Leslie Walker's .com Live
PayPal.com CEO Peter Thiel
Thursday, Aug. 2, 2001
The Internet stock market bubble may have burst, but Web shopping is here to stay. Online retailing keeps growing, despite the well-publicized deaths of many Web stores. To boost online consumer commerce further, a number of start-ups are working to make online payments easier and safer -- a difficult task given the Internet's Wild West nature.
PayPal.com was an early leader in developing and popularizing e-mail payments. As such, it became a magnet for credit card thieves. Rather than give up, the Palo Alto, Calif. company created a fraud-sniffing software program and assigned a team of 75 fraud-fighters to work with law enforcement officials.
Probably most recognized by eBay auction users, PayPal.com has grown significantly since it was launched in October 1999, amassing a customer base of more than 9 million. The company merged last year with rival X.com and signed a deal with Intuit Inc. to become the default payment system in Intuit's small-business accounting software.
PayPal.com CEO Peter Thiel will join .com author Leslie Walker to discuss the future of electronic payments and PayPal.com's leading role in stopping online fraud. As Newsweek reported earlier this month, PayPal.com's internal software program "sniffs the 180,000 transactions made every day, looking for abuse" (July 16 issue). To understand how PayPal works, read Leslie Walker's from article last October.
Before starting PayPal.com, Thiel headed Thiel Capital Management, LLC. He also has worked as a derivatives trader for CS Financial Products and as a securities lawyer for Sullivan & Cromwell. He received his BA from Stanford University and his JD from Stanford Law School.
And don't miss Leslie's .com column, published weekly on Washtech.com.
Editor's Note: Washingtonpost.com moderators retain editorial control
over Live Online discussions and choose the most relevant questions for
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A Transcript of the live discussion follows:
Hi Peter and welcome. So glad you could stop by our office in DC to do this chat live today. . .
Before we talk about fraud, could you give us a snapshot of PayPal's current scale? How many customers are spending how much money through PayPal on a typical day? And at what rate are you growing?
Peter Thiel: PayPal currently has about 9.5 million users. They're spending about $10 million per day, in about 200,000 transactions. And we're adding about 20,000 new users a day.
I've used PayPal for E-Bay auctions and it's worked well. But now, I'm getting regular notices to give a bank account number or other financial back-up to increase my spending limit. Since I don't want to do that, I'm not passing the info along, but am curious why your company asks for that. Seems a bit intrusive. Otherwise, however, I'm a fan of your service.
Peter Thiel: We ask for bank accounts as a way to verify our users. But if people only feel comfortable using credit cards, we don't have any requirement that they use other payment solutions.
What are the biggest mistakes people use with paypal that cause payments to go awry?
Peter Thiel: Sending payments to the wrong email address. As long as you correct it in time, no funds will be lost.
Let's dive into the fraud issue. How big is the problem at PayPal? What have you done to fight it?
Peter Thiel: Fraud runs at about 0.5% of our transactions. We have about 100 people working on our anti-fraud team, and have developed some start-of-the-art technology to identify and block suspicious transactions.
Peter, I'm wondering what lessons were learned from Cybercash, and what kind of groundwork it laid for the industry?
Peter Thiel: Cybercash was a great pioneer. The main lesson we learned from them was that you had to focus on consumer convenience, and somehow strike a balance with security. That's why we came up with the idea of email-based payments -- it made adoption a lot easier for new people.
Can the same person open multiple paypal accounts, each linked to a different email, but all linked to the same checking or credit cards on the back end? Or do you limit individuals to a single paypal account?
Peter Thiel: We limit individuals to a single PayPal account. But you can link multiple email addresses to that.
Hi and thanks for taking these questions. I'd like to know about Paypal's international operations.
How do you do currency exchanges; in how many countries does paypal work; and what are the future plans?
Peter Thiel: PayPal works in 42 countries outside the US, and we see international payments as a big growth area. We process the currency exchanges internally and charge a currency conversion fee (typically 1% to 3%). We want to increase the international functionality, and our next big step (over the next six months) will be to expand from a dollar-based system to a multi-currency system.
Severna Park, Md.:
What is the future of Amazon.com?
