PayPal is an e-commerce business allowing payments and money transfers to be made through the Internet. It serves as an electronic
alternative to traditional paper methods such as cheques and money
orders. PayPal performs payment processing for online vendors, auction sites, and other
corporate users, for which it charges a fee. On October
3, 2002, PayPal became a wholly owned subsidiary of
eBay.[1] Its corporate
headquarters are in San Jose, California, United States at eBay's North First Street
satellite office campus. The company also has significant operations in Omaha, Nebraska
in the US; Dublin, Ireland; and Berlin, Germany.[2]
History
Beginnings
PayPal is the result of a March 2000 merger between Confinity and X.com.[3] Confinity was founded in December
1998 by Max Levchin, Peter Thiel, and Luke Nosek, initially as a Palm Pilot payments and cryptography
company.[4] Both Confinity and X.com launched their
websites in late 1999. X.com was founded by Elon Musk in March 1999, initially as an Internet
financial services company. Both companies were located on University Avenue in Palo Alto. Confinity's website was initially
focused on reconciling beamed payments from Palm Pilots [5]
with email payments as a feature and X.com's website initially included financial services with email payments as a feature.
At Confinity, many of the initial recruits were alumni of The Stanford Review,
also founded by Peter Thiel, and most early engineers hailed from the University of Illinois at Urbana-Champaign, recruited by Max Levchin. On the
X.com side, Elon Musk recruited a wide range of technical and business personnel, including many that were critical to the
combined company's success, such as Amy Klement, Sal Giambanco, Roelof Botha, Sanjay Bhargava and Jeremy Stoppelman.[6]
To block potentially fraudulent access by automated systems, PayPal devised a system (see CAPTCHA) of making the user enter numbers from a blurry picture, which they coined the Gausebeck-Levchin test.
According to Eric M. Jackson, author of the book The PayPal Wars, PayPal invented this system now in common use; however, there is evidence
AltaVista used a CAPTCHA as early as 1997, before PayPal existed.[citation needed] The neutrality of The PayPal
Wars, which was self-published by Eric Jackson through his company World Ahead Publishing, funded in part by Peter Thiel, is
disputed.
eBay watched the rise in volume of online payments and realized its fit with online auctions. eBay purchased Billpoint in May 1999, prior to the existence of PayPal. eBay made Billpoint the official payment system of eBay,
dubbing it "eBay Payments", but cut the functionality of Billpoint by narrowing it to only payments made for eBay auctions.
For this reason, PayPal was listed in several times as many auctions as Billpoint. In February of 2000, there were
approximately an average of 200,000 daily auctions advertising the PayPal service while Billpoint (in beta) had only 4,000
auctions. By April of 2000 there were more than 1,000,000 auctions promoting the PayPal service. PayPal was able to turn the
corner and become the first dot-com to IPO after the September 11 attacks.
Acquisition by eBay
In October 2002, PayPal was acquired by eBay. PayPal had previously been the payment method of choice by more than fifty
percent of eBay users, and the service competed with eBay’s subsidiary Billpoint. eBay has since
phased out its Billpoint service in favor of retaining the PayPal brand. Most of PayPal’s major competitors have shut down or
have been sold; Citibank’s c2it service closed in late 2003, and Yahoo!'s PayDirect service closed in late 2004. Western Union announced the
December 2005 shut down of their BidPay service but subsequently sold it in 2006 to
CyberSource Corporation. Some competitors which offer some of PayPal’s services, such as
Wirecard, Moneybookers, 2Checkout, CCNow and Kagi, remain in
business.
PayPal’s total payment volume, the total value of transactions in Q4 2006, was US$11 billion, up 36% year over year. The company continues to focus on international growth and
growth of its Merchant Services division, providing online payments for retailers off eBay.
Business today
As of the end of Q4 2006, PayPal operates in 103 markets, and it manages over 133 million accounts. PayPal allows customers to
send, receive, and hold funds in 17 currencies worldwide. These currencies are the U.S.
dollar, Canadian dollar, Australian
dollar, Euro, Pound sterling, Japanese yen, Chinese renminbi, Czech Koruna, Danish krone, Hong
Kong dollar, Hungarian forint, New Zealand
dollar, Norwegian krone, Polish zloty,
Singapore dollar, Swedish krona, and
Swiss franc. PayPal operates locally in 13 countries.
