The Bankwatch

Tracking the consumer evolution of financial services

Celebrating PayPal’s ‘centenary’ – Paypal business model analysis

 Chris does a fantastic job of outlining Paypal’s history from inception in Dec 1998 (100 months ago).  In particular, the reason it succeeded so rapidly is what struck me here.

In fact, although many of us think PayPal displaces banks, it actually enhances banking services as demonstrated by the bank services behind PayPal. For example, PayPal runs through Wells Fargo and JPMorgan’s infrastructures and generates payment transactions through Visa and MasterCard.

As a result, the US backers of PayPal from the banking industry are making a mint through the massive volumes of payments that PayPal generates, as are the bank cards and deposit accounts used to provide PayPal payments.

In other words, PayPal is just a layer on top of the bank network, not the bank network itself. This means it is a complement to banking, not a replacement.

Source: Finextra: comment – Celebrating PayPal’s centenary

Paypal stats are astounding, especially the last point here.

PayPal Today

The result of all of this history is that PayPal has gone from strength to strength to become the de facto standard for online payments, and today’s PayPal statistics are pretty impressive:

  • PayPal’s revenue totaled $417 million in Q4 2006, up 37%, and $1.441 billion for the year.
  • PayPal transacted $37.75 billion of ecommerce in 2006, a 37% increase over the $27.5 billion of 2005, which was a 45% hyke over the $18.5 billion volume of 2004.
  • That’s about $1,384 being transacted every second.
  • PayPal is one of the most phished and targeted sites for hackers and fraudsters, but maintains a low loss rate of less than one half of one percent (0.41%) versus the average online fraud rate of about 1.5% for the top 150 online merchants.
  • PayPal claims 14 million merchant accounts, which is more than the total number of merchants registered with MasterCard, Visa and American Express combined.
  • Total payment volume for PayPal’s Merchant Services business was $3.9 billion in Q4 2006, up 57% year over year, and $11 billion for 2006, up 36% over a year earlier. PayPal payments accounted for $3.9 billion of that volume.
  • Over a third of PayPal’s payment volumes are non-eBay payments.
  • PayPal has over 133 million registered customer accounts, which is the equivalent of the total number of retail customers for Citibank USA, Bank of America, Wells Fargo, Barclays Bank and Deutsche Bank combined.

 Finally, the part that Banks didn’t and don’t get, as they lose all those deposits.

….  In fact, PayPal transactions ride on the very same systems we banks have spent billions of dollars building. And yet the banks lost the deal, despite our natural advantages. In less than one year, PayPal built a person-to-person payments solution that met the needs of the market better than any built by banks in the past five years.’

Heidi Miller, head of the treasury and securities services businesses at JPMorgan Chase

Paypal uses the access to Bank accounts that Banks intended to use between each other.  In Canada its called DEFT, in he US – ACH. 

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Written by Colin Henderson

April 11, 2007 at 11:20

Posted in Payments

One Response

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  1. PayPal makes much of that $1.4 billion profit by charging 3% acquiring fees on ACH transations that costs it pennies. That’s one hell of an arbitrage gain, makes it look like interchange might be over-priced and ACH underpriced. No matter how you look at it, it’s $1.4 billion the banking industry gave up by not creating a PayPal-like product prior to 1999.

    But as they say hindsight is 20-20. Banks had a lot on their plates back then: gearing up their online presence, Y2K, then the sub-prime credit card meltdown, 9/11 and so on. PayPal took on an enormous amount of risk in the early days, and is now being rewarded. A great story.

    Jim Bruene

    April 11, 2007 at 23:37


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