PayPal makes money primarily by processing customer transactions on the Payments Platform and from other value-added services. Thus, the revenues streams are divided into transaction revenues based on the volume of activity or total payments volume. And value-added services, such as interest and fees earned on loans and interest receivable. As of 2020 PayPal generated over $21.5 billion in net revenues with a 25% operating margin.
- Who owns PayPal?
- PayPal origin story
- The rise of the PayPal Mafia
- The PayPal Mafia phenomenon
- Jawed Karim (Youniversity Ventures)
- Jeremy Stoppelman (founded Yelp with Russel Simmons)
- Andrew McCormack (partner at venture capital firm Valar Ventures)
- Premal Shah (non-profit organization Kiva)
- Luke Nosek (Founders Firm)
- Ken Howery (VP at Clarium Capital)
- David Sacks (produced “Thank You for Smoking”)
- Peter Thiel (created hedge fund Clarium Capital and The Founders Firm)
- Keith Rabois (held senior positions at LinkedIn, Slide)
- Reid Hoffman (LinkedIn)
- Max Levchin (Slide. Google bought it for $182 million in 2010)
- Roelof Botha (Sequoia Capital)
- Russel Simmons (Yelp)
- Elon Musk (Tesla, SpaceX)
- The PayPal Mafia phenomenon
- The PayPal acquisition by eBay
- PayPal business model dissected
- PayPal Growth Strategy Explained
- Revenue streams
- If you don’t measure it, you can’t improve it: PayPal key metrics to measure its business success
- Strategic partnerships
- Seeking new areas of growth
- What is the PayPal value proposition?
- Two-sided Platform
- A quick glance at PayPal financials
- PayPal in numbers
- PayPal ESG Strategy
- PayPal business model explained in an infographic
- Key takeaways
- Connected Fintech Business Models
- Related to PayPal Story
- How does PayPal make its profits?
- How does PayPal make money if it's free?
- What is PayPal's biggest competitor?
Who owns PayPal?
Before we dive into the PayPal business models, it is important to notice that as of the time of this writing PayPal is a sub-organization of eBay, purchased for $1.5 billion in 2002.
The deal was sealed just a few months after PayPal went public. In fact, at the time eBay customers made up up the bulk of PayPal’s users.
As reported on cnet.com “63 percent of dollar volume for transactions in the first nine months of 2001 came from settling auction purchases, particularly on eBay.“
It is interesting to dive a bit into PayPal origin story, as it uncovers some critical strategic insights on its early growth and users acquisition, until its deal with eBay.
PayPal origin story
PayPal founded in 1998 by a company called Confinity. In fact, just in 1999 PayPal was launched as a money transfer system.
At the time Confinity had a fierce competitor, called X.com. This was a company founded by Elon Musk (yes that Musk!). The companies rather than compete with each other, they just merged to take over the payment industry.
Once the company merged, they could finally focus on the commercial strategy. Rather than boiling the ocean, PayPal started with a small niche at the time, until they monopolized it and grew further.Little business strategy note: If you’re familiar with Peter Thiel’s book Zero to One, he explains how the business world is about monopolies rather than competition. In fact, if you attended even for a day business school, you might have learned about the myth of market competition and how this is what makes capitalism work. In reality, how Peter Thiel pointed out capitalism is way more about monopolizing a market to grab most of its profits. In fact, in a situation of perfect competition, margins are so thin that companies can go easily go bankrupt. The real market dominator is the one that takes it all. Thus, the reason why many are not aware of this can be attributed to the fact that monopolies reframe their market position to hide the fact that they control a particular market. They do it because this is the secret that makes them successful. The moment when regulators and market players will find out about a monopoly they’ll try to bring it down.
PayPal’s first growth hack: The bot that gave the company a bit of traction
A little caveat: the story of this paragraph was inspired from the book “The PayPal Wars” a self-published book, based on account of a marketing employee at PayPal. Take this story as a reference, not as history as the account of the author might bias it.
