Hoffmeyer - PayPal Case Study - BL S2 2016

PayPal Holdings Inc. - Disrupting the Global Payment System
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Instituto de Empresas | Business School
January 2016
Nicholas Hoffmeyer
GMBA – BL - S2 - Group A
PayPal – Two Decades of Disrupting Global Payments
At the end of 2015, a newly independent PayPal Holdings Inc. (PYPL) stands alone as the undisputed
giant of the digital payments industry. At the close of 2014 PayPal can boast annual revenues of
$8.01Billion (USD) with over 4 Billion transactions totaling over $235 Billion from 157 million users.1
In
its short 18 year history PayPal’s meteoric rise has been a journey fraught with many strategic
challenges in the firm’s three chapters from a Silicon Valley tech start-up, into a subsidiary of a
multinational technology giant and recently to an powerful independent spinoff firm.
In 1998 PayPal was founded with the strategy of value innovation by creating a new customer centric
service that reduces the cost of online transactions to deliver exceptional customer value. When
PayPal entered their blue ocean they struggled to gain first mover advantages, become a technology
standard, forge strategic partnerships and build competitive advantages; all the while outmaneuvering
their competitors and new entrants.
As PayPal was acquired by eBay in the early 2000s they worked together to solidify their allied
competitive advantages by fending off regulatory and fraud risks through resource alignment and
acquisitions. After shoring up their market position PayPal widened their business scope and sought
to take advantages of economies of scale and expanded into international markets. Next PayPal
sought to pivot away from eBay and the online auction sector by diversifying with differentiation into
new attractive markets.
More recently PayPal has entered a new phase in strategy in 2015 as they look to forge a fresh path
as an independent firm untethered from their original compliment eBay. The landscape of the
payments industry has continued to evolve rapidly since PayPal’s explosion onto the scene. This is
especially the case with the advancement of social media, mobile phone capabilities and point of sale
payment innovations. PayPal now must analyze their competitors’ and new entrants’ moves find new
market opportunities and continue to innovate. If they are successful they can maintain their
competitive advantages and retain their standard as the premier online payment solution. In the
following pages we will analyze the PayPal journey and the many effective strategies employed along
the way through launch, differentiation, innovation and beyond.

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PayPal Beginnings: Taxi to Takeoff; 1998 – 2002
“CREATIVE MONOPOLY means new products that benefit everybody and sustainable profits for the
creator. Competition means no profits for anybody, no meaningful differentiation, and a struggle for
survival.” ― Peter Thiel, PayPal co-founder.13
In late 1998 the online electronic money transferring service Cofinity was started by Max Levchin,
Peter Thiel, Luke Nosek and Ken Howery. The service launched in 1999 and quickly merged with the
online banking company X.com in 2000. X.com founder Elon Musk (later of Telsa Motors and SpaceX)
recognized the potential of this new venture and quickly aligned the new venture’s internal resources
to focus on the development of this payment service. The firm was renamed PayPal.
Peter Thiel and Elon Musk in 2000.2
The founders of PayPal discovered a customer need for a simpler online payment system. At the turn
of the century in the aftermath of the dotcom bubble burst, there were a host of new online
ecommerce sites coming on to the scene like eBay, Alibaba and Amazon. These businesses
connected sellers and buyers across the globe via their online networks. This was incredibly
innovative and exciting for consumers and these services quickly took off. However their ecommerce
payment systems lagged behind as they were slow, clumsy, unreliable, and presented many security
risks threatening the growth of these future ecommerce colossuses.
PayPal’s Corporate & Business Strategy: The Foundations of an Empire
In order for PayPal to succeed the founders need to have an effective corporate strategy based on
industry attractiveness and competitive advantages that form the basis of their business strategy.
The online payments industry was not particularly attractive at first glance as analyzed by using
Harvard Business School professor Michael Porter’s Five Forces of Competition Framework. The
power of suppliers in this industry appeared to be already strong as credit card companies and banks
closely controlled their client’s funds and charged high fees for third party access to these monies.
Competing against these highly competitive firms with deep resources would be extremely difficult in
a head-to-head scheme, essentially the equivalent of starting one’s own bank or credit card

