Executive Summary:
PayPal is a financial services company that is most notably known for allowing users and businesses to send and receive payments online.
PayPal makes money via transactions fees, premium features offered to business accounts (in the form of subscriptions), the sale of card readers, business loans, referral fees on cashback rewards, interchange fees, interest on cash, as well as by promoting shipment services.
Established in October 2000, PayPal has grown to become one of the world’s largest facilitators of (online) payments. Today, more than 325 people are registered on the platform. More than $936 billion were transacted through its various platforms in 2020 alone.
What Is PayPal?
PayPal is a FinTech company that facilitates the exchange of money across the web. As a PayPal user, you can:
- Pay other businesses (both within the platform as well as on the merchant side) in exchange for goods and services
- Transfer money to friends and family
- Receive money from other accounts
PayPal is directly connected to the user’s bank or credit card account from which money is then retrieved or transferred.
Furthermore, the company enables Two-Factor-Authentication (via the mobile phone number), which adds a necessary layer of security.
Apart from these essential features, PayPal offers a breadth of other products, such as paying with monthly installments (via PayPal Credit) or receiving cashback at selected partner stores.
Conversely, PayPal works together with businesses of all sizes and enables them to receive payments online. Its merchant services include a direct checkout feature on the merchant’s storefront, shipping discounts (through its partnership with UPS), dispute management, fraud monitoring and prevention, business loans, and many more.
PayPal can be accessed via the company’s website as well as its mobile and tablet applications (available on Android and iOS).
PayPal is available in over 200 countries across the globe. More than 325 million people are registered on its platform.
The History Of PayPal
PayPal, as we know it, was established in October 2000 as a result of the merger between Confinity and X.com.
To understand how PayPal came to be, let’s first take a closer look at how each of these companies was established.
In the summer of 1998, Ukraine-born Max Levchin just moved to Paolo Alto after wrapping up his Computer Science studies at the University of Illinois. His intentions were crystal clear: go to the Valley and start a business.
Levchin didn’t rent an apartment of his own but instead decided to crash on his friend’s couch. At this point, one of Levchin’s closest friends (who he didn’t stay at), a guy named Luke Nosek, had already started a company.
That business received its first initial investment from Peter Thiel, a former derivatives trader that had just returned to San Francisco to fund other startups (he raised $1 from friends and family) – and give guest lectures at Stanford in his spare time.
Nosek prompted Levchin to get in contact with Thiel, which he did by attending one of his guest lectures. He chatted him up after the lecture and the pair met for breakfast where Levchin proposed his idea of a product that allowed users to store encrypted information on PDA devices, which enabled them to become digital wallets.
Soon after, in September 1998, they incorporated a company named FieldLink together with Levchin’s friend Nosek (who had given up on his previous startup) as well as Ken Howery. Unfortunately, FieldLink never really took off and forced Thiel and Levchin (who served as the firm’s CEO and CTO, respectively) to pivot.
They rebranded the company to Confinity, a combination of the words confidence and infinity. Apart from the new name, the team set out to develop a different type of product. Instead of storing encrypted information, Confinity would allow users to make payments to anyone on handheld devices.
By July 1999, the team was able to secure its first-ever outside funding round from Nokia Ventures who’s intention was to keep pushing the adoption of mobile products. To make Confinity more appealing to the public and its use case clearer, the team decided to launch its flagship product under the name of PayPal.
At PayPal’s launch party, Nokia Ventures used the software to transfer the $3 million funding, signaling the possibilities its solution would offer. PayPal created an extremely simple signup process, which involved registering with a credit card on the website and choosing a PIN, to remove friction.
A few months later, in October 1999, PayPal finally launched to the public. By that time, thousands of people had already signed up for the service. Luke Nosek came up with a genius growth hack that would propel the startup’s growth to instant heights.
They started off by offering people $20 for signing up or if they referred anyone else. Over 100,000 users signed up within the first month, forcing the team to drop the referral bonus to $5 eventually.
The early buzz that the team created allowed PayPal to keep on raising money to fund its user acquisition strategy. PayPal raised a Series B of $23 million and Series C of $100 million in less than 9 months after launching to the public. At one point, PayPal was doling out $10 million a month to acquire customers.
Luckily, PayPal had found an avenue that allowed it to fund its business without relying on outside investments. At the time, online marketplaces like eBay began to gain widespread adoption but were lagging convenient means of payment (users were using checks or the U.S. mail for payments).