The merger that brought together PayPal and X.com
As reported by Julie Anderson on Quora:
After the merger everyone tried to play nicely together at first, but – as has been widely chronicled from various perspectives – it took just a few months before the differences in opinion turned ugly. Elon took a vacation that year and I’ve always hated that I didn’t realize they were going to oust him as CEO in time; he called that day from somewhere in Africa and asked “How bad is it?” and I said “Not that bad. I think it’s going to be okay.” Middle of the night I sat straight up in bed and headed back to the office; the lights were blazing and everyone was there. It was done by morning, the company became known as PayPal, and that was that.
Whether or not the merger was painful and whether or not it created conflicts it also brought together a group of very smart people, the so-called PayPal Mafia.
The rise of the PayPal Mafia
You might not see PayPal’s business model as the most interesting one. Yet, the story of PayPal is compelling as this is the place where the so-called PayPal mafia was born.
This group of talented individuals would create among the most valued companies in the Silicon Valley. Let’s start with the deal that made this possible.
The PayPal Mafia phenomenon
Source: telegraph.co.ukA group of people that were called PayPal Mafia after the eBay deal went on to create many prominent start-ups that would contribute in the later years to the Silicon Valley scene:
Jawed Karim (Youniversity Ventures)AtPayPal, Jawed Karim was in charge for the company’s real-time anti-fraud system.Once he left PayPal, by 2008, he founded Youniversity Ventures with early PayPal investors Kevin Hartz and Keith Rabols. A company targeting students and graduates to implement viablebusiness ideas.
Jeremy Stoppelman (founded Yelp with Russel Simmons)Jeremy Stoppelman was one of the early executives at PayPal, first, as an engineer (when PayPal still didn’t change its name from X.com). He eventually became Vice President of Engineering.After leaing PayPal he founded Yelp, together with Russel Simmons.
Andrew McCormack (partner at venture capital firm Valar Ventures)Andrew McCormack was Peter Thiel’s assistant, as Peter Thiel became CEO of the company, succeeding Elon Musk. As he left PayPal he assisted Pether Thiel in funding various venture capital funds afterward. Until co-founded Valar Ventures, in 2010. A private equity firm backed by Peter Thiel “focused on startups outside of Silicon Valley.”
Premal Shah (non-profit organization Kiva)Premal Shah was among the initial executive team and he was principal product manager at PayPal. He then founded Kiva, a non-profit organization “on a mission to expand financial access to help underserved communities thrive.”
Luke Nosek (Founders Firm)Among the PayPal’s co-founder, Luke Nosek was in charge of VP, business development, marketing and strategy at PayPal. After leaving the company he co-founded The Founders Fund, Pether Thiel’s venture capital fund, which invested in many startups turned multi-billion dollars companies.
Ken Howery (VP at Clarium Capital)Ken Howery, after being co-founder and CFO of PayPal, joined eBay as Director of Corporate Development. Later on, he co-founded The Founders Fund together with Peter Thiel, until 2019, when by September 2019, he joined the U.S. Department of State, as U.S. Ambassador to the Kingdom of Sweden.
David Sacks (produced “Thank You for Smoking”)David Sacks joined PayPal in 1999 from McKinsey & Company.He would become a successful angel investor in technology companies involved in the industry for two decades with investments suchAirbnb,Eventbrite,Opendoor,Postmates, Scribd,Slack, andUber.
Peter Thiel (created hedge fund Clarium Capital and The Founders Firm)Referred as the “Don” of thePayPalMafia, he co-foundedPayPal, and led it to the merge with Elon Musk’s company X.comBeyond Clarium Capital, he also co-founded The Founders Fund and Palantir, an enterprise software company working with the United States Government, military, intelligence, and police.
Keith Rabois (held senior positions at LinkedIn, Slide)After being Executive Vice President at PayPal, he held several positions, from Vice President, Business & Corporate Development at LinkedIn, to Until joining Founders Fund as General Partner in 2019.
Reid Hoffman (LinkedIn)Reid Hoffman also played a key role within PayPal, later on co-founding LinkedIn, which sold to Microsoft. He is the author of Blitzscaling. After being He also served as board member in many startups, and sat as borad member in Microsoft since 2017, as the company acquired LinkedIn.
Max Levchin (Slide. Google bought it for $182 million in 2010)After PayPal, Max Levchin worked on many interesting business projects (among which he was VP of Engineering at Google between 2010-11). Until he founded Affirm, back in 2012, a major fintech company.