Residents in 48 new markets can now use PayPal in their local markets to send money online. These new markets include
Peru, Indonesia, the Philippines, Croatia, Fiji, Vietnam and Jordan. A complete list can be viewed at PayPal's website.[1]
In China PayPal offers two kinds of accounts:[2]
- PayPal.com accounts, for sending and receiving money to/from other PayPal.com accounts. All non-Chinese accounts are
PayPal.com accounts, so these accounts may be used to send money internationally.
- PayPal.cn accounts, for sending and receiving money
to and from other PayPal.cn accounts.
It is impossible to send money between PayPal.cn accounts and PayPal.com accounts, so PayPal.cn accounts are effectively
unable to make international payments. For PayPal.cn, the only supported currency is the renminbi.
PayPal’s operation center is located near Omaha, Nebraska and PayPal’s international
headquarters is located in Dublin, Ireland. The company also recently opened a technology center
in Scottsdale, Arizona.
Bank status
In the United States, PayPal is licensed as a money transmitter on a state-by-state
basis.[citation needed] Although PayPal is not a
bank, the company is still subject to and adheres to many of the rules and regulations governing
the financial industry including Regulation E consumer protections and the USA PATRIOT
Act.[citation needed] However, on May 15, 2007, PayPal announced that it would move its European operations from the UK to Luxembourg, commencing July 2, 2007 as PayPal
(Europe) S.à r.l. & Cie, S.C.A.[citation needed] This would be as a Luxembourg entity regulated as a bank by the Commission
de Surveillance du Secteur Financier (CSSF), the Luxembourg equivalent of the FSA.[citation needed] PayPal Luxembourg will then provide the PayPal service throughout the
European Union (EU).
Safety and protection policies
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The PayPal Buyer Protection Policy[3] claims that customers may file a buyer complaint within 45 days if they did not receive an item or if the
item they purchased was significantly not as described. If the buyer used a credit card, they might get a refund via charge back
from their credit card company.[7]
PayPal protects sellers in a limited fashion via the Seller Protection Policy [8]. In general the Seller Protection Policy is intended to protect the seller from certain kinds of
chargebacks or complaints if seller meets certain conditions including proof of delivery to the buyer. PayPal states the Seller
Protection Policy is "designed to protect sellers against claims by buyers of unauthorized payments and against claims of
non-receipt of any merchandise". Note that this contrasts with the consumer protection they claim to offer. This policy should be
read carefully before assuming protection. In particular the Seller Protection Policy includes a list of "Exclusions" which
itself includes "Intangible goods", "Claims for receipt of goods 'not as described'" and "Total reversals over the annual limit".
There are also other restrictions in terms of the sale itself, the payment method and the destination country the item is shipped
to (simply having a tracking mechanism is not sufficient to guarantee the Seller Protection Policy is in effect).[9]
The nature of Internet marketplaces is that not all fraud can be prevented or detected; sometimes a buyer or seller gets
cheated.[10]American consumers reported losing over a
billion dollars to Internet fraud.[11]
The company—by its own admission—uses automated systems to verify tracking numbers in some cases. If a seller has an item
not received claim filed against them, they are required to enter a tracking number for the item. If they fail to enter a
valid tracking number that shows a successful delivery, or even mistype the number by one digit, they may lose the claim
automatically without a real person ever adjudicating the claim. In other cases, ebay makes a determination as to which party is
to win the claim.
