© 2005 UMFK. 1-1 PayPal internet business models text and cases Steven Young ELC498.

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© 2005 UMFK.

PayPal

internet business models

text and cases

Steven Young ELC498

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© 2005 UMFK.

Description of the Industry or market

segment 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.

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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.”

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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 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 PresidentMary M. Hentges - Vice President, FinanceAlex E. Kazim - Vice President, MarketingScott Thompson - Senior Vice President, Chief Technical OfficerSalvatore J. Giambanco - Vice President, Human Resources and AdministrationJohn D. Muller - Head of Legal DepartmentAmy E. Rowe - Vice President, ProductionKen A. Miller - DirectorRyan D. Downs - Vice President, Operations

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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.

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Marketing 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-be-released product.

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Technologies employed

Innovative electronic payment system utilizing email, bank account information, credit card information, and a proprietary fraud protection system to facilitate ecommerce transactions.

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Determination of relative success

Number of Global User Accounts (millions)

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Paypal has grown approximately 6 fold from 2001 to 2005 (projected to year end), currently representing over $26M in total

payment volume by over 87 Million users globally

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Identify Value Bubble Components

Attracting (Building Traffic) – Widely advertised on eBay site and other channels, stressing attractive features including:• No monthly fees • No setup fees • No gateway fees

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Identify Value Bubble Components

• Engaging (Building Loyalty) – by offering free eBay and merchant tools.

• Retaining (Strengthening the Relationship) – by offering excellent functionality and antifraud systems at no extra cost, and only charging fees when transaction is completed, financial confidentiality is strictly maintained.

• Learning (Building the Database) – facilitating repeat use by customers through retention of key information.

• Relating (Data-Driven Interactions) – Facilitate documentation and tracking of transactions.

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The Customerization model

The company would not benefit in the way that a company with multiple goods and services offerings that could be specifically configured to an individual customer.

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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?