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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. Many of its initial recruits were
alumni of The Stanford Review. 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.
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 Mafia rings
found ways to steal millions from the young company. And worst
of all, eBay launched a payments service named Billpoint to
compete with PayPal. Yet the company 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. This paved the way for the
company to eventually reconcile with its former rival, eBay.
Acquired 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's only
substantially similar competitor is now BidPay, after Citibank's
c2it service closed in late 2003, and Yahoo!'s PayDirect service
closed in late 2004.
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'/
Today
As of the end of Q2 2005, PayPal operates in 57 countries
(including China) and it manages over 78.9 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 and
Japanese Yen.
PayPal operates locally in 13 markets, including: UK, Canada,
Australia, Austria, Belgium, France, Germany, Italy, Spain,
Ireland, the Netherlands, Switzerland and China.
Bank status
Due to the manner in which it operates, PayPal is not considered
a bank. Therefore it is not obligated to abide by the
legislation that governs banks. Like Western Union, PayPal is
considered a money transmitter in many states and is licensed as
such where required.
Criticism
PayPal is the most widely used service of its kind. However, a
number of users have had frustrating situations with PayPal
authorities. A controversial aspect of PayPal is that they have
a policy and history of freezing accounts and withholding funds
for reasons that they will not disclose. Another controversial
aspect is that PayPal is not subject to normal banking
regulations, which means that users do not have many of the
legal safeguards they would with conventional banks.
In March 2002, two PayPal account holders separately sued the
company for alleged violations of the Electronic Funds Transfer
Act (EFTA) and California state law. Most of the allegations
concerned PayPal's dispute resolution procedures. PayPal denies
any wrongdoing. 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 changes to its dispute resolution
procedures to make it compliant with the EFTA, as well as a U.S.
$9.25 million payment to members of the class. |
