://www.infoworld.com/article/07/06/13/PayPal-CTO-security-mobility-spur-growth_1.html)
Endnotes
i
PayPal Press Release. 10 December 2004 (Retrieved Oct. 8, 2007, from: http://www.shareholder.com/PayPal/releaseDetail.cfm?ReleaseID=150301&Category=US) ii Soundclick Solution Center. (Retrieved Oct. 5, 2007, from: http://www.soundclick.com/solutioncenter/default.cfm?subOf=240) iii Holahan, Catherine, “The Bank of PayPal,” Business Week, 15 June 2007, (Retrieved Oct. 7, 2007, from: http://www.businessweek.com/technology/content/jun2007/tc20070614_606853.htm?chan=technology_technology +index+page_top+stories) iv Milligan, Jack, “When Money Meets Email,” On Magazine, Sep 2001, (Retrieved Oct. 9, 2007, from: http://www.PayPal.com/html/onmag-0901.html) v Smith, Geoffrey, “Why PayPal May Survive Citi’s Onslaught”. BusinessWeek, 20 November 2000, (Retrieved Oct. 5, 2007, from: http://businessweek.com/common_frames/tc.htm?/ebiz/0011/ep1120.htm) vi Gutzman, Alexis, “PayPal,” Ecommerce-guide.com, 28 August, 2000, (Retrieved Oct. 5, 2007, from: http://www. ecommerce-guide.com/resources/product_reviews/article.php/3691_382831) vii Roberts, Paul F, “PayPal, eBay offer Security Key to U.S. Customers,” InfoWorld, 15 June 2007, (Retrieved from: http://www.infoworld.com/article/07/06/15/paypal-using-verisign-tokens_1.html?source=searchresult) viii PayPal Press Release. 4 October 2007, (Retrieved 7 Oct., 2007, from: http://www.shareholder.com/paypal/releaseDetail.cfm?ReleaseID=267314&Category=US) ix “PayPal, Inc.,” Hoovers, (Retrieved Oct. 10, 2007, from: http://premium.hoovers.com/subscribe/co/overview.xhtml?ID=ffffjrytrrxyjcrhxy) x Arrington, Michael, “Amazon To Launch Payments Services; Will Compete With PayPal and Google Checkout,” TechCrunch, August 2007, (Retrieved Oct. 8, 2007, from: http://www.techcrunch.com/2007/08/01/amazon-to-launch-payments-services-will-compete-with-paypal-andgoogle-checkout/) xi Ibid. xii Kabir, Nowshade, “Selling Through Auction Marketplaces,” User Group Network, (Retrieved Oct. 10, 2007, from http://www.user-groups.net/articles/nk_auction_selling.html) xiii “PayPal, Inc.” Hoovers, (Retrieved Oct. 10, 2007, from: http://premium.hoovers.com/subscribe/co/overview.xhtml?ID=ffffjrytrrxyjcrhxy) xiv Kabir, Nowshade, “Selling Through Auction Marketplaces,” User Group Network, (Retrieved Oct. 10, 2007, from http://www.user-groups.net/articles/nk_auction_selling.html) xv Hochmuth, Phil. “Linux, open source software pay off for PayPal”. Network World. 23 March 2007. xvi Holahan, Catherine, “The Bank of PayPal,” BusinessWeek, 15 June, 2007, (Retrieved Oct. 9, 2007, from: http://www.businessweek.com/technology/content/jun2007/tc20070614_606853.htm?chan=technology_technology +index+page_top+stories) xvii WireCard Solution Center. (Retrieved Oct. 7, 2007, from: https://www.wirecard.com:443/wirecard/AboutUsPage.html) xviii Moneybookers.com Solution Center (Retrieved Oct. 7, 2007, from: http://www.moneybookers.com/app/help.pl?s=aboutus)