Roelof Botha (Sequoia Capital)He was PayPal CFO between 2000-2003, then he joined various startups as board members, as a Sequoia Capital Partner since 2003.
Russel Simmons (Yelp)He was reimagining the experience of learning. Breaking from traditional models of education, we buildstreamlinedproducts for students toexplorethe subjects of theircuriosity.” PayPal Mafia. His entrepreneurial story after PayPal, saw the investments in Tesla, the creation of SpaceX, and later on Neuralink and The Boring Company.
The PayPal acquisition by eBayFinally in 2001, after a few months from PayPal IPO, eBay decided to buy the payment company. We don’t know the “real reasons” for eBay to acquire PayPal.It seems though that at the time most PayPal users were coming from eBay. As reported by a release on July 2002:
The agreement also should benefit eBay shareholders. The combination of the two networks should expand both platforms while minimizing shared operational costs. Strengthening the marketplace and realizing the efficiencies made possible by the acquisition will increase the value of both businesses.In other words, on the one hand, eBay users were already accustomed to PayPal. On the other hand, PayPal could allow eBay to tap into a new audience as reported in the same press release:
PayPal, which will continue to operate as an independent brand, is a leading online payments solution. Approximately 60% of PayPal’s business takes place on eBay, making it the most preferred electronic payment method among eBay users. The remaining 40% occurs primarily among small merchants who constitute a potential new audience for eBay. Likewise, eBay’s community of 46 million users worldwide represents a growth opportunity for PayPal. eBay’s current payment service, eBay Payments by Billpoint, will be phased out after the close of the transaction.It is important to notice here that the acquisition of Billpoint that was to meant to allow eBay to have its own transactions system to speed up payments and enable fraud prevention was not successful.As it failed, this might also have been a critical reason for eBay to purchase PayPal at that price.
PayPal business model dissectedWe’re going to see the ecosystem the company was able to build throughout the years via acquisitions and international expansion. We’ll also look at the overall business model.
PayPal Network Effects ExplainedPayPal network effects, or competitive moats are based on a few key strenghts. As the company highlights from its financials:
- Two-sided network—PayPal offers an end-to-end product experiences while gaining valuable insights into customer behavior.
- Scale, the company has been growing organically for years. As of 2020, it had 377 million active accounts, of which 348 million consumer active accounts and 29 million merchant active accounts.
- Brands—PayPal comprises a galaxy of fintech brands spanning from PayPal as core product, Braintree, Venmo, Xoom, Hyperwallet, iZettle, and Honey.
- Risk and Compliance Management—the core platform uses built-in tokenization to keep customer information secure, and to help ensure we process legitimate transactions around the world, while identifying and minimizing illegal, high-risk, or fraudulent transactions.
- Regulatory—over the years the company has been building a portfolio of regulatory licenses, which enable it to operate in markets around the world. This is a key competitive moat for companies operating in the financial field, as without licenses it’s not possible to operate in may juristiciton. And it does play as a disincentive for new players, as it might take massive investments in time and financial resources to gain these licenses.
PayPal Customer Segments, Key Partners and Value PropositionsPayPal serves two main segments/key partners:
- And Consumers.
Merchant Value PropositionAs PayPal highlights in its financials, the key elements that make up its offering for merchants is to help:
Grow and expand their businesses by providing global reach and powering all aspects of digital checkout. We offer alternative payment methods, including access to credit solutions, provide fraud prevention and risk management solutions, reduce losses through proprietary protection programs, and offer tools and insights for leveraging data analytics to attract new customers and improve sales conversion
Cuustomer Value PropositionFor customers, some of the key values offered comprise:
Providing affordable consumer products intended to democratize the management and movement of money. We provide consumers with a digital wallet that enables them to send payments to merchants more safely using a variety of funding sources, which may include a bank account, a PayPal Cash or Cash Plus account balance, a Venmo account balance, our consumer credit products, a credit card, debit card, or other stored value products such as coupons, gift cards, and eligible credit card rewards.
The PayPal family: the galaxy of payment systems and apps around PayPalPayPal, as part of eBay over the years, has created an ecosystem of payments that comprise platforms and mobile gateways that allow it to penetrate several markets. Around PayPal there are other four primary brands:
What is Braintree?