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company. Also concerning, there appeared to be a constant threat of new entrants into the industry
as the early internet was fairly open and if one was technologically savvy as a programmer it was
simple to enter the game. So even if an online payment transfer service was created it could be
quickly mimicked or copied by incumbent or new firms which indicated a high threat of substitutes.
Finally buyers or customers had many challenging demands for an online payment system like
security, fraud prevention and low cost that would be challenging from a technology standpoint. All of
this also would need to be delivered together in an easy-to-use package. At the time on surface
these five forces do not appear to indicate this was an attractive industry to enter. PayPal’s
founders however where able to pass Porter’s essential attractiveness test by making the industry
attractive through innovative ways to mitigate these risks and a way to survive in a niche market by
concentrating its resources.
The founders of PayPal had identified two key success factors that would generate competitive
advantages. The first was an analysis of customer demand to figure out what customers want from a
payment system. Online consumers wanted an alternative to the current payment systems were
expensive, slow, unwieldy and insecure. If PayPal could deliver a seamless solution to there was a
chance to succeed. PayPal acts as a secure go-between for buyers and sellers. Both the buyer can
pay a seller via three secure methods: credit cards and debit cards, bank accounts or existing PayPal
balances. The funds are then securely transferred from the buyer to the seller via the PayPal system.
The seller then receives and confirms the funds and will then send the buyer the good or service. The
seller then is able to withdraw the funds to their own external bank account or leave it in their PayPal
account as a balance. PayPal primarily received revenue from fees for every transaction completed.
To a much lesser extent they received revenue from PayPal issues debit cards, net interest on
PayPal account balances, interest from credit lines and later monthly service fees for proprietary
turnkey checkout services and business accounts.
Example of PayPal Transaction Flow for Merchant Cancun Limo:
Source: Cancun Limo Payments website.18

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The second key success factor for PayPal was to identify how to survive the competition. PayPal
found an answer by not working against the credit card companies and banks but rather by accepting
them as necessary evils. PayPal used them as a foundation for their transactions by connecting the
two but not directly competing with them. To add to their survival chances PayPal found a market
niche by entering into the expanding online ecommerce focused on servicing the transactions
between buyers and merchants on online auction marketplaces. Smaller ecommerce sellers, especially
on auction sites, were unable to qualify for or purchase credit card merchant services because they
did not have a high volume of transactions to justify the high flat fees. For example online auction
purchasers would have to wait to receive money orders or checks via mail before shipping their goods
to purchasers. This was inconvenient for the sellers but also slowed the time before the buyer
received their purchased goods. Conversely a PayPal account took only minutes to set up with only a
name, email, shipping/billing address, bank account and/or credit card. Better still; the auction
merchant could place the link to pay via PayPal directly on their ecommerce store or eBay auction
pay. This simple set-up lowered the barrier to entry for online auction bidders and sellers allowing
them to bypass the tedious and expensive incumbent auction payment solutions. PayPal alleviated
online money transaction inconveniences and many buyers and sellers alike quickly recognized the
value of this new service. PayPal began to see a prolific user development among online auction
merchants and their purchasers.
PayPal had followed a market-creating strategy later to be
called Blue ocean strategy. This undefined market space
was spun off of existing online payment solutions in an area
with little competition and huge opportunities for profitable
growth. PayPal’s new service could be described as a value
innovation by the creators of the Blue ocean strategy, W.
Chan Kim and Renée Mauborgne. Value innovation is the
simultaneous pursuit of differentiation and low cost which
creates an increase in value for both customers and the
business as seen in the adjacent diagram19
. PayPal provided
a universal system that lowed costs for individuals and
small merchants to exchange payments online in a new and
different way. This was a departure from the unpopular
status quo of payment solutions in the online auction
marketplace which provided value for the consumer.
PayPal was able to build great value for its service by differentiating the platform from other available
payment solutions. Economies of scale and the implicit open access of the internet allowed PayPal to
easily service a limitless number of transactions from multiple locations and fund sources greatly
reduced their costs. They also internalized the cost of funds for the consumer adding to the
perceived value of the service for the customer. PayPal’s services were differentiated from the

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market because they provided an affordable universal of platform via the internet. This payment
platform was secure, easy to use and convenient for buyers and seller alike. PayPal delivered
exceptional value for their customers with this relatively simple technology that could solve a basic
need of online auction merchants and purchasers.
PayPal’s Differentiation and Cost Advantages: Creating Consumer value.
PayPal was able to lower the cost of transactions for the merchant, especially at higher volumes,
because they internalized the cost of the funds are deposited into the user’s PayPal account. The
cost of funds metric is a weighted average of the fund sources: credit and debit cards, bank accounts
and existing PayPal balances. Payments funded from existing PayPal balances were cost free and the
most desirable for PayPal. Balances financed by bank accounts were inexpensive for PayPal too as
the funds were processes by the ACH (Automated Clearing House) costing PayPal only
$.05/transaction. The drawback for ACH was for customers it could take days for funds to be
processes by financial institutions so PayPal would loan the advanced funds to the user and
deposited the funds into the user’s PayPal account faster. Also to encourage ACH funding PayPal
required that after $2,000 of lifetime funds from credit or debit cards they required the user to link a
bank account. Credit cards and debit cards were the highest cost of funds by costing an average of
2% + $.15/transaction to process. With these set overhead costs it was imperative the PayPal
promote funds from existing balances and bank accounts in order to maintain high net margins for
their main transaction driven revenue streams.
Credit card and bank theft was especially rift in the new world of the internet. Security of banking
information was a top concern in the early 2000s and still is a paramount concern for online shoppers