Other companies, such as Beenz or Flooz, had attempted to solve this issue by developing their own e-currency that could be used for paying online. Unfortunately, they failed to gain critical mass and had to eventually shut down. In the end, people were feeling more comfortable paying in U.S. dollars, which PayPal ultimately allowed them to do.
Nevertheless, PayPal was not the only company on eBay competing for market share. Its fiercest rival became X.com, a startup that was founded a few months after PayPal’s public launch and led by no other than Elon Musk.
And Musk certainly wasn’t the one to back down. His company made sure to always outspend PayPal when it came to customer acquisition cost. To make matters worse, X.com was even copying many of the features that PayPal pioneered.
Both PayPal and X.com were paying excessive amounts of money to acquire and retain customers. They soon realized that the 2 companies would go out of business if they kept the spending pace. Instead of continuing on the path of destruction, both companies eventually decided it would be best to join forces.
In March 2000, Confinity and X.com announced that they would merge into one company, which would be known as PayPal. Overnight, the newly established PayPal became the de-facto market leader in the online payments industry, allowing them to significantly cut down marketing spend.
Bill Harris, previously CEO of X.com, became PayPal’s acting chief executive. His tenure would only last a month though. Just weeks after the merger, Harris (who went on to found Personal Capital in 2009) would be replaced by Musk.
Nevertheless, the change in leadership didn’t bring the stability the company desired. Musk would often be seen shouting at people in the office and clashing with many of Confinity’s founders.
One key arguing point became Musk’s desire to move PayPal’s servers from the free Unix operating system to Microsoft Windows – a suggestion that didn’t particularly sit well with Max Levchin. After a major and vocal fight between the 2, Musk decided it was best to take a vacation in Australia.
While on route to his vacation, he received a call from the board, which notified him of his immediate release. Nevertheless, Musk wasn’t the only one who clashed with his new partners. “We had been rivals, so it was awkward,” said Jeremy Stoppelman, an early employee of X.com (who’d go on to found Yelp), in a 2007 interview with Fortune.
“And that awkwardness turned into total dysfunction and warfare. Most X employees ended up leaving or getting fired. The culture was really an intellectual pissing contest, and some people didn’t like that.”
As a result of the leadership change, Thiel claimed back his spot as the firm’s acting CEO. Musk continued to stay on as chairman of the Board of Directors. He, furthermore, remained PayPal’s largest stakeholder.
Even under Thiel’s leadership losses and other problems began to mount. Russian fraudsters were, for instance, able to hack into PayPal’s systems and steal millions by retrieving their user’s credit card information.
To make matters worse, eBay, the firm’s biggest growth-accelerant, tried to poach on PayPal’s turf by acquiring its competitors and favoring them on the marketplace. Lastly, customer complaints were often left unanswered or, in some instances, were right out deleted.
To remain in business, PayPal needed to raise a lot more cash. It did another $90 million equity round (Series D) in March 2001 and subsequently filed to go public in September 2001. After 11 revisions to its prospectus, PayPal was able to go public on February 15, 2002 (allowing the company to raise another $70.2 million).
Life as a public company did not last for too long, though. Just 5 months after the IPO, eBay announced that it would acquire PayPal for $1.5 billion in an all-stock deal. At the time of the acquisition, every 1 in 4 transactions on eBay was facilitated through PayPal.
The acquisition would allow eBay to dictate the fee structure it imposed on sellers. Additionally, they would own the payment gateway to a hyper-growth industry (e-commerce).
The exit, furthermore, created a breadth of new millionaires who would go on to be known as the so-called ‘PayPal Mafia’. At its helm was Elon Musk, who netted $165 million from the eBay exit and went on to start Tesla and Space X, respectively. Other members include:
- Peter Thiel went on to become an early investor in companies like Airbnb and Facebook (amongst others) while co-founding Palantir Technologies (went public in July 2020).
- Max Levchin launched Affirm and led the company to an IPO in January 2021.
- Jeremy Stoppelman, who was a Head of Engineering at X.com, went on to launch Yelp.
- Reid Hoffman, PayPal’s former COO, launched LinkedIn in 2002 and subsequently sold the business to Microsoft for $26.6 billion in December 2016.
