PayPal makes money primarily by processing customer transactions on the Payments Platform and from other value-added services. Thus, the revenue 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. In 2022, PayPal generated over $27.5 billion in revenues and over $2.4 billion in net profits.
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.
That was the deal that made rich people like Peter Thiel, Elon Musk, and Reid Hoffman, which respectively founded companies like Founders Fund, Tesla, and LinkedIn.
The deal was sealed just a few months after PayPal went public. In fact, at the time, eBay customers made 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 user acquisition until its deal with eBay.
Table of Contents
PayPal origin story
PayPal was born as the merger of two early Internet startups, Confinity (founded by Max Levchin and Peter Thiel) and X.com (founded by Elon Musk). Both companies stumbled on a commercial killer feature (enabling Internet payments via email) and ended up being extremely useful on a nascent auction platform: eBay. From the merger of these companies, PayPal was born. And it wrote the Internet business playbook for startups.
You can listen to the whole History of PayPal based on our episode of the Digital Business Models Podcast, with an incredible interview with Jimmy Soni, author of the book: The Founders. This is an incredible research and account of PayPal in its early years and how it built a business playbook as an early Internet startup.
PayPal was 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 competing with each other, just merged to take over the payment industry.
Once the company merged, it 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
In his book “The PayPal Wars” Eric M. Jackson, part of the so-called PayPal mafia (the group of people that would be part of PayPal before its acquisition by eBay) were looking for a way to grow their users’ base, fast.
PayPal management understood they had to acquire users, quickly on an already established platform. At the time they identified eBay as the place where “power users” would help PayPal scale up.
There was an issue though. They were trying to use a classic growth hacking strategy, called OPN (others’ people network). In other words, when you start a venture and can’t leverage yet on your branding (it’ll take years), you need a faster route.
One way is to leverage on distribution agreements with large platforms. However, it’s very hard at the beginning to close any of those deals. Why? For several reasons. First, as your start-up is still small, you don’t have yet anything to offer to the distributor.
Second, a distribution agreement requires at times a certain level of organizational structure to handle the deal, which a start-up might not have. Third, and most important. A large corporation like eBay at the time has a strong brand.
This is an asset but also a liability. In short, getting into a distribution agreement with a start-up that is now yet “known” would represent a too high risk to bear for the established companies.
As PayPal could not leverage on a distribution agreement with eBay, it had to find a “growth hack” to scale up. In short, an unofficial way to use eBay to grow their users’ base.
At the time eBay had purchased a startup, named Billpoint, to make the transactions on the website smooth.
However, also covering the transactions side of the site for eBay was still too risky, as fraud detection was a primary concern. As Eric M. Jackson explains in “The PayPal Wars” this was too much of a concern for eBay as a listed company.
This, in turn, gave PayPal time to come up with a strategy before Billpoint could be rolled out.
The strategy was meant to wipe out competition and take over the payment market. At that point, one idea came to mind, which was to enter in as many actions as possible and then convince the other part of the transaction to use PayPal as payment.
This strategy would be expensive but a good marketing acquisition tactic. How to scale this up? One option was to hire a web farm in Asia. Or, employ a bot (a computer program) that would look for specific auctions and bid on them.
In the end, they went with the bot, on charity auctions with the aim of exposing PayPal to as many eBay users as possible. The bot together with other marketing and product initiatives brought PayPal to over 10,000 users per day.
Growth picked up yet the competitive landscape was still very challenging, with companies, like X.com that were threatening PayPal existence.
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.
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.
A 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.
Some of the companies in which The Founders’ Fund has invested in, through the years.
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.
Palantir is a software company offering intelligence services from governments and institutions to large commercial organizations. The company’s two main platforms Gotham and Foundry, are integrated at enterprise-level. Its business model follows three phases: Acquire, Expand, and Scale. The company bears the pilot costs in the acquire and expand phases, and it runs at a loss. Where in the scale phase, the customers’ contribution margins become positive.
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 Executive Vice President, Strategy & Business Development, at Slide, and COO at Square. 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 Executive Vice-President at PayPal he was CEO and Chairman at LinkedIn between 2003-2007. Executive Vice-PresidentHe also served as board member in many startups, and sat as borad member in Microsoft since 2017, as the company acquired LinkedIn.