Source: crunchbase.comIn 2013 Braintree, a company that allows acceptance and processing of payments got acquired by PayPal in 2013. This was an all-cash deal of $800 million, and as reported by Tech Crunch after the acquisition, eBay Inc. President and CEO John Donahoe said: “Bill Ready [CEO of Braintree] and his team add complementary talent and technology that we believe will help accelerate PayPal’s global leadership in mobile payments.“
What is Venmo?Venmo has become so prominent among millennials that it has become a verb (“venmo me money”):When your brand name becomes a verb (just like “Google it”) that company might be on the right path to success. Braintree acquired Venmo in 2012:
Source: crunchbase.comThus, before Braintree would become part of PayPal, it acquired Venmo, an app that allows users to share and make payments with friends for a variety of services. The social aspect of this app is critical, and it is also what makes Venmo so successful among millennials.
What is Paydiant?The Paydiant Platform is a white label mobile wallet solution. Thus, it provides solutions for merchants and banks, as well as for resellers and distributors, and point-of-sale and ATM providers. In short, they can deploy branded mobile wallet apps that work at the point of purchase at retail, restaurant, fuel site, cash access atm, and other in-person locations.
What is Xoom?Xoom is a PayPal service that provides worldwide money transfers. It allows consumers to send money, pay bills and reload mobile phones from the United States to 52 countries. As pointed out by PCmag “Xoom lets you send money to recipients in 66 different countries, as well as top up cell plans and pay utilities abroad. It’s a convenient and well-designed service, though its rates are less favorable than some of the competition.“
PayPal Growth Strategy ExplainedAs PayPal highlights, the growth strategy moves along four main areas:
- Growing the core business: by expanding global capabilities, customer base and scale, increasing customers’ use of products and services by better addressing everyday needs related to accessing, managing, and moving money, and expanding the adoption of solutions by merchants and consumers;
- Expanding the value proposition for merchants and consumers: by being technology and platform agnostic, partnering with merchants to grow and expand their business online and in-store, and providing consumers with simple, secure, and flexible ways to manage and move money across different markets, merchants, and platforms;
- Forming strategic partnerships: by building new strategic partnerships to provide better experiences for customers, offering greater choice and flexibility, acquiring new customers, and reinforcing role in the payments ecosystem;
- Seeking new areas of growth: organically and through acquisitions and strategic investments in existing and new international markets around the world and focusing on innovation both in the digital and physical world.
- Transaction revenues: Net transaction fees charged to consumers and merchants primarily based on the volume of activity, or Total Payments Volume
- Other value-added services:Net revenues derived principally from interest and fees earned on loans and interest receivable
Transaction revenues grew more slowly than both TPV and number of payment transactions in 2017 due primarily to a higher proportion of person-to-person (“P2P”) transactions, primarily from our PayPal and Venmo products from which we earn lower rates and foreign exchange hedging losses. The percentage growth in transaction revenues was lower than the percentage growth in TPV and payment transactions in 2016 primarily due to a higher proportion of P2P transactions (including our Venmo products) for which we earn lower rates, and a higher portion of TPV generated by large merchants who generally pay lower rates with higher transaction volume. The impact of increases or decreases in prices charged to our customers did not significantly impact transaction revenue growth in 2017 or 2016 .
If you don’t measure it, you can’t improve it: PayPal key metrics to measure its business successAs Peter Drucker would put it, “if you can’t measure it, you can’t improve it.”This principle applies to any business model. In a way, the metrics a business picks up to measure its success as a business are also indicative of its culture and values that it tries to create. Of course, financial metrics have to be easy to measure.Which in some ways allow them to be very actionable. On the other hand, a business model will have several kinds of metrics that might in part be disjoined from the bottom line. In PayPal’s cases we have a few KPIs (key performance metrics):
- Active customers accounts
- Payment transactions
- Total payment volume
Source: 2017 PayPal 10K
What are active customer accounts?
An active customer account is a registered account that successfully sent or received at least one payment or payment reversal through our Payments Platform, excluding transactions processed through our gateway and Paydiant products, in the past 12 months.This is the definition of active customer account given by PayPal. As of 2017 PayPal had 227 million active customer accounts, a 16% growth compared to 2016.