Peter Thiel: I think Amazon will be around for the long term. I think their quality and selection are great. [I'm less convinced that they're a great investment, though.]
Besides online auctions, what are the top purposes for which people are using paypal?
Peter Thiel: Lots of small web sites use us to sell goods, collect donations, etc. A little over half our payments are eBay-related; the rest are distributed over a very broad spectrum of uses.
Everyone agrees that secure online payments are vital to the growth of e-commerce. What kind of changes do you see for the industry, and what needs to happen to speed the implementation of your service and others?
Peter Thiel: I see a continued race between payment technology companies (like PayPal) and the Russian mafia (and other gangsters) that threaten the integrity of e-commerce.
At this point, our service is scaling at a dramatic clip, so we feel there is no need to accelerate that process. But we need to make sure that we strike the right balance between convenience and security -- so that all legitimate users can use our service and so that all the evil people trying to steal money by the wheelbarrow get stopped in their tracks.
Mr. Thiel, I was unfortunately victimed by a fraud seller in a yahoo auction last year. I wasn't a lot of money but I was really angry. The seller was a paypal user. Have you found a way or trying to find a way to prevent fraud besides having the users verified (which from the previous posting a lot of legitimate sellers/buyers do not like doing)?? Thanks!
Peter Thiel: We're doing a great deal more than we were doing one year ago. In particular, we've started to monitor much more closely new users and users whose patterns are changing suddenly.
If we can catch the fraud in time, we preemptively push the money back to the buyer, so that there's no need to deal with the hassle of a chargeback.
How can you handle the volume of problems and glitches that must arive in your novel payment system. Can you tell us how many staffers you have and in particular, how many work in customer service?
Peter Thiel: We have 600 employees, of whom about 450 work in customer service, operations, and fraud prevention.
I haven't heard much about Paypal's role in corporate transactions. I'm involved in a company that expects to do business with a client in Brussels, and would like to know how payments averaging several thousand dollars each would be handled. Also would our client in Brussels have to sign up, and what would be the cost?
Peter Thiel: We haven't focused a lot on the B-to-B payments market. It's our sense that you need a product which include some complex escrow and accounting functionality, and that that's just not our area of expertise. So we're not really focused on that at this time.
[In my humble opinion, nobody's come up with a good B-to-B payments product, because I think the minimum bundle of required services actually is extremely complex.]
Can you tell us more about your race against the Russian mafia and other organized fraudsters? You developed a software system dubbed "Igor" that helps you spot their activities on your site, right? Without giving away any trade secrets, what can you tell us you've noticed about how organized fraudsters try to game the online payment systems?
Peter Thiel: We got targetted big-time in the summer of 2000, and raced around the clock to develop some new technologies to stop them. The "Igor" system was named after one of the Russians who was trying to defraud the PayPal system.
Our anti-fraud technology works on two levels: First, we try to verify users on the way in; and second, we double-check people as they're taking money out. The more money people try to withdraw, the more closely we scrutinize the transactions. This second check is only possible because of the account-centric nature of the PayPal system.
How are banks reacting to PayPal. ARe many rolling out similar services? Also, do most charge their customers to move money from checking into paypal? thanks.
Peter Thiel: Citigroup has been the most competitive and has been promoting its c2it service aggressively over the last eight months. They've had limited traction to date, however; we believe that the security features in c2it are too onerous for most legitimate customers.
There should be no fee for moving money from checking into PayPal.
PayPal's innovation has helped create the online payments space. Why do you think the banks and credit card companies have been so slow to jump in?
Peter Thiel: Well, I'm not sure that they have been unusually slow. I prefer to think that PayPal -- and, by extension, our user community -- has been unusually fast. We launched the service on October 22, 1999; we hit 1 million users in April 2000 and expect to reach 10 million by early September 2001. To my knowledge, that's faster than any payment service has scaled in the history of the world.
San Francisco, CA:
I'm an entreprenuer and I've used PayPal in the past. What new features can I expect to see in the future?
Peter Thiel: We're always looking to our customer base for new ideas on how to extend our payment technology.