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and merchants today. In order to reduce fraud and ensure users that PayPal was a trustworthy
service PayPal already had built in advantages over bank and credit cards. PayPal served as the
intermediary between buyer and seller so there was no direct exchange of credit or bank account
numbers. The secure platform handled the exchange for both parties reducing the potential for theft.
PayPal also had the supplier power to verify sellers and buyers by their previous transaction history
which eased the identification of reliable and legitimate buyers and sellers. The PayPal account was
further protected by requiring PayPal account passwords for all transactions which hindered the use
of stolen credit or bank card numbers. These security features allowed many users new to the
internet and ecommerce to trust PayPal and would start to use the platform as their go-to online
payment service. For added benefit, merchants and consumers PayPal acted as merchant service
provider so they could refund any good loses due to fraud just like credit and bank card companies
were able to do. PayPal’s low transaction costs, fraud prevention, merchant returns and free and
easy funding further added immense value for the customers. All these factors combined to create a
strategic fit that differentiated PayPal from all other online services.
Simplified PayPal Activity Map: Demonstrating Strategic Fit

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Setting the Pace: New Online Payment Standard
“moving first is a tactic, not a goal.” ― Peter Thiel, PayPal co-founder.12
PayPal was fortunate to have an early mover advantage in the online auction payment market. This
allowed PayPal benefits of capturing a large market share (users), increasing brand awareness and
building goodwill with their customers. The decision to focus on the niche online auction market first
before even considering a larger mass market scoped service was critical to lowering PayPal’s initial
costs and ensuring high quality service while also minimizing the treats of new entrants and any
substitution services.
At the beginning PayPal did not have the luxury of intellectual patent protection nor were they able
to own or partner with an important complimentary resource like eBay, which threatened to erode
their first-mover advantage. These factors exacerbated the need to focus on a fast customer
development strategy and sprint to become the public standard for online payment solutions.
PayPal’s strategy was centered on growing the user base by creating positive customer feedback
and building network externalities to solidify their competitive advantage. They sought to
exponentially grow their users by creating satisfied customers who shared their positive feedback
with their friends and colleagues especially at on eBay, social forums and blogs. The more buyers and
seller that adopted PayPal the greater the network effect became and uptake was continually
reinforced by the positive feedback loop.
The PayPal team created an aggressive marketing campaign focused on development of the PayPal
user base fueling customer growth and goodwill also. PayPal gave $10 in their accounts free of
charge and for every new user their referred PayPal would deposit an additional $10 in their account.
This was a powerful incentive to generate word-of-mouth (who doesn’t like free money?) and virally
spread the PayPal platform amongst the burgeoning internet community, especially between eBay
users. PayPal pioneered these non-traditional marketing efforts at the time with great success to
complement their race to gain customers and become eBay’s payment standard. The co-founders of
PayPal wisely knew the barriers to entry in payment services were low and their lead time would not
protect them from competition for long.
The Competition Comes Alive: eBay’s Billpoint Challenge
All happy companies are different: Each one earns a monopoly by solving a unique problem. All failed
companies are the same: They failed to escape competition. – Peter Thiel, PayPal co-founder.2
Indeed PayPal’s first-mover advantage did not last long as a host of similar payment services soon
entered the online auction marketplace: Citibank's c2it, Yahoo!'s PayDirect, Google Checkout and
Western Union's BidPay. The biggest challenger came from eBay itself in March 2000 when they
launched their own payment service called Billpoint. EBay had recognized the threat that PayPal
posed to their hold on the online auction marketplace especially in the payment collection vertical.

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They choose to react to the new entrant by forcefully resisting the upstart PayPal service and
launch their own service. EBay gave Billpoint prominent placement on all seller auction pages and
limited the placement and branding of PayPal on auction site pages. Billpoint also used marketing
promotions to allowing eBay users to waive their auction fees if they used Billpoint for their
payments. To further dislodge PayPal, eBay made Billpoint the default payment service for fixed price
transactions on its auction platform. These incumbent advantages were aimed at destroying PayPal’s
network effects and test the sustainability of their competitive advantages.
Source 6
Before they could respond to the threat of Billpoint however, PayPal had to address internal
challenges and establish a stable business model if they were going to survive. In PayPal’s effort to
quickly acquire users they exposed themselves to fraud risks. The simple account set up of only
requiring a credit card to sign up allowed nefarious individuals and crime groups to utilize stolen credit
cards to quickly launder money to other PayPal accounts and quickly withdraw the funds from the
system. This was a huge concern and PayPal responded by quickly freezing suspicious looking
accounts to mitigate the losses. These ‘frozen’ account funds could only be unlocked if the user
was able to establish legitimacy. This angered customers as many of the frozen accounts were owned
by legitimate users. PayPal was unprepared for the customer service nightmare this triggered with
tens of thousands of users emailing and calling to get their accounts unfrozen. While this tactic
drastically reduced the fraud rate overall it also jeopardized customer goodwill and many customers
switched to Billpoint. Co-founder Max Levchin came up with a better solution to the ongoing fraud
problem by developing software that could detect new distrustful accounts. This would prove
essential in identifying future high risk accounts and reducing the number of mistaken frozen
accounts.
The principal concern beyond countering Billpoint was that PayPal did not charge merchants monthly
or transaction fees. PayPal’s founders had hoped their primary revenue stream would be to earn
interest on the money sellers and buyers left in their PayPal accounts. This revenue stream failed to
materialize however because it was discovered users quickly cashed out their accounts after
completing transfers and transactions. PayPal’s profitability concerns were exacerbated by their high
burn rate of capital as marketing costs for new user incentives and referrals bonuses soared. Another
unforeseen expenditure concern was that transactions executed by users were at first mainly funded
by credit cards which required PayPal to pay the credit card companies fees for these monies. In
order to improve profit margins, PayPal encouraged users to fund transactions with bank account