- Jawed Karim, Chad Hurley, and Steve Chen, who held engineering and design positions at PayPal, founded YouTube in 2005 and sold the business to Google for $1.65 billion in 2006.
- Keith Rabois, PayPal’s former Head of Business Development, held executive roles at LinkedIn and Square (COO). He is now the Managing Director of the Founders Fund.
- Scott Banister, a former PayPal member of the PayPal board, co-founded email service IronPort and sold it to Cisco in 2007 for $830 million.
- David Sacks, who also held a COO role at PayPal, launched Yammer, the first-ever Enterprise Social Network, in 2008 and sold the business to Microsoft for $1.2 billion 4 years later
Other notable members include Luke Nosek, Roelof Botha, Russel Simmons, or Jason Portnoy. One reason why the PayPal Mafia rose to worldwide prominence was the fact that its members kept on supporting each other, for instance by funding new business ideas. Max Levchin, for instance, was the first one to invest in Stoppelman’s Yelp.
Problematic news about business conduct kept arising, even after the company was acquired. The firm was sued by existing shareholders and other businesses. AT&T, for instance, claimed that eBay and PayPal copied one of its online payment patents without approval.
In the next few years, under the leadership of its new President Scott Thompson, PayPal continued to ascend. Its growth got accelerated when eBay announced that it would limit the payment options on its platform to only PayPal and ProPay (as well as payment upon pickup).
In the late 2000s, PayPal’s strategy was to expand the business into as many countries as possible. It did so to avoid enabling other competitors to establish a dominant presence in their home markets, which would eventually allow them to become a threat.
Simultaneously, PayPal became one of the early adopters in the mobile wave. It launched its iPhone app back in April 2010. Furthermore, its underlying infrastructure simply started to mature and minimized its propensity to outside attacks.
Furthermore, continuous product iterations led to substantial improvements in conversation rates – and thus revenue. When PayPal introduced its Express Checkout feature in 2011, it was able to boost merchant sales by over 18 percent. That same year, the FinTech was able to hit the 100 million user milestone.
Even a change in leadership wasn’t halting the company’s growth. President Scott Thompson left PayPal in January 2012 to serve as Yahoo’s new CEO and was eventually replaced by David Marcus who had joined the firm a year prior.
While PayPal was still the undisputed leader in the online payments space, life under Thompson hasn’t always been good. PayPal, influenced by eBay’s corporate culture, had been riddled by bureaucracy and slow decision making.
Changing things like the wording on a page would sometimes take up to 6 weeks. The company would even go as far as not hiring the most talented people so its leadership could avoid being challenged.
Under Marcus’ leadership, PayPal went back to its roots and adopted a more agile approach to doing business. PayPal launched an army of new products and even got busy buying up other businesses. In 2013, it announced one of the firm’s most significant acquisitions when it agreed to buy payment processor Braintree for $800 million in cash.
What many didn’t realize at the time was that PayPal found itself another golden nugget when it acquired Braintree. Just a year prior, Braintree itself had bought a little-known payments app called Venmo for $26.2 million. Today, Venmo represents one of America’s most prominent peer-to-peer payment applications, facilitating millions of transactions every year.
By the end of 2013, PayPal was generating annual revenues north of $6.6 billion – representing 41 percent of eBay’s total revenue and 36 percent of its profits. Not everyone was taking pleasure with that.
Activist investor Carl Icahn had, for the longest time, pushed eBay to spin-off PayPal. “PayPal’s a jewel and eBay is covering up its value,” Icahn said in an interview with Forbes. “If you just went out and took it public you’d get a huge premium because of growth.”
Even Elon Musk came out and publicly supported the move, saying that 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.”
eBay’s management eventually came to the same conclusion. In September 2014, eBay announced that it would officially spin-off PayPal to allow it to become an independent company.
A little less than a year later, in July 2015, PayPal officially spun off from eBay while becoming a publicly-traded company again. PayPal was already valued higher than eBay right after the company’s market debut – and hasn’t looked back ever since.
Alongside the spinoff, PayPal made a significant change in its leadership team. Dan Schulman, who previously held leadership positions at American Express, T-Mobile, and Virgin Mobile amongst others, joined the company as their new CEO (and has remained in this position to this date).
After all, the change was necessary and inevitable. Other companies, such as Square or even Apple and Google (via their Wallet products) had made big strides in the mobile payment space and posed a serious threat to PayPal’s bottom line. On top of that, startups like Adyen and Stripe were gaining more and more traction in the payment processing space.