Over the last year, we've added international payments, debit/ATM cards (so that people can withdraw the funds within minutes of making a transaction), and credit cards.
Over the next six months, we're looking to add multi-currency (so that payments can be denominated in euros, yen, pounds, Canadian dollars, etc), bill payment (so you can pay your utility bills, phone bills, etc with PayPal), a client-side wallet (so you can use your PayPal debit card with larger ecommerce sites), and various shipping features (so that you can more easily track goods purchased through PayPal). We launch a new version of the site every 6-8 weeks.
Mr. Thiel, with the economic slowdown and the mounting .com failures, what do you think the long term effect is on e-business. I've been reading that investors are staying away from any company with a .com attached to it's company name. Do you think companies like yahoo who relies a lot on advertising will survive?
Peter Thiel: While I don't have a great global perspective, we do see the amount of volume conducted through the PayPal system ramping up at a very rapid clip. And it requires almost no marketing or advertising, as our 9.5 million user base itself promotes the product through its very use. [I agree with your comment on aesthetics, and that's one of the reasons we dropped the ".com" from the PayPal name six months ago.]
I think Yahoo will survive, but I think there's going to be a shift from advertising revenues to subscription payments for online content.
How difficult would it be to use software similar to PayPal and Napster to power an online jukebox?
Peter Thiel: PayPal launched a subscription payment service at the end of June, and it is targetted at supporting payments for all kinds of digital content, including an online jukebox.
Quite a few other e-mail and electronic payment systems have been slow catching on or failed. AFter C2it, who do you see as your top competitors now?
What's the competive landscape likely to look like in the future? Do you think Microsoft will enter this e-payments business?
Peter Thiel: eBay's in-house Billpoint service has been quite competitive -- although we continue to see users voting with their transactions and choosing PayPal. :)
Outside of that, however, there really aren't all that many strong competitors left (a lot of the copycat services were destroyed by the Russian mafia last year). Microsoft will provide at least a wallet-like functionality, but I'm not convinced they want to deal with the regulatory issues, the fraud risks, and the customer service load involved in actually handling other people's money.
If PayPal were to truly become a mass payment system, wouldn't it need to be regulated like the banking system? It worries me mightily that you're unregulated.
Peter Thiel: We are regulated in that we're subject to a whole host of securities and broker-dealer rules. The PayPal balances have the same level of protection as a money-market account held by Fidelity or Charles Schwab, even though none of these would count as a bank.
Hi Peter, thanks for participating today. Paypal has done a great job preventing fraud from shady merchants, etc, but what about the "buyer" that skirts the system? As a Paypal merchant we recently had a buyer buy something, dispute the charge with his CC company and then come back to us for a refund as well - before he disputed the charge. Paypal sided with the buyer - now we're out, twice and Paypal won't work with us, because it's the "buyer" you prefer to protect. Is there anyone at Paypal that will work with us? Thanks.
Peter Thiel: The best way to proceed is through our customer service center. We have a whole team of people trying to adjudicate buyer-seller disputes. I realize we don't always get things right, but we try to do the best we can to resolve these issues equitably on a case-by-case basis.
San Francisco, CA:
How is PayPal doing as far as international expansion? Do you have
plans to expand further into Asia?
I was also curious about how people in other countries receive paypal money presently. Are merchants outside the US able to use the system now in the same way as Americans?
Peter Thiel: Over time, we intend to expand the PayPal system to the entire world -- and thereby become a truly global, real-time payment system.
Outside the US, merchants in 42 countries can accept PayPal payments. In 7 countries (Canada, the UK, Germany, France, Netherland, Australia, and New Zealand) we will sweep the merchant's funds into the local banking system. We're working to increase that list on a country-by-country basis.
Mr. Thiel, a lot of people shy away from any online transactions because of identity theft by hackers on some of the sites (like the one last year who blackmailed the company into selling customer identification --sorry, forgot the company name). Have you had any problems with that and what's your policy on customer information database?
Peter Thiel: Our customer database is secured with military-strengh 128-bit encryption. We started as a security company, and indeed, Dr. Martin Hellman, a Stanford professor who invented public key encryption, was an early advisor to PayPal.