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funds instead of credit cards to avoid paying fees for access to these funds. PayPal also began to
phase out both the new user and referral bonuses.
The solution to their flawed business model was PayPal business accounts where they would charge
transaction fees of $0.25 and 1.9% +$.25 for merchants who had more than $500 of credit card funded
transactions in six months. PayPal had the price advantage compared to the Billpoint who charged
4.75% for every transaction. This advantage was a direct result of PayPal’s strategy to internalize the
cost of funds from credit and debit card sources. These new transaction fees were initially met with
resistance by early adopters of PayPal who were initially promised the service would always be free
but this did not deter many users to switch to Billpoint. This was a great sign that PayPal’s growth
strategy and focus on positive network effects was working. PayPal still delivered more perceived
value to customers than Billpoint or any of their competitors. Unprompted, PayPal users were even
vocal in defending the service in online forums against eBay’s and Billpoint’s attempts to dislodge
the service from its auction platform.
PayPal vs. Billpoint Service Fees (2000).21
PayPal Monthly PayPal
Payments
0 to $500
(6 months)
$500+
(6 months)
Transaction Fees 0% +$0.25 1.9% + $0.25
Billpoint Monthly PayPal
Payments
Unlimited
Transaction Fees 4.75%
PayPal was able raise profitability by dealing with fraud and changing the business model to improve
profitability. However at the same time these efforts sacrificed some customer goodwill and service
value which risked customer growth and adoption rates. Despite these challenges PayPal reached a
tipping point of users and payment volume and revenues.
PayPal’s transaction based profit structure made it imperative that as they continued to grow their
number of users and the volume of payments while reducing costs and losses. Essentially the more
payments, especially those funded by bank accounts and existing PayPal balances rather than credit
or debit cards, would yield more revenues. The key metrics watched closely by PayPal to monitor
their business success would be number of users, total volume of payments (TVP), cost of funds, loss
rate and most importantly the overall take rate (TVP%). See the charts in Appendix A for detailed
PayPal history of these key metrics.
By 2002 PayPal had grown to include 12.2 million accounts and 3.2 million business accounts. The
total transaction fees netted the company $48.3 million at a take rate of 3.3% of the total payment
volume.11
PayPal payment services had reached a tipping point to become the online auction payment
standard for eBay. In 2002 PayPal filed an IPO raising $70.2 million in just the first day at $13/share.

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The IPO filing disclosed that 70% of all eBay auctions accepted PayPal payments and about 25% of
auction listings used PayPal.11
In the end PayPal’s network externalities and sustainable standard
were just too powerful for eBay to displace. EBay conceded defeat by the end of 2002 and acquired
PayPal for $1.4 billion in stock.
PayPal’s Differentiation & Expansion: 2003 – 2013
After the acquisition of PayPal eBay CEO Meg Whitman and her management team took stock of the
online auction landscape and their new procurement. It was decided to close Billpoint and make
PayPal the default payment system of choice for all eBay auctions. The truth was the acquisition was
both eBay and PayPal benefited from the merger. EBay now had full control of a large portion of their
payments consolidating their grip on all the revenue streams tied to their online auction service as
60% of PayPal’s revenues were from eBay. 11
PayPal, although giving up its independence, was able to
reduce their risk of displacement in their niche by merge with the owner of their primary
complimentary resource. The new eBay/PayPal venture would also benefit by sharing resources and
economies of scale to provide better service and customers. This new venture passes Porter’s
better-off test of either the new unit must gain competitive advantage from its link with the
corporation or vice versa. Both sides gained advantages indicating that eBay’s diversification by
acquiring PayPal will truly create shareholder value. Another analysis tool eBay management that
displays the synergies between PayPal and eBay is the concept of parenting advantage. Using the
Ashridge portfolio display it can be seen that eBay is has a high potential to add value to PayPal. The
new stronger eBay/PayPal venture had more industry power and was poised to flex this muscle in
expansion and differentiation efforts.
Source: Grant 370

