Paypal’s Success

The Economist writes about how eBay’s PayPal is turning into a huge online-payments business:

One of the most powerful forces in e-commerce is the network effect: the more people who flock to a particular website, the greater its appeal. The latest beneficiary of this phenomenon is PayPal, which now handles online payments at an annualised rate of more than $17 billion. PayPal is not a bank, but for online buyers and sellers it performs much the same function. It already has 45m account-holders worldwide, one-quarter of the number of the mighty Citigroup.

PayPal’s ambition is to become the global standard for internet payments and it is expanding overseas in eBay’s footsteps. In the first quarter of 2004, the value of items sold on eBay was $8 billion, 51% more than a year earlier. Meg Whitman, eBay’s chairman, told analysts recently that the company reckons one in three online shoppers in America now has a PayPal account.

PayPal’s cut comes from charging recipients between 2.2% and 3.4%, depending on the country, and levying fees for currency conversions. In the first quarter of 2004, PayPal’s revenues were $155m, 69% more than a year before.

PayPal has helped slash the time internet users spend completing transactions and has greatly increased confidence in trading online, says Matthew Bannick, the company’s general manager of global payments. It can take several weeks for cheques to arrive in the post and for payments to clear, but online payments are made instantly, which means goods can be shipped straight away. It has improved the velocity of trade, adds Mr Bannick.

Another benefit, he says, is that buyers do not have to impart banking or credit-card information to merchants.

PayPal wants to expand internationally, to continental Europe and Asia…PayPal has no plans, though, to become a bank, even though it performs some similar functions.

Late last year it introduced lower processing fees for micro-payments, to make it more feasible for online merchants to accept tiny payments for digital-music downloads. The success of portable music players, such as Apple’s iPod, suggest that this too will be big online business.

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Rajesh Jain

An Entrepreneur based in Mumbai, India.