Paypal Phenomenon

PayPal business model evolutionPayPal’s success in terms of users and volumes was the product of a three-phase strategy described by eBay CEO Meg Whitman: “First, PayPal focused on expanding its service among eBay users in the U.S. Second, we began expanding PayPal to eBay’s international sites. And third, we started to build PayPal’s business off eBay”.[40]

[edit] Phase-1In the first phase, payments volumes were coming mostly from eBay auction web-site. The system was very attractive to auction sellers, most of which were individuals or small businesses that were unable to accept credit card, and for consumers as well. In fact, many sellers could not qualify for a credit card “merchant account” because they lacked a commercial credit history. The service also appealed to auction buyers because they could fund PayPal accounts using credit cards or bank account balances, without divulging credit card numbers to unknown sellers. PayPal employed an aggressive marketing campaign to accelerate its growth, depositing $10 in new users’ PayPal accounts (+$10 for each new user they referred).

[edit] Phase-2The biggest challenge in 2000 remained PayPal’s unsustainable business model. Initially, PayPal offered its service free of charge, planning to earn interest on funds in users’ PayPal accounts (i.e., the “float”). However, most recipients withdrew their funds immediately. Furthermore, a large majority of senders funded their payments using credit cards, which cost PayPal roughly 2% of payment value, rather than relying on electronic transfers from bank accounts, which were much less costly.

In order to boost its user base over eBay, both in US and internationally, PayPal decided to lever some of the ever existing concerns of sellers and buyers dealing with the virtual world, simplifying and easing the procedures regarding litigations, frauds and liabilities (transaction losses borne by PayPal also included the cost of buyer and seller protection programs. In...