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In 2004 Whitman tapped Jeff Jordan the then head of eBay’s US operations to be the president of
PayPal. Jordan was tasked to first shore up the PayPal business model and solidifies their market
penetration in the United States. Whitman, Jordan or other eBay executives may have used Boston
Consulting Group’s (BGC) Growth Share matrix to identify PayPal’s position and formulate these
strategic objectives. PayPal was a question mark in the early 2000s. They had high growth but an
unstable business model and low market share that were concentrated in the US and primarily on
eBay. Jordan’s task was to first strengthen PayPal’s business model and then as the service gains
market share invest in for growth as PayPal becomes a star.
Source: Grant 36815
Jordan immediately went to work at improving PayPal’s poor customer service and fraud protection
to improve the take rate and feed the customer positive feedback loop. Jordan invested heavily in
customer service to speed response time to customer inquiries about transaction statuses, frozen
accounts, merchant disputes or fraudulent changes. This strategy would strengthen eBay and
PayPal’s competitive advantages and reduce the amount of risk in their business model.
EBay also acquired VeriSign gateway in late 2005 to enhance its security and add new merchants to
their burgeoning user base. In 2008 eBay purchased the Israeli company Fraud Sciences to continue
improvement of PayPal’s security improvements. Both of these acquisitions pass Porter’s better-off
test as they are building value for shareholders by strengthening PayPal’s core business model.
These internal gains strengthened the business model foundation allowing the firm to turn their
attention to expansion efforts domestically, internationally and beyond the auction marketplace. Meg
Whitman in 2006 described their PayPal strategy at the time:
“First, PayPal focused on expanding its service among eBay users in the U.S. Second, we began
expanding PayPal to eBay’s international sites. And third, we started to build PayPal’s business off
eBay.” – Meg Whitman, EBay CEO, January 2006.2

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As PayPal shifted in the early 2000s to a business model dependent on transaction fees they updated
their schedule of feeds depending on monthly transaction volume. This transaction schedule provided
discounts to higher volume US merchants which incentivized larger sellers to adopt the PayPal
service. These fees would remain unchanged after 2004 until 2015 further establishing merchant
confidence and reliability for their payment service. This reworking of transfer fees also enabled
PayPal to open its doors to international markets with a 3.9% + fixed fee. PayPal would quickly find
that internationalization was going to be quite challenging.
PayPal Service Fee Structure Evolution
PayPal (2002) Monthly
PayPal
Payments
$0 to
$1,000
$1,000+
Transaction
Fees
2.9% +
$.30
2.2% + $.30
eBay/PayPal
(2004)
Monthly
PayPal
Payments
$0 to
$3,000
$3,000 to
$10,000
$10,000 to
$100,000
$100,000+ International
Transaction
Fees
2.9% +
$.30
2.5% + $.30 2.2% + $.30 1.9% +
$.30
3.9% + fixed fee*
*Fees vary by merchant
country.
Source: PayPal IPO11
and eBay 10K Filings.21
Internationalization
Our goal is to be the global standard for online payments. - Jeff Jordan, PayPal President, August
2005.7
Expanding PayPal internationally was a key part of eBay’s overall strategy because in 2002 PayPal
only had 21.3% of its revenue coming from international markets (non-US). 11
This represented a huge
opportunity to grow by expanding the scope of the service worldwide. Expansion into new markets
would also benefit the eBay parent and strengthen both of their market shares into new markets. This
tandem expansion allowed both services to leverage each other to expedite the entry time and
continue growing exponentially. PayPal ran into many regulatory challenges as they increased the
scope of their operations outside of the US. Even within the US it had been a difficult battle to gain
recognition that PayPal was a payment intermediary and not a traditional bank. This was a key
distinction that was clarified state by state so that PayPal could continue to operate its same
business model and provide the universal service to all its customers. These challenges would only be
amplified as PayPal expanded into global markets. PayPal had to receive banking licenses for all these
local markets stretching all across the globe and deal with international restrictions on cross border
transactions. Despite these legal hurdles international users flocked to eBay and PayPal in droves
adopting the system quickly. This allowed PayPal to reach 100 million active users by 2010. 21

