PayPal

From Free net encyclopedia

Image:Paypal.png PayPal is an Internet business which allows the transfer of money between email users and merchants, avoiding traditional paper methods such as checks/cheques and money orders. PayPal also performs payment processing for e-commerce vendors, auction sites, and other corporate users, for which they charge a fee. Corporate headquarters are in San Jose, California; it is now an eBay company.

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History

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Beginnings

PayPal was founded in December 1998 by Peter Thiel and Max Levchin. One of its first premises was the 165 University Avenue office in Palo Alto, California, home of a number of other noted Silicon Valley startups. On the business side, many of its initial recruits were alumni of The Stanford Review, which was also founded by Peter Thiel. Most of the early engineers hailed from the University of Illinois at Urbana-Champaign, recruited by Max Levchin. In its initial incarnation, PayPal was a service for users to send money via PDAs, with actor James Doohan, Star Trek's "Scotty," as its spokesman. The PDA software was later discarded in favor of a web-based system that became popular with eBay's millions of buyers and sellers. Coupled with aggressive marketing campaigns offering $10 (and later $5) for new users to sign up, the firm grew at a meteoric rate of 7–10 percent per day between January and March 2000.

Unknown to many people is the fact that PayPal is one of the few Internet companies which has a single letter domain name, (http://www.x.com) in use. As of March 2006, this URL still resolves to the PayPal home page. This domain name was associated with PayPal in early 2000, when X.com acquired Confinity, the parent company of PayPal. [1] After the acquisition, the leads of X.com ran PayPal before being ousted by both companies' investors. During this time PayPal attempted to port their service from UNIX to Windows NT, which was later scrapped when Peter Thiel was reinstated as company head.

Though growing rapidly, PayPal was losing $10 million a month and was fraught with internal turmoil that led to three CEO changes in its first year of operations. Foreign organized crime rings found ways to steal millions from the young company by automatically registering accounts using stolen identities. To block automated systems from using this form of fraud, PayPal devised a system (see Captcha) of making the user enter numbers from a blurry picture; according to Eric M. Jackson, author of the book The PayPal Wars, PayPal invented the system now in common use.

eBay saw the rise of online payments and how they would be essential match with online auctions. Rather than work with PayPal, eBay purchased a competing payment service named Billpoint to compete with PayPal. Although eBay made Billpoint the official payment system of eBay, dubbing it "eBay Payments", eBay crippled the functionality of Billpoint by limiting it to only payments made for eBay auctions. PayPal was listed in several times more auctions than Billpoint. In February of 2000 there were approximately an average of 200,000 daily auctions advertising the PayPal service while Billpoint (in beta) had only 4,000 auctions. By April of 2000 there were more than 1,000,000 auctions promoting the PayPal service. PayPal was able to turn the corner and become the first dot-com to IPO after the September 11 attacks — an accomplishment that ironically backfired when PayPal's new high profile status helped prompt a slew of class action lawsuits and regulatory probes, including one by NY Attorney General Eliot Spitzer.

Near the time when PayPal went public (first quarter 2002), it filed an anti-competition complaint against eBay on the grounds of using its auction venue to attempt to force PayPal off its site. The company eventually reconciled with its former rival, eBay. [2] [3]

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Acquisition by eBay

In October 2002 PayPal was acquired by eBay. PayPal had previously been the payment method of choice by over fifty percent of eBay users, and the service competed with eBay's subsidiary BillPoint. eBay has phased out its BillPoint service in favor of retaining the PayPal brand. PayPal no longer has any similar competitors, after Citibank's c2it service closed in late 2003, Yahoo!'s PayDirect service closed in late 2004, and BidPay ceased payment operations on the 31st December 2005 (BidPay's site remains to carry out any remaining customer service issues). When eBay purchased PayPal, it barred PayPal from being used for any "adult" services such as pornography and online gambling. For those transactions, offshore money transfer services such as Neteller were set up. However, PayPal's rules were amended in early 2006 when betting exchange Betfair entered into an agreement with PayPal (Europe) Ltd. These changes only apply within the European Union, where online gambling is legal and regulated.

In 2004, the total value of transactions through the PayPal system was $18.9 billion, up 55% year over year. In January of 2005 PayPal announced plans to pursue the Merchant Services opportunity, the online payments business 'off of eBay'.

In 2005 the total payment value on PayPal was 27.5 billion dollars according to the corporate presentations on Ebay's website.

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Today

As of the end of Q4 2005, PayPal operates in 57 countries and it manages over 96 million accounts and in Feb. 2006 PayPal declared that it reached 100 million accounts. Every second PayPal processes an average of $823 in total payment volume. PayPal supports payments in U.S. Dollars, Canadian Dollars, Australian Dollars, Euros, Pounds Sterling, Japanese Yen and Chinese Renminbi (Chinese PayPal.com.cn accounts only).

PayPal operates locally in 13 markets, including: Australia, Austria, Belgium, Canada, China, France, Germany, Ireland, Italy, the Netherlands, Spain, Switzerland and the United Kingdom.

In China, PayPal offers two kinds of accounts[4]:

  • PayPal.com accounts, for sending and receiving money to/from other PayPal.com accounts. All non-Chinese accounts are PayPal.com accounts, so these accounts may be used to send money internationally.
  • PayPal.com.cn accounts, for sending and receiving money to/from other PayPal.com.cn accounts.

