PayPal Looks To Evolve Beyond Its Auction Roots

By Leslie Walker
Thursday, May 19, 2005

Digital money pioneer PayPal is on the prowl.

Since eBay Inc. bought the Internet payment upstart for $1.5 billion in 2002, PayPal has grown at a heady clip, reeling in 71.6 million account holders who pumped $6.2 billion through its money-transfer system during the first quarter this year. The company claims twice as many accounts as Bank of America and recently surpassed Discover, too.

Yet PayPal's identity remains virtually inseparable from eBay, the auction market where it greases the wheels of commerce between strangers by letting them zap money to any e-mail address. Three-quarters of the goods and services swapped on eBay's U.S. site are paid for with PayPal, and auctions account for a large share of PayPal's $233 million in quarterly revenue.

EBay hopes that will change this year as PayPal rolls out a major marketing campaign to tout new payment services to larger merchants selling from sites independent of eBay. PayPal is expanding overseas, too, where it has introduced localized payment services in a dozen countries.

"We feel confident that PayPal can become the online wallet for an entire global generation of Internet shoppers,'' eBay chief executive Meg Whitman said in a recent conference call with analysts.

Yet some analysts remain skeptical that PayPal can become more than a niche player, servicing mostly auctions and tiny Internet merchants. They say PayPal's early advantages could dwindle as it moves into mainstream commerce, where buyers and sellers are accustomed to dealing directly with banks and credit card giants Visa and MasterCard.

A key test will come in June when PayPal introduces a suite of new services for merchants, including software to help them reduce the risk of online payment fraud, to integrate PayPal more tightly with their own Web sites, to customize check-out and offer other customer services.

PayPal already handles payments for a few large merchants, including the Napster and iTunes music stores, auction rival and electronics retailer TigerDirect. PayPal is hoping its fees, which it lowered last August and are well below those charged by traditional card processors, will attract more big merchants.

Yet the jury is still out on whether PayPal can create a truly global currency, one as linked in people's minds with Internet payments as, say, American Express is with travel.

"It's not easy to create a new global payment brand," said Jim Bruene, editor of the Online Banking Report newsletter. "If it was, PayPal would have already done it."

PayPal's system piggybacks on existing credit card and bank accounts, which customers can link to their PayPal accounts when they register. To send money, a buyer logs into PayPal and enters the recipient's e-mail address and amount they want to send. PayPal deposits the funds into the recipient's PayPal account and takes it from any source the senders choose -- their PayPal account balance, credit or debit account, or bank account. Last year, PayPal also added a line-of-credit option provided by GE Consumer Finance. While most recipients pay fees, all PayPal transfers are free to buyers.

PayPal spawned many rivals after it launched in 1999. Most have since died or disappeared, including Citigroup's c2it and Bank One's E-Mail Money. Just this week, Yahoo finished shuttering the last of its PayDirect money-transfer accounts, which it jointly offered with HSBC before deciding to close last November.

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