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The regulatory challenges are called Factor conditions in Porter’s national diamond framework. This
tool helps managers identify challengers or competitive advantages in each new national market.
Fortunately for PayPal they are an online payment system so the strategy, structure and rivalry in
each national market were essentially the same due to the inherent transnational nature of the
internet. The other encouraging factor was that there was a high demand for their service in new
markets among internet users. The challenges would be to comply with local factor conditions like
regulatory issues and syncing with the related and supporting industries like local credit card and
banking firms. Overall Porter’s national diamond clearly illustrates how easy it was for PayPal to
expand fast internationally via their competitive advantages and economies of scale.
Source: Grant 32115
Off –eBay: PayPal Merchant Services
Differentiation of PayPal beyond its eBay niche market was a top strategic priority because in 2004 it
was estimated eBay only accounted for 12% of all ecommerce12
. PayPal’s potential of expanding not
beyond the limited auction marketplace and would strengthen the entire firm and spread risk by doing
so. Jordan pressed Whitman’s strategic initiatives beyond the international scope expansion by
increasing the ‘off eBay’ revenue stream. PayPal had formed PayPal Merchant Services in 2003
after the acquisition by eBay to focus on providing payment solutions for small and medium business
outside of the eBay platform. This new market was critical because this was reaching a huge number
of unexplored non-customers. PayPal Merchant Services wasted no time and launched PayPal for
Business in 2004 targeting small and medium businesses. This was PayPal’s first bold direct attack
on the credit card industry. To reduce the risk and increase this new services survival, PayPal
partnered with the merchant acquirer Paymentech. Paymentech was used its dedicated sales force
to push the PayPal service to new merchants who did not service customer’s credit or bank card
transactions. There was slow growth in this B2B sales group because of entrenched position of credit

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and bank cards. Some merchants also were wary of adopting PayPal because of their roots in the
online auction marketplace industry. PayPal then launched Website Payments Pro in 2005 another
B2B product targeting small and medium businesses by giving them a turnkey checkout solution. This
not only created a new revenue stream of monthly merchant fees but also would serve to drive more
overall transaction volume. The acquisition of VeriSign helped stimulate the growth of PayPal
merchant services by giving them access to more online merchants. These efforts to grow into the
B2B space were arduous but able to slowly transition PayPal away from reliance on eBay’s
marketplace.
News Challengers to PayPal’s Creative Monopoly
Along with Billpoint, Citibank's c2it, Yahoo!'s PayDirect, Western Union's BidPay service, Amazon
Payments all ceased operations between 2003 and 2006 leaving eBay’s PayPal as the leader and
also default payment service for the largest online marketplace. The low barriers of entry due to the
availability of the internet however threaten their early dominance as the PayPal transaction system
can be easily replicated and adopted to new innovations. At the same time eBay and PayPal both
received new leadership Scott Thompson became President of PayPal in 2006 succeeding Jeff
Jordan and eBay CEO Meg Whitman resigned and was succeed by John Donahoe in 2008. This new
leadership would need to be vigilant to changes in the Political, Economic, Social, and Technological
factors of the external macro-environment (PEST analysis).
Mobile Wallet Wars: Google Wallet and Square Inc.
“The single most important top-level trend is the shift to mobile.” - Max Levchin. 23
PayPal Here and Square Reader. 25
The first technological and social trend this new management identified was the growth of
advancement of smartphones and tablets. Before his departure, Jordan had relayed rumors to
Thompson that the search engine giant Google was entering into the online payment space soon. This
challenge would materialize in 2011 with the release of Google Wallet. This service would allow users
to pay at the point of sale with their smartphones via MasterCard PayPass card readers. The biggest
threat for PayPal was Google had built in network effect with its Gmail users it could quickly engage
with the new service. Another new challenger Square Inc. launched their own a mobile point of sale

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(POS) reader in 2011 that could be used by smartphone and tablet users to receive payments via
bank or credit cards. David Marcus replaces Scott Thompson as PayPal president in 2012 and he
choose to quickly respond in 2012 to the challenges from Google and Square. This was a direct threat
to PayPal’s off eBay PayPal Merchant Services by developing their own credit and bank reader
called PayPal Here. Marcus was concerned the Square would become the mobile payment standard
so speed to response was essential to not allow Square sizable market share or the development of
any network effects. This is an ironic hyperbole to PayPal own beginnings when they competed
against eBay and Billpoint.
PayPal’s Future: To Independence & Beyond, 2014 - 2016
“It doesn’t make sense that a global payment system is a subsidiary of an auction website. It’s as if
Target owned Visa or something... [PayPal] will get cut to pieces by Amazon Payments or by others
like Apple and by startups if it continues to be part of eBay.” Elon Musk, early PayPal executive.14
EBay and PayPal were riding high together continuing their growth and expansion into new markets
by 2014. However by this time it was becoming evident that eBay’s growth was slowing and PayPal
was continuing their torrid growth capitalizing on their differentiation innovations. Since its acquisition
PayPal had grown into a star and in 2010 accounted for half of eBay’s overall revenue. Only five
years later in PayPal was projected to out earn its parent company for the first time. 22
PayPal’s Revenue Growth Compared to eBay Parent22