What is the number of payment transactions?
Number of payment transactions is defined as the total number of payments, net of payment reversals, successfully completed through our Payments Platform, excluding transactions processed through our gateway and Paydiant products.As of 2017, 7.6 billion payment transactions went through PayPal, up of 26% compared to 2016.
What is TPV?
The total payment volume was $451 billion, up of 27% compared to 2016.TPV is the value of payments, net of payment reversals, successfully completed through our Payments Platform, excluding transactions processed through our gateway and Paydiant products
Strategic partnershipsFor PayPal success it is crucial the company keeps building new strategic partnerships to provide better experiences to customers, offering greater choice and flexibility. In short, the value of PayPal is given by the strength of the ecosystem it creates.
Seeking new areas of growthPayPal growth is also part of the long-term plan. The growth can be driven by international markets expansion and innovation in the digital technology landscape.
What is the PayPal value proposition?As highlighted in the annual report PayPal focuses on trust and simplicity, providing risk management and insights from our two-sided Payments Platform and being technology and platform agnostic.
Two-sided PlatformPayPal is a classic example of a two-sided platform. The platform connects merchants and consumers. Thus, it gains valuable insights into customer behavior through data. The aim is to keep the platform both brand and technology agnostic. This aspect is critical as it leverages on trust.
BrandingBranding is a critical building block of PayPal overall strategy. In fact, over the years the company has been able to build a trusted brand. There’s no transaction without trust and PayPal is at this stage a globally recognized brand.
CompetitionThe competitive landscape shows several challenges:
- retain and engage both merchants and consumers part of the two-sided platform;
- show merchants incremental sales via end-to-end services;
- safety and security of transactions
- the simplicity of fee structure;
- ability to develop products and services across multiple commerce channels
- trust in dispute resolution and buyer and seller protection programs;
- customer service;
- brand recognition and preference;
- the website, mobile platform and application onboarding, ease-of-use, speed, availability, and dependability;
- the technology and payment agnostic nature of Payments Platform;
- system reliability and data security;
- ease and quality of integration into third-party mobile applications and operating systems;
- quality of developer tools
- other vital challenges are related to the regulatory landscape:
A quick glance at PayPal financialsIn 2017 the company recorded over $13 billion in revenues and almost $1,8 billion in net income.Total operating expenses increased by $1.7 billion, or 18 %, in 2017 and $1.5 billion or 19% in 2016. Operating income increased $541 million, or 34%, in 2017 and $125 million, or 9% in 2016. Net income increased by $394 million, or 28%, in 2017 and $173 million, or 14%, in 2016.
PayPal in numbersSource: PayPal FinancialsPayPal generated over $21.5 billion in 2020, with a 25% operating margin, 377 million active accounts (up 24% from 2019), 40.9 payment transacitons per active account. And a total payment volumne of $936 billion.
PayPal ESG StrategySource: PayPal Financials
PayPal business model explained in an infographic
Key takeawaysPayPal started out as a service launched by Confinity, and it eventually became a service offered by the merger between Confinity and X.com.The team behind the initial traction phase and before PayPal arrived at the deal with eBay comprised brilliant people, the so-called PayPal Mafia. Many former PayPal employees would take part in the development of a new startup that became critical in the Silicon Valley landscape.After the deal with eBay, PayPal has grown to become a giant that comprises other companies like Braintree and Venmo. Today PayPal is a two-sided platform which success depends on its ability to cope with the competitive and regulatory landscape.
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How does PayPal make its profits?
PayPal makes money primarily by processing customer transactions. Therefore most of its money comes from transactions revenues. As of 2020 PayPal generated over $21.5 billion in net revenues with a 25% operating margin.
How does PayPal make money if it's free?
PayPal is a free service, but it makes money via transaction revenues. Indeed, as the company offers an end-to-end transaction platform when transactions go through the company collects a fee on top of each transaction.
What is PayPal's biggest competitor?
PayPal competitors are those offering end-to-end payment services for either consumers or merchants. Among these competitors, we have Google with Google Pay, Square with Cash App, and Apple with Apple Pay.