Since 2009 he is partner at Greylock. A venture capital firm parnering “early with consumer, enterprise, and crypto entrepreneurs.” With a “mission to help realize rare potential.”In practical terms, the firm has invested in many consumer and enterprise startups turned into large tech companies.
Jan 2000 – Oct 2002 · 2 yrs 10 mos
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.
Started as a pay-later solution integrated to merchants’ checkouts, Affirm makes money from merchants’ fees as consumers pick up the pay-later solution. Affirm also makes money through interests earned from the consumer loans, when those are repurchased from the originating bank. In 2020 Affirm made 50% of its revenues from merchants’ fees, about 37% from interests, and the remaining from virtual cards and servicing fees.
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 Lead Software Architect at PayPal. After that he co-founded Yelp together with the other PayPal Mafia member Jeremy Stoppelman between 2004-2010. In 2011 he founded Learnirvana, who as the company claims is “reimagining the experience of learning. Breaking from traditional models of education, we buildstreamlinedproducts for students toexplorethe subjects of theircuriosity.”
Elon Musk is among the most emblematic from the PayPal Mafia. His entrepreneurial story after PayPal, saw the investments in Tesla, the creation of SpaceX, and later on Neuralink and The Boring Company.
Elon Musk, seen as one of the most visionary tech entrepreneurs from the Silicon Valley scene, started his “career” as an entrepreneur at an early age. After selling his first startup, Zip2, in 1999, he made $22 million, which he used to found X.com, which would later become PayPal, and sell for over a billion to eBay (Musk made $180 million from the deal). He founded other companies like Tesla (he didn’t start it but became a major investor in the early years) and SpaceX. Tesla started as an electric sports car niche player, eventually turned into a mass manufacturing electric car maker.
Finally 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 dissected
We’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 Explained
PayPal 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 Propositions
PayPal serves two main segments/key partners:
Merchants.
And Consumers.
Merchant Value Proposition
As 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 Proposition
For 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 PayPal
PayPal, 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:
In 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.com
Thus, 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 Explained
As PayPal highlights, the growthstrategy 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.
Revenue streams
PayPal revenue streams are classified into the following two categories:
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
If you don’t measure it, you can’t improve it: PayPal key metrics to measure its business success
As 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: PayPal Financials
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 2021 PayPal added 48.9 million new accounts.
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.
What is TPV?
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
The total payment volume passed a trillion-dollar in 2021, reaching $1.25 trillion in the same year!
Strategic partnerships
For 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.
Example of the DoorDash PayPal integration, as a key partnership in 2021.
Seeking new areas of growth
PayPal 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 Platform
A two-sided marketplace is a platform business that connects two primary groups as it enables them to interact and transact within the platform. As an intermediary working to enable frictionless interactions and transactions on the platform, it will usually work as a government collecting a “tax” on both groups on the platform.
PayPal 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.
Branding
Branding 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.
Competition
The 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:
PayPal in numbers
Source: 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 Strategy
Source: PayPal Financials
PayPal business model explained in an infographic
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.
Key takeaways
PayPal 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 participate in developing a new startup that became critical in the Silicon Valley landscape.
After the deal with eBay, PayPal became a giant comprising other companies like Braintree and Venmo.
Today PayPal is a two-sided platform whose success depends on its ability to cope with the competitive and regulatory landscape.
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.
PayPal makes money primarily by processing customer transactions on the Payments Platform and from other value-added services. Thus, the revenue 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. In 2022, PayPal generated over $27.5 billion in revenues and over $2.4 billion in net profits.
PayPal is a two-sided marketplace which collects a transaction fee for each payment that happens via the platform. PayPal’s flywheel is based on creating a stronger and stronger network, where the company provides a suite of services to merchants, and consumers are given affordable digital payment solutions. In 2022, PayPal processed over $1.35 trillion in global payments.
PayPal processed $1.36 trillion in payment volume in 2022, compared to $1.25 trillion in 2021—a growth of 9% year over year. In 2020, PayPal passed a trillion-dollar in payment volume, with $936 billion processed via the platform.