The item significantly not as described claim is different. In this situation, the buyer has acknowledged the receipt
of the item but has found the item to be "significantly not as described." The multi-level process provides an initial period of
time for the seller and buyer to attempt to reach an agreement on their own. If the seller does not respond to the initial
dispute from the buyer, or if the seller is unable to offer a settlement which is agreeable to the buyer, either the buyer or
seller have the option of escalating the dispute to a claim. If seller does not wish to communicate with buyer, the seller also
may choose to escalate a dispute to a claim. The escalation from dispute to claim is not automatic; if a dispute is not escalated
it will be automatically closed after a certain period of time. By escalating the dispute to a claim, the party is asking a
PayPal representative to review the claim and make a settlement decision.[12]
"If a buyer files a Claim asserting receipt of a Significantly Not as Described item, PayPal will generally require the
buyer to return the item to the seller at the buyer's expense and to provide proof of return delivery."[13]
If the seller has not been found to have misrepresented the item in a significant way, then the buyer's claim will be denied
and the buyer will have no further opportunity for claims of any type using PayPal's systems. The only recourse the buyer would
possibly have at that point would be through their credit card company (if payment was made using a credit card) or by filing a
claim against PayPal through the Better Business Bureau or another similar
consumer protection organization.[14]
Security
Security key
In early 2007, PayPal introduced an optional security key to its users. This adds an additional layer of protection when
logging into a PayPal or eBay account. Once a user enters their login ID and password, they are prompted to press a button on the
small security key, then enter the six-digit number to complete the login process. There is a one-time US$5 charge for this
device, with no ongoing fees; however, business accounts get them free of charge.[15]
Phishing
PayPal is among the most popular email phishing targets. In response, PayPal has developed substantial anti-Phishing
resources[16], for identifying and reporting phishing,
and offers its US customers free credit monitoring. However, PayPal has instructed Spamcop to
NOT forward it spamcop reports when PayPal's hostname is used in spam.[17]
Money market
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In 2000, PayPal began offering its customers the option of investing their funds in a money
market account managed by Barclays plc. If a user activates it, the balance of their
account begins earning monthly dividends. The rate fluctuates daily, but thus far has been around 5%, and this percentage is the
same regardless of the account balance. Funds are not insured by the FDIC.
Entrepreneurship by former employees
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A number of companies have been started and funded by former PayPal employees. This trend prompted The New York Times to publish a story entitled "It Pays to Have Pals in Silicon Valley" that
analyzes the connections between several PayPal employees who went on to become influential.[18]
- LinkedIn was founded by Reid Hoffman, a former VP at
PayPal.
- Facebook received its first angel investment from Peter Thiel.
- Clarium Capital Management is a hedge fund run by Peter
Thiel. Principal partners at Clarium include Ken Howery and Luke Nosek, both of whom were among the earliest employees at
PayPal.
- Palantir Technologies was founded by Nathan Gettings, who
developed PayPal's anti-fraud models. Palantir received funding from Peter Thiel.
- Slide was founded by Max Levchin, Jared Kopf, and former PayPal board member Scott Banister.
- Yelp was founded by Jeremy Stoppelmann, former VP of
Engineering at PayPal, and Russ Simmons, one of the first employees at PayPal. Yelp is funded by
Max Levchin.
- YouTube (now owned by Google) was founded by Chad
Hurley, Steve Chen, and Jawed Karim,
all of whom were early employees at PayPal. YouTube is funded by Sequoia Capital.
Roelof Botha, the former CFO of PayPal, is a partner of Sequoia Capital who sits on
YouTube's board of directors.
- Room 9 Entertainment, which produced the movie Thank You for Smoking, was founded by David O.
Sacks, who founded PayPal's Product Group and later served as Chief Operating Officer (COO).
- Geni.com was also founded by David Sacks.
- SpaceX was founded by Elon Musk, who founded X.com and
served as the CEO following its merger with PayPal.
- Fraudwall Technologies is run by Ken Miller, who was
VP of Risk Management at PayPal and the architect of PayPal's anti-fraud system.
- Tesla Motors' principal owner and Chairman of the Board is Elon Musk.
Criticism
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PayPal's handling of customer issues has been criticized. In September 2005, the owner of the website Something Awful, Richard Kyanka, set up an account to collect donations for Hurricane Katrina, to be given to the Red Cross. Due to the high rate at which donations were made,
the account was automatically frozen, and Kyanka criticized the time and difficulty involved in getting PayPal's customer service
to unfreeze the account. In response to the concerns of Something Awful members over the charity used by Paypal, United Way,
Kyanka finally opted to have the money refunded to the donators so that they could donate directly to their charities of
choice.[19][20][21][22][23]
Legal issues
In March 2002, two PayPal account holders separately sued the company for alleged violations of the Electronic Funds Transfer Act (EFTA) and California law. Most of the allegations concerned
PayPal's dispute resolution procedures. 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 changing its
dispute resolution procedures to make them EFTA-compliant), as well as making a US$9.25 million payment to members of the class.