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This was beginning to worry some of eBay’s shareholders and directors as the situation could not
pass Porter’s better-off test and eBay’s parenting advantage was rapidly eroding as seen again in
the Ashridge portfolio display.
Source Grant 370.15
Carl Icahn an activist investor and eBay’s sixth-largest shareholder with 0.82% ownership (worth
$570 million in 2014) became vocal that PayPal and eBay should separate because together they did
not maximize shareholders’ value. Icahn leveraged the media and allied board representation through
eBay board member Jonathan Christodoro, Icahn Capital’s managing director to make his sentiment
known and push for the split-up.
"It is almost a 'no brainer' that these companies should be separated to increase the value of these
great assets and thus to meaningfully enhance value for all shareholders." - Carl Icahn, 2014. 17
The eBay board led by CEO John Donahoe and PayPal President David Marcus both resisted Icahn’s
plan and accused his agitations of being disruptive to the core business.
“We and our board believe the best way to drive long-term shareholder value is to keep eBay and
PayPal together, to capitalize on the opportunities” eBay CEO John Donahoe in 2014. 16
Icahn’s aggressive pushing did prompt the eBay board to authorize a six month strategic inquiry to
recommend a solution. The review highlighted the already discussed market trends, rising competition
and declining parenting advantage. In a rare move the eBay board of directors recognizing their
primary duty to shareholders authorized the split of PayPal from eBay.
"A thorough strategic review with our board shows that keeping eBay and PayPal together beyond
2015 clearly becomes less advantageous to each business strategically and competitively. The

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industry landscape is changing, and each business faces different competitive opportunities and
challenges." eBay CEO John Donahoe in 2014. 16
The split was scheduled for 2015 and this precipitated the resignation of both Donahoe (who was
appeased with the position of Chairman of the Board for the new PayPal) and Marcus (who left to
head Facebook’s payment services.). The new independent PayPal (PYPL) would be led by CEO Dan
Schulman, a former American Express executive. Schulman would be inheriting a complex situation
but a new untethered PayPal has great opportunities for new growth areas. As incoming CEO
Schulman wasted little time in outlining the strategy of PayPal as continuing the ‘off eBay’
differentiation efforts launched a decade ago starting with three decisions.
Dan Schulman, PYPL CEO, 2015.9
First it was announced that in early 2015 that PayPal would ‘simplify’ its fees. This has eliminated
any transaction volume discounts and has once again been met with disdain from some customers.
This is part of their strategy to differentiate their payment services from B2B and P2P revenue
streams. This would push merchants to PayPal’s B2B services and away from the online payments
centered on P2P transactions.
PYPL (2015) Monthly PayPal
Payments
Domestic International
Transaction Fees 2.9% + $.30 3.9% + fixed fee*
*Fees vary by merchant country.
The second maneuver was the focus on mobile technology started by Marcus and Thompson. This
industry was becoming more competitive than ever as PayPal, Square and Google were joined by new
entrants Apple Pay and Samsung Pay in 2015. No clear winner has emerged with a majority market
share or with a technology standard. To add complexity to the digital payment wars social media
companies Facebook, SnapChat and Twitter all announced peer to peer payment systems. All these
new entrants hope to capitalize on positive network externalities like PayPal did in the early 2000s.
Countering these threats the then PayPal subsidiary had acquired Braintree and Venmo, mobile
payment providers that also played on the social aspect of payments. They also launched their own

18
mobile payment platform PayPal.Me in early 2015. These latest challenges to PayPal will test their
strategy to survive the influx of competition in a now red ocean.
As Schulman looks at opportunities perhaps the largest will be in the international space. This area of
opportunity has increased as the availability of mobile devices and the internet has spread throughout
the world. This gives payment provides access to a new market segment of underbanked persons
especially in developing countries of Asia, Africa and South America. These giant growing populations
and economies offer big openings for PayPal as they look to expand. In support of this strategy
Schulman completed his first acquisition, purchasing Xoom an international digital remittance firm.
“Everyone has all the power of a bank branch in the palm of their hand... So that should provide a
tremendous opportunity for us [PayPal] to think in new innovative ways to provide just different ways
of thinking about the democratization of money. And I think that's a tremendous opportunity for us
[PayPal] and also a very important thing for the world.”– Dan Schulman, CEO PayPal, Dec. 22, 2015 3
Conclusion
Once an open ocean PayPal now faces new entrants in the industry to compete for digital payments
and offline transactions at the point of sale. Also there are still the credit cards and banks who will
fight viciously maintain their monopoly as payment vehicles. These incumbent giants are increasingly
being pushed further into the background by becoming the backend system that drives payment
processes. Most new digital wallets are essentially rebranding the payment system with "sexy
designs" and sleek user interfaces, but the infrastructure of the transaction still relies on the
hundred year old credit and bank firms. Swiping a smartphone at the register is a novel idea but the
security risks and human psychology of money transactions will most likely not replace credit and
bank cards anytime soon. There are too many mobile payment solutions available today, and surely
more to come. A clear standard has not yet emerged and the market has not begun to converge. If
PayPal is to be the winner of the mobile payment wars, they must establish themselves as one of the
standards as the market coalesces. To succeed, PayPal will need to be the most secure, transparent,
convenient and universal system that can accommodate the credit card and debit card, anywhere,
anytime.
In their traditional online transaction monopoly has to be wary of new entrants that could offer lower
fee services and displace market share. Also the P2P and B2B challengers will have profound impact
on future of the payment industry. The universality of the PayPal solution can differentiate their
service and PayPal must focus on Venmo’s growth to counter here.
There is also an opportunity in emerging markets to fundamentally change the exchange of money
system design. PayPal can test new democratized money solutions internationally which can later be
scaled up to the developed world.