In 2022, PayPal generated over $27.5 billion in revenue compared to over $2.4 billion in profits. Compared to over $25 billion in revenue and over $4.1 billion in revenue in 2021.
In 2022, of over $27.5 billion in revenue, over $25.2 billion came from transaction revenues. Thus, transaction revenue represented 91.6% of total revenue, while revenues from other value-added services (primarily comprising revenue earned through partnerships, interest and fees from merchants and consumer credit products, interest earned on certain assets underlying customer balances, referral fees, subscription fees, and gateway services) were over $2.3 billion, representing about 8.4% of PayPal’s total revenue.
The PayPal Mafia describes a group of former PayPal employees and founders who have since become involved with other tech companies. While most know SpaceX founder Elon Musk’s association with PayPal, the company also has links with YouTube, LinkedIn, and Yelp, among many others. In addition to founding these generation-defining companies, the members of the PayPal Mafia are some of the richest men in Silicon Valley.
Acorns is a fintech platform providing services related to Robo-investing and micro-investing. The company makes money primarily through three subscription tiers: Lite – ($1/month), which gives users access to Acorns Invest, Personal ($3/month) that includes Invest plus the Later (retirement) and Spend (personal checking account) suite of products, Family ($5/month) with features from both the Lite and Personal plans with the addition of Early.
Started as a pay-later solution integrated to merchants’ checkouts, Affirm makes money from merchants’ fees as consumers pick up the pay-later solution. Affirm also makes money through interests earned from the consumer loans, when those are repurchased from the originating bank. In 2020 Affirm made 50% of its revenues from merchants’ fees, about 37% from interests, and the remaining from virtual cards and servicing fees.
Alipay is a Chinese mobile and online payment platform created in 2004 by entrepreneur Jack Ma as the payment arm of Taobao, a major Chinese eCommerce site. Alipay, therefore, is the B2C component of Alibaba Group. Alipay makes money via escrows transaction fees, a range of value-added ancillary services, and through its Credit Pay Instalment fees.
Betterment is an American financial advisory company founded in 2008 by MBA graduate Jon Stein and lawyer Eli Broverman. Betterment makes money via investment plans, financial advice packages, betterment for advisors, betterment for business, cash reserve, and checking accounts.
Braintree
Venmo is a peer-to-peer payments app enabling users to share and make payments with friends for a variety of services. The service is free, but a 3% fee applies to credit cards. Venmo also launched a debit card in partnership with Mastercard. Venmo got acquired in 2012 by Braintree, and Braintree got acquired in 2013 by PayPal.
Chime is an American neobank (internet-only bank) company, providing fee-free financial services through its mobile banking app, thus providing personal finance services free of charge while making the majority of its money via interchange fees (paid by merchants when consumers use their debit cards) and ATM fees.
Coinbase is among the most popular platforms for trading and storing crypto-assets, whose mission is “to create an open financial system for the world” by enabling customers to trade cryptocurrencies. Its platform serves both as a search and discovery engine for crypto assets. The company makes money primarily through fees earned for the transactions processed through the platform, custodial services offered, interest, and subscriptions.
Compass is a licensed American real-estate broker incorporating online real estate technology as a marketing medium. The company makes money via sales commissions (collected whenever a sale is facilitated or tenants are found for a rental property) and bridge loans (a service allowing the seller to purchase a home before the revenue from the sale of their previous home is available).
Dosh is a Fintech platform that enables automatic cash backs for consumers. Its business model connects major card providers with online and offline local businesses to develop automatic cash back programs. The company makes money by earning an affiliate commission on each eligible sale from consumers.
E-Trade is a trading platform, allowing investors to trade common and preferred stocks, exchange-traded funds (ETFs), options, bonds, mutual funds, and futures contracts, acquired by Morgan Stanley in 2020 for $13 billion. E-Trade makes money through interest income, order flow, margin interests, options, future and bonds trading, and through other fees and service charges.
Klarna is a financial technology company allowing consumers to shop with a temporary Visa card. Thus it then performs a soft credit check and pays the merchant. Klarna makes money by charging merchants. Klarna also earns a percentage of interchange fees as a commission and for interests earned on customers’ accounts.