PayPal denied any wrongdoing.
In August 2002, Craig Comb and others filed a class action against PayPal in Craig Comb, et al. v. PayPal, Inc.. They
sued for alleged mishandling of customer accounts and customer services, with regards to PayPal's user agreement. Allegations
included restricting deposited funds for up to 180 days until disputes are resolved, forcing customers to arbitrate their
disputes under the American Arbitration Association's guidelines (a
costly procedure), and requiring users to file claims individually, restricting class action suits. The court stated that "the
User Agreement and arbitration clause are substantively unconscionable under California law" and ruled in favor of Comb.[24]
PayPal has also been involved in a number of other lawsuits.[25] [26] [27] [28] [29] [30]
References
- ^ Troy Wolverton (2002-10-03). It's official:
eBay weds PayPal. CNet. Retrieved on 2007-05-07.
- ^ PayPal Careers. Retrieved on 2006-11-17.
- ^ Findlaw Documentation (2006-12-31).
- ^ Wired Article (2006-12-31).
- ^ Wired Article (1999-07-27).
- ^ PayPal: An alternate history according to Elon Musk
- ^ The in-line paypal URL in this paragraph :https://www.paypal.com/cgi-bin/webscr?cmd=p/gen/ua/policy_buyer_complaint-outside#pbp-policy This reference is
supplemental to the inline reference.
- ^ https://www.paypal.com/us/cgi-bin/webscr?cmd=p/gen/ua/policy_spp-outside (it reads in part: "Credit card chargeback
rights, if they apply, are broader than PayPal Buyer Protection")
- ^ The in-line paypal URL in this section. https://www.paypal.com/cgi-bin/webscr?cmd=p/gen/ua/policy_buyer_complaint-outside#pbp-policy
- ^ http://www.smartmoney.com/dealoftheday/index.cfm?story=20071009&src=fb&nav=RSS20
- ^ ibid. (SmartMoney)
- ^ The in-line paypal URL in this section. https://www.paypal.com/cgi-bin/webscr?cmd=p/gen/ua/policy_buyer_complaint-outside#pbp-policy
- ^ The in-line paypal URL in this section. https://www.paypal.com/cgi-bin/webscr?cmd=p/gen/ua/policy_buyer_complaint-outside#pbp-policy
- ^ The in-line paypal URL in this section. https://www.paypal.com/cgi-bin/webscr?cmd=p/gen/ua/policy_buyer_complaint-outside#pbp-policy
- ^ http://ebay.com/securitykey
- ^ https://www.paypal.com/us/cgi-bin/webscr?cmd=_security-center-outside
- ^ http://www.spamcop.net/sc?track=www.paypal.com
- ^ Helft, Miguel (2006-10-17). "It Pays to Have Pals in Silicon Valley". New York Times.
- ^ Wired News
- ^ http://www.ecommercetimes.com/story/46325.html
- ^ http://www.wilsonweb.com/wct5/paypal_assess.htm Asessing Criticism of PayPal
- ^ http://www.somethingawful.com/d/news/paypal-fiasco-summary.php
- ^ http://www.news.com/2100-1017-842240.html
- ^ Comb v. PayPal Inc. (2007-01-21).
- ^ Internet: Paypal Sues Bank One Over Patent Infringement (2007-09-27).
- ^ Stamps.com Asserts Breach of Contract Claim Against PayPal and eBay (2007-09-27).
- ^ EBay payments 'not rock-solid' (2007-09-27).
- ^ AT&T sues eBay, PayPal over patent (2007-09-27).
- ^ CertCo Drops PayPal Patent Suit (2007-09-27).
- ^ EBay Settles Patent Lawsuit With Tumbleweed Communications (2007-09-27).
See also
External links
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