Schulman’s focus was put towards 2 strategic initiatives: signing partnerships and expanding PayPal’s reach through acquisitions. In the span of 2 years, PayPal was able to ink partnerships with the likes of Mastercard, Visa, Apple, Google (via Android), Nintendo (Switch), Samsung Pay, and even China’s Baidu.
These partnerships allowed consumers to use their PayPal accounts for in-app/in-store payments. But especially the Mastercard and Visa partnerships, both announced in the span of a few months (in 2016), highlighted Schulman’s deal-making capabilities.
Prior to these announcements, PayPal was engaged in a public feud with Visa because it pushed its users to pay with their bank account as opposed to using a Visa-powered payment card. The partnerships significantly boosted PayPal’s presence and gave them a strong foothold in various ecosystems such as Apple’s AppStore or Google’s Play Store.
Second, PayPal went on a wide-ranging acquisition spree. Some of its most notable purchases include:
- July 2015: $890 million for money transfer company Xoom
- February 2017: $233 million for bill payment management company TIO Networks
- May 2018: $2.2 billion for Sweden-based iZettle
- June 2018: $120 million and $400 million for Simility and Hyperwallet, respectively
- November 2019: $4 billion for the browser extension Honey
Even under Schulman’s leadership, the company continues to face various instances of scrutiny. For once, there are countless reported incidents in which PayPal withheld multiple seller accounts without any further clarification.
Today, close to 25,000 people are employed by PayPal which operates out of more than 50 offices scattered across the whole world. In 2020, more than $936 billion was transacted through PayPal’s various platforms.
How Does PayPal Make Money?
PayPal makes money via transactions fees, subscriptions offered to business accounts, the sale of card readers, business loans, referral fees on cashback, interchange fees, interest on cash, as well as by promoting shipment services.
This analysis only covers income generated by PayPal’s core platform for the sake of simplicity. Nevertheless, it has to be noted that revenue from its other subsidiaries (such as Venmo, Xoom, or iZettle) represents a significant portion of its business.
Let’s take a look at each of PayPal’s income streams in the section below.
Consumer Account Fees
Opening a personal account on PayPal is free of charge. Additionally, most payments can be sent at no cost. This includes:
- Sending money to family and friends
- Receiving money from family and friends
- Paying for goods and services
- Withdrawing money to your personal bank account
Nevertheless, sending and receiving payments as a consumer is not always gratis. PayPal charges users on the following types of payments:
- Sending money to family and friends using a debit or credit card
- Conducting international payments
- Selling goods and services, for instance on platforms like eBay
- Instant transfers to a personal bank account
- Transferring money to personal debit or credit card
- Buying and selling cryptocurrencies
- Have a paper check mailed to you
A detailed overview of all the above-mentioned fees can be found here. It has to be noted that the fees do vary by country.
Furthermore, the fees are not always applicable across all countries. For instance, the purchase and sale of cryptocurrencies are only available in a few, selected countries as per the time of writing.
Business Account (Fees)
Apart from personal accounts, users can also open business accounts to send and receive payments (either online or in-store).
The business account, as the name suggests, allows firms to accept payments via PayPal for the goods and services they offer.
Similar to personal accounts, business accounts can be set up at no cost. If business owners require access to a more advanced set of features, they can do so by opting into PayPal Payments Pro.
Payments Pro is offered as a monthly subscription which comes in at $30 per month. Payment Pro features include a virtual terminal, the ability to process Visa, Mastercard, American Express payments, a dedicated customer support, and many more.
Apart from the subscription fee, business owners are also charged on a per-transaction basis. A detailed overview of merchant fees can be found here. Examples include:
- Transaction fee, for instance, paying 2.9 percent (plus fixed fee) for online or 2.7 percent (plus fixed fee) for in-store sales
- An additional surcharge of 1.5 percent on the base fee for international transactions
- PayPal Here transaction fees (more on that in the next chapter)
- Fees on debit and credit card payments
- Mass payments, allowing businesses to organize many recipients at once (maximum 2 percent)
- Micropayment fee, equal to 5 percent plus fixed fee
- Chargeback fees are applied for transactions that are not processed either through a buyer’s PayPal account or through a guest (non-PayPal user) checkout
- Dispute fees are charged whenever buyers file a claim or request a chargeback
- Currency conversion fees
… and plenty more. On top of that, business account owners can opt into additional premium features, which again, are paid every month (along with set-up fee and per-transaction charges).