19
PayPal’s 3 keys for continued success:
 Improve Security – This is the paramount concern especially with more users and information
being online. The winner of the POS and mobile payment standards will come from a
foundation of security of information and money.
 Customer Service – PayPal must not forget to continue to value innovate and be customer
centric service and solve the needs of the consumer.
 Proactive Regulatory Compliance – PayPal must be ready for banking regulations in
international and domestic markets that could provide intelligence and competitive
advantages over rivals.
PayPal has had quite a journey in just less than 20 years. The payment service firm has grown from a
small startup to its position as the leader in online payment solutions. Looking to the future, PayPal
has an advantageous position that includes many competitive advantages. Focus on sound corporate
and business strategy will lead to continued success. Effective strategies, implementation, and value
innovation can lead PayPal forward to become the firm that successfully disrupted payments and
moves the world toward a true democratization of online and physical money.

20
Appendix A
Source: PayPal / EBay 10K filing 21,24

21
Source: PayPal / Ebay Filing 21, 24

22
Endnotes
1. Thiel and Musk – Associated Press. http://www.businessinsider.com/peter-thiel-has-an-insane-story-
about-what-a-real-tech-bubble-feels-like-2015-2
2. Competition Is for Losers. http://www.wsj.com/articles/peter-thiel-competition-is-for-losers-
1410535536
3. Q4 2005 eBay Earnings Conference Call, Voxant Fair Disclosure Wire, January 18, 2006
4. http://www.businessinsider.com/paypal-ceo-dan-schulman-interview-2015-12/
5. http://www.ecommercebytes.com/cab/abn/y04/m06/i17/s02
6. http://www.ecommercebytes.com/cab/abn/y15/m08/i28/s01
7. https://www.paypal.com/us/webapps/mpp/merchant-fees
8. Mickey Alam Khan, Payments News, August 3, 2005,
www.paymentsnews.com/2005/08/paypals_goal_th.html, accessed March 19, 2006.
9. Dan Ilett, “What Next for PayPal? eBay's Mate Looks At Markets Beyond the Net,” Silicon.com, March
21, 2006, accessed through Factiva, March 23, 2006
10. http://www.bloomberg.com/news/articles/2015-07-20/paypal-s-debut-market-value-tops-ebay-s-
as-investors-seek-growth
11. 2002 IPO SEC filing:
http://www.sec.gov/Archives/edgar/data/1103415/000091205702023923/a2082068zs-1.htm
12. http://venturebeat.com/2012/10/27/how-ebays-purchase-of-paypal-changed-silicon-
valley/#8cV8y19jcBArQLfE.99
13. Zero to One: Notes on Startups, or How to Build the Future.
https://www.goodreads.com/work/quotes/25332940-zero-to-one
14. Can PayPal Beat Apple, Google, Amazon And Icahn In The Wallet Wars?
http://www.forbes.com/sites/stevenbertoni/2014/02/12/can-paypal-beat-apple-google-amazon-and-
icahn-in-the-wallet-wars/
15. Page 368. Grant, Robert M. Contemporary Strategy Analysis: Text Edition, 8th Edition. John Wiley &
Sons UK, 12/2012. VitalBook file.
16. http://dealbook.nytimes.com/2014/09/30/ebay-to-spin-off-paypal-adopting-strategy-backed-by-
icahn/?_php=true&_type=blogs&_r=2
17. http://www.cnet.com/news/ebay-to-split-paypal-into-separate-company-in-2015/
18. Cancun Limo Services: http://www.cancunlimo.net/payments/
19. http://tylerwest.net/workbench/why-smbs-virtual-assistants-need-each-other
20. “eBay Outlines Global Business Strategy at 2005 Analyst Conference,” February 10, 2005,
http://investor.ebay.com/
21. eBay Annual reports 2002 – 2015:https://investors.ebayinc.com/annuals.cfm
22. PayPal Eclipses eBay's Core Business Prior to Spin-Off: http://www.statista.com/chart/1279/ebays-
revenue-by-segment/
23. Read more at: http://www.azquotes.com/author/22128-Max_Levchin
24. http://www.statista.com/statistics/218493/paypals-total-active-registered-accounts-from-2010/
25. https://www.cardfellow.com/paypal-here-vs-square/

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