PayPal

Q1. What explains PayPal’s early success?

One can see PayPal’s early success from 3 different angles:
1. The entry time: As the transaction quantity and amount of e-tailing increased during early Y2K (year two thousand), incumbent methods of money transferring (checks and money orders; even eBay was fuelled by payments made by regular land mail) were being outdated. Whoever introduced secure, fast, easy funds exchange model on the internet was going to hit the jackpot big time. Although there were some participants in the internet money transfer sector, trouble was that people did not trust these payment systems because they were new and were flawed because they were not trusted as real currencies. PayPal had a few vital differences: 1. It used the dollar as its medium of exchange, rather than trying to create a new currency for online payments, 2. It used email for faster, less troublesome communications; and 3.It used the existing bank networks for making the payment, guaranteeing less fraud, more safety.

2. The viral or network effect of PayPal: As you gain new user, each user becomes a viral marketer for PayPal. To increase their customer base, PayPal began aggressively marketing the firm through special promotions, such as offering $10 to new sign-ups for PayPal accounts. The result was that PayPal surged from just 12,000 accounts in January 2000 to over 2.7 million by August 2000.

3. Minimization of the cost of transactions and authentication: They paid close attention and to the existing credit, debit card payment system and found out a meticulous way of keeping transaction cost to the minimal point. On the other hand, they enabled smaller scale merchants to accept credit card payments made from buyers to the merchants’ accounts through PayPal system. Buyers, on the other hand, were relatively safe to do business online owing to the fact that PayPal payments didn’t show private information (card number, credit history…) to merchants. The bonds created between buyers and PayPal, sellers and PayPal ultimately meant the ever increasing online purchases.

The result of being based upon banking services and offering the lowest cost per transaction through e-mailed payments established PayPal's business model. The promotion, marketing and 'network effect' then turbo-charged PayPal to become the de factor standard for online payments.

Q2. Does Google represent a serious threat to PayPal? What strategy for payments would you recommend for Google? For eBay/PayPal in defending against Google’s attack?

Although PayPal, along with eBay, has become the main method of online shopping, and platform, Google is a large threat to PayPal. 70% of all e-commerce is initiated through web search, and Google is the largest search engine. What’s more, as Google is targeting customers through keyword advertising, content network advertising (needless to mention that YouTube and other most visited sites on the internet are of Google’s).

For Google to succeed, it should first acquire large enough customer base that use Google IDs. Although Google search engine is the most used engine, e-mail accounts base is not one of its core competencies. The current 2% of the sales amount and 20 cents on each transaction is a bit more expensive than that of PayPal’s, but compared to direct credit card sales, that is cheap. Trust is another thing that is hard to establish between two parties. At the moment, Google is allowing only those who have credit or debit cards. Those who don’t hold any of the two cards (bank account holders) should be enabled to connect their accounts to the Google account. As for the merchant base, Google, perhaps, could initiate the same promotional tactics of free money transfers up to 10$ for a limited amount of time just to increase the base. After the amount of merchants that have account on Google is large enough compared to PayPal’s, the rest will be history.

The only way for PayPal to stay on the same business would be increase the amount on sites that allow PayPal transactions. Already they have expanded through different modes of transactions – mobile… If that doesn’t work, perhaps it is time for PayPal to invest in new technology, rather than in new business. They might work on RFID + online payment model. Cell-phones fitted with RFID chips are increasing in number. Why can’t PayPal come up with a system that combines the internet payment with daily cash payments? That way, PayPal might become the universal currency of tomorrow.