Examples include account monitoring services ($29.95 set-up fee and $19.95 per month), advanced fraud management filters ($20 per month and $0.05 per transaction), or buyer authentication services ($10 per month and $0.10 per transaction), amongst others.
Business account fees are subject to the country of operation as well as where the payments are made from.
PayPal Here
PayPal Here is a point-of-sale (POS) system that allows merchants to accept in-store payments. Consumers can pay using their debit and credit cards as well as various mobile wallets (such as Apple or Google Pay).
As stated before, PayPal charges a transaction fee for accepting in-store payments. Apart from that, it makes money through the sale of its card readers. Prices range between $24.99 to $99.99.
Payflow
Payflow is a payment gateway that allows merchants to link their website to their processing network and merchant account.
As highlighted above, merchants pay a fixed fee for every transaction ($0.10 in the United States). If merchants need more customization capabilities, they can do so by opting into Payflow Pro, coming in at $25 per month.
PayPal Working Capital
PayPal Working Capital allows business owners to apply for loans issued by PayPal. The additional funding should then be used to expand the business and its operations.
The maximum cash advance is dependent on a variety of factors, such as the number of sales, account history (how many claims you receive, for instance), and whether PayPal Working Capital has been used before.
As opposed to traditional loans, which charge monthly interest, PayPal loans are repaid on a per-transaction basis. This means that every time you make a sale, a certain percentage is deducted and used to repay the loan. Consequently, PayPal generates income on the deducted fees.
Pay in 4
In September 2020, PayPal launched installment payment plans (called Pay In 4). The offering enables users to pay for their purchases (ranged between $30 and $600) over a six-week period in 4 installments.
Pay In 4 allows PayPal to compete with the likes of Affirm (established by PayPal co-founder Max Levchin), AfterPay, or Klarna, amongst others.
Right now, PayPal generates income from fees that it charges consumers for delayed payments. In the future, it could also charge merchants, either on a monthly- or transaction-basis.
Cashback
In August 2017, PayPal announced that it would offer a Mastercard branded credit card which, at the same time, would offer cashback rewards.
The card offers 2 percent back on purchases without an annual fee, no minimum redemption requirements, no constraints on how to use cash rewards, and no expiration date.
Companies that offer cashback rewards then make money for every transaction that they source for the merchant. By promoting spending at selected partners, they end up receiving a portion of the transaction volume.
Interchange Fees
PayPal offers both a debit and credit card to consumers and businesses alike. Those cards are provided in cooperation with payments provider Mastercard.
Whenever you pay with your debit or credit card, a so-called interchange fee is applied. Interchange fees are paid by the merchant and normally are less than 1 percent. So if you buy something for $100, around $1 of that would go to Mastercard.
PayPal would then receive a portion of that fee in exchange for promoting the card to its users. The actual percentage share is not publicly disclosed.
Cash Interest
Users can open so-called Cash Accounts which allows them to hold a balance, and use the balance to send and accept money, pay for items online using mobile phones or in stores, and make payments, among others.
PayPal, just like any normal bank, uses the cash residing on those accounts to lend it out to other institutions, such as said banks.
They then collect interest from these institutions (also called Net Interest Margin). For 2019, according to Statista, the net interest margin for all U.S. banks was equal to 3.35 percent.
Shipping Label
PayPal works together with the United States Postal Service as well as UPS to offer shipping services to merchants on its platform.
Merchants can receive discounts on shipping, purchase, and print shipping labels, track shipments, or opt into shipping coverage.
Merchants then pay a postage fee to the above-mentioned shipping providers. The service can be accessed at no cost.
While free of charge, it can be assumed that PayPal receives a portion of the shipment fee from the logistics provider.
PayPal Funding, Valuation & Revenue
According to Crunchbase, PayPal has raised a total of $216 million across 6 rounds of venture capital funding. The company raised another $70.2 million during its IPO in July 2015.
PayPal was valued at $1.5 billion when eBay acquired it back in 2001. That valuation has skyrocketed ever since. Today, PayPal has a market cap of $277 billion, making it one of the world’s most valuable companies.
For the fiscal year 2020, PayPal has generated $21.4 billion in revenue. The company turned a profit of $3.29 billion over the same timespan.