We believe that none of our customer data has ever been compromised.
Could you please give me a break-down
of your fee structure. How competitive is
Peter Thiel: 2.2% + $0.30 for merchants ($1000 a month or more in payment volume, low-risk, in the system for at least three months); and
2.9% + $0.30 for standard fees (just about everyone else).
For small to mid-sized businesses, I believe that we're less expensive than anybody else -- especially when you include the fixed monthly expenses (as much as $20/month) involved in direct card processing and when you include all the additional work needed to set up alternates to PayPal.
Overall, however, our main competitive focus is not on price, but on convenience.
Can we drill down more on the question of whether electronic payments should be regulated. The nation imposed a whole host of regulations after the bank fiascos of the Great Depression, and it's my impression PayPal flies outside most of those regulatory radars because it's such a novel money-transaction system.
Do you agree with any of the banking experts who have been saying there ought to be some new regulations promulgated for electronic payments? And for the record, what kind of insurance is there on PayPal's customer accounts?
Peter Thiel: We offer a private reinsurance policy through Travellers', on up to $100,000 of the funds in customer accounts.
Our customer money is segregated from the company's funds, and already is subject to all the regulation that money-market funds (like Fidelity) are subject to. In addition, we need to comply with a whole host of anti-money laundering laws, and various state money transfer rules.
I do not believe that PayPal should be regulated as a bank. We do not engage in lending customer monies to high-risk customers (banks lending money to stock market speculators in the 1920's, or to real estate developers in the 1980's) and therefore are in a completely different category from the financial institutions that got into trouble in the past and that motivated today's regulatory regime.
Are you planning an IPO and if so, when?
Peter Thiel: That's the sort of thing I'm not allowed to talk about. As a CEO, right now I'm focused on driving PayPal towards profitabilty (which I expect to achieve by the end of 2001).
We are running out of time, folks.
I asked a group of my co-workers to pay me for a recent dinner via pay pal. I was shocked to discover I had to upgrade to a business account and pay you a fee to accept the $125 or so worth of payments.
When did you drop the limit for free personal accounts so low--$100--and why?
Peter Thiel: We created the $100 limit about six months ago, but it only applies to credit-card funded transactions.
On all credit-card transactions, PayPal functions as the merchant of record and needs to pay interchange fees (about 2% + $0.20). As a result, we would lose a lot of money if we subsidized credit card payments for our customers and didn't pass these fees through to them.
What's your biggest worry about PayPal?
Peter Thiel: No single issue, but there's a great deal of complexity in coordinating the product, anti-fraud, customer service, and operational pieces of the business. PayPal needs to make sure all these diverse parts are well synchronized, so that we can continue to provide our customers with the best service possible.
What I'm trying to get at is how Mastercard, Visa and other credit card companies view PayPal. Do they consider PayPal the merchant of record when I make a payment through you? In which case I don't have much recourse against the actual merchant in a disputed transaction?
Peter Thiel: PayPal is considered the merchant of record, and you can always initiate a chargeback against PayPal. As a result, PayPal will have to then find a way to recover funds from the actual merchant who defrauded you.
You said earlier that PayPal hasn't focused on the B-to-B market. You said that the minimum bundle of services is extremely complex. What do you mean?
Could we handle transactions of perhaps $2,000-10,000 payed by a client in Brussels?
Peter Thiel: We can handle payments up to $10,000. Given our fee structure (2.2% +$0.30), however, we might not be the cheapest solution for that large a dollar amount.
That's it for now.
Peter Thiel: Wow, this has been a great deal of fun -- there have been a lot of really incisive questions.
In leaving, the one message I'd want to underscore is that PayPal is a grass-roots driven company; we need to stay in touch with our users and we need to continue to provide them with the best payment service possible. So if you have suggestions or requirements, please contact us at firstname.lastname@example.org; and if you have complaints, please contact us at email@example.com.
That's all we have time for today, folks. Thanks so much to Peter Thiel for taking time to answering so many questions. Sorry we couldn't get to them all today, but we'll try to get him back again -- after he defeats the Russian Mafia!
Hope to see many of you again next week.
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