E-Commerce: PayPal’s Big Play

When Silicon Valley high-tech financier Peter Thiel and computer wunderkind Max Levchin, 24, launched PayPal in late 1999, they offered up something cyberspace had never seen before: a way of transferring money securely by e-mail. There was only one problem: no one wanted to use it.

Then, in early 2000, eBay customers started showing up. Payments had long been a weak link for eBay. After participating in an auction entirely online, eBay buyers were forced to pay by sending a paper check by snail mail, which added a week or more to the transaction. But with PayPal paypal.com) payments could be made as effortlessly–and as quickly–as sending an e-mail.

This new line of business started with a few e-mails from eBay sellers asking whether they could put a link to PayPal in their eBay auction listings. The rest is Internet history. At the end of 1999, PayPal had just 10,000 users. But as word of mouth swept through the world of eBay, sellers recruited buyers to sign up, and buyers recruited sellers. PayPal now has more than 13 million registered users–and is poised to make Internet history again.

In late September, while Wall Street was still reeling from the World Trade Center attacks and a nasty recession, PayPal stunned the financial world by filing to sell shares of stock to the public, beginning sometime this month. The PayPal IPO, which aims to raise $80 million, could be the biggest Internet financing event since the dotcom bubble burst in spring 2000. And it will end a long drought: only one Internet company, Loudcloud, went public in all of 2001, and its stock has since fallen about 40%.

In these lackluster economic times, when Internet pure plays like Yahoo and Priceline.com are languishing, PayPal is growing like a dotcom start-up circa 1999. In the first half of 2001, PayPal had revenues of $34.2 million, up from just $3.3 million for the same period a year earlier.

PayPal has a remarkably low-cost and efficient business–more like eBay’s than Amazon’s. While the online bookseller takes on the expense of acquiring, storing and shipping goods, eBay simply takes a percentage of each transaction it facilitates. Similarly, PayPal makes its money by facilitating online transactions and skimming off a few percentage points from all the money that passes through its hands.

PayPal is also fortunate to be in a particularly hot sector. So-called P2P transactions–transfers of money online from one person to another–are poised to revolutionize commerce every bit as much as credit cards once did. TowerGroup, a Needham, Mass., research firm, predicts that P2P transactions will increase at an annual rate of nearly 150% over the next four years, reaching 4 billion in 2005. More than 95% of P2P payments right now arise from online auctions. But that percentage is expected to fall as users increasingly pay landlords, send money to children at school and make other financial transfers through e-mailed payments.

Other companies, some with vast resources, are jumping into this business. eBay Payments, owned by eBay and Wells Fargo, saw its 2001 processing revenues soar fourfold from the year before. In its favor: eBay promotes eBay Payments heavily on the eBay site. Citibank has started a service called C2it c2it.com) and Western Union now offers MoneyZap <a