Lemonade is an insurance tech company using behavioral economics and artificial intelligence to process claims efficiently. The company leverages technology to streamline onboarding customers while also applying a financialmodel to reduce conflicts of interest with customers (perhaps by donating the variable premiums to charity). The company makes money by selling its core insurance products, and via its tech platform, it tries to enhance its sales.
Monzo is an English neobank offering a mobile app and a prepaid debit card for consumers and businesses. It was one of the first app-based banks to enter the UK market, founded by Gary Dolman, Jason Bates, Jonas Huckestein, Paul Rippon, and Tom Blomfield in 2015. All were employees of Starling Bank, a similar neobank challenging the dominance of established financial institutions in England. The company enjoys many revenue streams: business and consumer subscriptions, interchange and overdraft fees, personal loans, and more.
NerdWallet is an online platform providing tools and tips on all matters related to personal finance. The company gained traction as a simple web application comparing credit cards. NerdWallet makes money via affiliate commissions determined according to the affiliate agreements.
Quadpay was an American fintech company founded by Adam Ezra and Brad Lindenberg in 2017. Ezra and Lindenberg witnessed the rising popularity of buy-now-pay-later service Afterpay in Australia and similar service Klarna in Europe. Quadpay collects a range of fees from both the merchant and the consumer via merchandise fees, convenience fees, late payment, and interchange fees.
Revolut an English fintech company offering banking and investment services to consumers. Founded in 2015 by Nikolay Storonsky and Vlad Yatsenko, the company initially produced a low-rate travel card. Storonsky in particular was an avid traveler who became tired of spending hundreds of pounds on currency exchange and foreign transaction fees. The Revolut app and core banking account are free to use. Instead, money is made through a combination of subscription fees, transaction fees, perks, and ancillary services.
Robinhood is an app that helps to invest in stocks, ETFs, options, and cryptocurrencies, all commission-free. Robinhood earns money by offering: Robinhood Gold, a margin trading service, which starts at $6 a month, earn interests from customer cash and stocks, and rebates from market makers and trading venues.
SoFi is an online lending platform that provides affordable education loans to students, and it expanded into financial services, including loans, credit cards, investment services, and insurance. It makes money primarily via payment processing fees and loan securitization.
Squarespace is a North American hosting and website building company. Founded in 2004 by college student Anthony Casalena as a blog hosting service, it grew to become among the most successful website building companies. The company mostly makes money via its subscription plans. It also makes money via customizations on top of its subscription plans. And in part also as transaction fees for the website where it processes the sales.
Stash is a FinTech platform offering a suite of financial tools for young investors, coupled with personalized investment advice and life insurance. The company primarily makes money via subscriptions, cashback, payment for order flows, and interest for cash sitting on members’ accounts.
Venmo is a peer-to-peer payments app enabling users to share and make payments with friends for a variety of services. The service is free, but a 3% fee applies to credit cards. Venmo also launched a debit card in partnership with Mastercard. Venmo got acquired in 2012 by Braintree, and Braintree got acquired in 2013 by PayPal.
Wealthfront is an automated Fintech investment platform providing investment, retirement, and cashmanagement products to retail investors, mostly making money on the annual 0.25% advisory fee the company charges for assets under management. It also makes money via a line of credits and interests on the cash accounts.
Zelle is a peer-to-peer payment network that indirectly benefits the banks’ consortium that backs it. Zelle also enables users to pay businesses for goods and services, free for users. Merchants pay a 1% fee to Visa or Mastercard, who share it with the bank that issued the card.
Gennaro is the creator of FourWeekMBA, which reached about four million business people, comprising C-level executives, investors, analysts, product managers, and aspiring digital entrepreneurs in 2022 alone | He is also Director of Sales for a high-tech scaleup in the AI Industry | In 2012, Gennaro earned an International MBA with emphasis on Corporate Finance and Business Strategy.
2 thoughts on “How Does PayPal Make Money? PayPal Business Model In A Nutshell”
Some of the companies in which The Founders’ Fund has invested in, through the years.
PayPal network effects, or competitive moats are based on a few key strenghts. As the company highlights from its financials: 
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: 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. 
Source: PayPal Financials
Great information. Thanks
Thank you Devin!