PayPal.com's Business Model

Abstract

The case describes the business model of PayPal.com (PayPal), the market leader in e-payment services. It discusses in detail the transaction process involved in sending money electronically. The case explains the types of user accounts of PayPal, the funds transfer mechanism, the user charges and the security systems employed by the company. The case also briefly discusses the marketing initiatives of PayPal, the benefits of its business model and the challenges faced by the company.

"I think it's rather innovative. It's a simple, straightforward idea. We really haven't seen any consumer-to-consumer payment schemes break out."

- Avivah Limn, Research Director of Payment Systems, Gartner Group.

"PayPal has been the best thing that could have happened to our business. We have received over 1,500 payments through PayPal with only one single problem, and it was my fault."

- Paul Lewis, a Cincinnati Merchant.

"Our vision is to deploy PayPal in the conventional online setting as well as all these mobile devices to enable people to beam money to any e-mail account in the world from a PC, Palm Pilot or cell phone."

- Peter Thiel, CEO of PayPal.com.

In January 2002, a leading market research firm - Gartner Inc -- conducted a web survey of over 1000 online customers in the US, to study their payment practices. The survey revealed that PayPal, the electronic payment system of the California-based PayPal.com was the most trusted payment system over the Internet. It was used by 27% of the respondents, and an additional 8% were planning to use it in the future. One-third of the respondents viewed PayPal as a very reliable provider of payment services.

Through PayPal, the promoters of Paypal.com wanted to bring about a complete transformation in the way people made online payments. When the service was launched, several analysts expressed doubts over its future. They dismissed the company as just another start-up with an innovative application. Expressing his opinion on PayPal, Michael Angus, Director of financial services practice for Gemini Consulting, said, "Maybe, but it doesn't sound like the killer app to me - the thing that is going to blow open Internet payments."

But the rapid pace at which the PayPal service network expanded in five years proved the analysts wrong. It grew from 10,000 customers in 1999 to 45 mn customers in 2004, giving the credit card companies a run for their money. Analysts felt that winning the trust of millions of customers was a significant achievement for PayPal. The company achieved this with a very competitive business model, by having the appropriate security systems in place to check frauds, by consistently offering new services, and by expanding its network.

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        Case Code   ITSY040
   Case Length    18 Pages
              Period    1999 - 2004
 Organization     PayPal.com.
        Pub Date     2004
Teaching Note    Not Available
     Countries    USA
      Industry    Online Finance

Issues

• Study the business model of an e-payment services company

• To Develop an understanding on how an online payment system works

• Examine the online marketing initiatives of an e-payment services company

• Get insights into the security systems employed by an e-payment services company

• Study the privacy policy of Paypal.com.

• Analyze the weaknesses and possible threats to the business model of Paypal.com.

Case, PayPal.com, Electronic Payment System, Transaction Model, Automated Clearing House Network, Fee Structure of PayPal, Internet Security, Privacy Policy.

Please note:

This case study was compiled from published sources, and is intended to be used as a basis for class discussion. It is not intended to illustrate either effective or ineffective handling of a management situation. Nor is it a primary information source.