It is impossible to send money between PayPal.com.cn accounts and PayPal.com accounts, so PayPal.com.cn accounts are effectively banned from international payments. For PayPal.com.cn, the only supported currency is the Renminbi (RMB, ISO: CNY), whereas for PayPal.com accounts the only supported currencies are USD, CAD, AUD, EUR, GBP and JPY.

PayPal also operates a large customer-service centers in La Vista, Nebraska, just outside Omaha as well as Vancouver, British Columbia.

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Bank status

Due to the manner in which it operates, PayPal is not considered a bank. Therefore it is not required to abide by the legislation that governs banks. Like Western Union, PayPal is considered a money transmitter in many states in the United States and is licensed as such where required. PayPal's European subsidiary PayPal (Europe) is licensed as an electronic money institution and regulated by the UK Financial Services Authority.

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Safety

PayPal's business model involves providing safety to buyers and merchants/sellers. However buyers are not ensured they receive the item they buy as it is described. So long as anything at all is sent, PayPal considers the transaction satisfactory. If the buyer used a credit card, they might get a refund via chargeback from their credit card company.

PayPal protects sellers in a limited fashion via the Seller Protection Policy. In general the Seller Protection Policy is intended to protect the seller from chargebacks or buybacks but it is subject to various terms. PayPal states the Seller Protection Policy is "designed to protect sellers against claims by buyers of unauthorised payments and against claims of non-receipt of any merchandise". This policy should be read carefully before assuming protection. In particular the Seller Protection Policy includes a list of "Exclusions" which itself includes "Intangible goods", "Claims for receipt of goods 'not as described'" and "Total reversals over the annual limit". There are also other restrictions in terms of the sale itself, the payment method and the destination country the item is shipped to (simply having a tracking mechanism is not sufficient to guarantee the Seller Protection Policy is in effect).

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Sandbox

PayPal also has a "sandbox" version geared towards developers. Template:Sect-stub

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Criticism

PayPal is not subject to regular banking regulations. Because it considers itself to be an 'electronic money transmitter', user rights and safeguards vary.

Controversial aspects of PayPal include the terms of its User Agreement; particularly, for limiting account access and user access to funds. According to the PayPal user agreement, users agree to give PayPal the power to limit access to funds in the account for 180 days. This policy appears to protect PayPal from financial loss in the event of chargebacks or disputes. Banks and financial institutions provide chargeback rights for a specified period of time that varies by the institution. PayPal's account access limitations prevent the movement of funds until discrepancies, or terms of the limitation, are resolved.

In March 2002, two PayPal account holders separately sued the company for alleged violations of the Electronic Funds Transfer Act (EFTA) and California law. Most of the allegations concerned PayPal's dispute resolution procedures. The two lawsuits were merged into one class action lawsuit (In re PayPal litigation). An informal settlement was reached in November 2003, and a formal settlement was signed on June 11, 2004. The settlement requires that PayPal change its business practices (including changing its dispute resolution procedures to make them EFTA-compliant), as well as making a $9.25 million USD payment to members of the class. PayPal denies any wrongdoing.

PayPal's Seller Protection policies do not cover intangible goods or goods that are "not as described". Many scammers have used this lack of policy to their advantage. They will buy a product and pay for it via PayPal. When the product is recieved, they will dispute the charge as "not as described." This freezes the seller's account until the chargeback is finalized. Then, a refund is given back to the buyer and PayPal makes no attempt to regain the goods to the seller. This has lead to many sellers getting cheated out of not only their money, but the goods as well.[5]

PayPal does not allow people from certain countries to use its services, and in some occasions where it does, it only allows the participants to send and not receive. This has brought criticism from people from within these countries.[6]

Paypal's decision to allow online gaming companies in the European Union to use its services in early 2006 angered anti-gambling advocates in the U.S. - although the changes do not officially apply in the U.S. some are concerned that American gamblers may nonetheless be able to use Paypal's European servies to gamble online and evade American laws.

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In the news

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Startups by former employees

Former PayPal employees have started several high-profile companies

  • LinkedIn was started by Reid Hoffman, a former VP at PayPal.
  • Palantir Technologies was started by Nathan Gettings, who developed PayPal's anti-fraud models. Palantir received funding from Peter Thiel.
  • Slide was started by Max Levchin.
  • Yelp was started by Jeremy Stoppelmann, former VP of Engineering at PayPal, and Russ Simmons, one of the first employees at PayPal. Yelp is funded by Max Levchin.
  • YouTube was started by Chad Hurley, Steve Chen, and Jawed Karim, all of whom were early employees at PayPal. YouTube is funded by Sequoia Capital. Roelof Botha, the former CFO of PayPal, is a partner of Sequoia Capital who sits on YouTube's board of directors.
  • Room 9 Entertainment was started by David Sacks, who founded PayPal's Product Group and later served as Chief of Operations (COO).
  • SpaceX was started by Elon Musk, who founded X.com and served as the CEO following the acquisition of PayPal.
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See also

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Books

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External Links

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Company Websites

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Critical Sites

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Other Resources

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