The rise of alternative
payment providers is giving banks cause to be concerned. PayPal is
one such player that is determined to innovate to capture an even
greater share of payments. This extract from the World Payments
Report 2010
outlines how PayPal is set to keep on


Chart showing total PayPal transaction volumePayPal has
established itself as a global payments processor, facilitating
€51.3bn ($69.9bn) in total payments volume (TPV) in 2009 and making
it the world’s largest online PSP.

In 2009 in fact, PayPal accounted
for almost 6% of all global online payment transactions (and 7.5%
of online payments in the US), capturing a significant share of
revenues that could have gone to the banking industry.

Along with its international
expansion, the proportion of revenues derived solely from eBay has
declined as a percentage of total revenues to 42% at the end of

In 2009, PayPal revenues were
around €1.89bn, nearly one-third of which was derived from US
sellers and nearly 40% from cross-border transactions. PayPal had
81m active users as of December 2009, after sustaining annual
growth of 18% in 2006–2009, and is extremely popular among its
users, because it is perceived to offer:

  • An easy-to-use service.
    Accounts take less than five minutes to set up and require minimal
    information; its platform is designed exclusively for facilitating
  • A simple and cost-effective
    integrated payments solution compared to traditional merchant
    accounts and gateways, especially for smaller merchants that lack
    scale, cannot meet merchant credit standards, or prefer not to open
    a dedicated merchant account or use a gateway service
  • Flexible payment options.
    Users can choose to fund their accounts through credit cards, bank
    accounts or PayPal balances;
  • Simple but effective fraud
    prevention. Buyer details (eg, account numbers) are not disclosed
    to sellers and dual factor authentication requires a user name and
    password, so the system is less vulnerable than a credit card if
    account information is stolen;
  • Straightforward procedures
    for fraud and liability claims for buyers and sellers, eg,
    hassle-free refunds and charge-backs in cases of unauthorised
    payments or missing purchases.

The most distinctive element of the
PayPal business model, though, is its ability to draw on various
funding sources with very different costs.

Pull quote explaining PayPal's expansion strategyIn 2009, payments were
funded 50% by credit and debit cards, 31% by ACH (eg, bank
accounts) and 19% directly from PayPal account balances.

Payments linked to credit cards
cost PayPal the most, while payments funded from a user’s PayPal
account cost virtually nothing, so PayPal actively seeks to shift
users into funding sources that are cheaper to process, and
therefore, by employing an appropriate pricing policy, generate
higher margins.

Another integral element of the
PayPal business model is maintaining low average loss rates (0.25%
of TPV in 2009), which it does by keeping down dispute rates (they
are four to six times lower than average card-not-present dispute
rates), and buyer losses (60% to 70% lower).


Further growth and
innovation potential

PayPal has arguably pretty much
tapped out the potential in US eBay penetration, but there are
still opportunities for growth, including:

  • Geographic expansion,
    especially into locations where the online auction business is
    still maturing;
  • Customer-segment expansion,
    in particular through Bill Me Later. Acquired by PayPal in 2008,
    Bill Me Later provides online credit approvals for specific
    transactions to offer convenience for customers with higher-quality
  • Customer-base expansion by
    opening up the service platform. Since opening its platform to
    third-party software developers in November 2009, new applications
    have already been developed, including Payvment, which allows
    individuals to integrate a shopping cart with a retail storefront
    on their Facebook page, and Rentalic, a marketplace that enables
    P2P renting of services and real estate;
  • Mobile initiatives. PayPal
    has seen limited success with its SMS-based service (PayPal Text 2
    Buy) and has since launched a WAP-based checkout service (Mobile
    Checkout), but most compelling is the rapid growth in applications
    for smartphone platforms like the iPhone, Android and

These and other initiatives could
help PayPal to grow quickly and cost effectively, further
challenging traditional market boundaries.