PayPal

Type: Subsidiary
Founded: Palo Alto, California (June 1998)
Headquarters: San Jose, California, U.S.
Area served: Worldwide
Founders: Ken Howery, Max Levchin, Elon Musk, Luke Nosek, Peter Thiel
Key people: Patrick Dupuis, CFO
Revenue: US$5.6 billion (2012)
Owner: eBay Inc.
Advertising: Yes
Registration: Optional
Available in: Multilingual

PayPal is an Internet business which allows the transfer of money between email users and merchants, avoiding traditional paper methods such as checks/cheques and money orders. PayPal also performs payment processing for e-commerce vendors, auction sites, and other corporate users, for which they charge a fee. Corporate headquarters are in San Jose, California; it is now an eBay company.

History

Beginnings

PayPal was founded in December 1998 by Peter Thiel and Max Levchin. One of its first premises was the 165 University Avenue office in Palo Alto, California, home of a number of other noted Silicon Valley startups. On the business side, many of its initial recruits were alumni of The Stanford Review, which was also founded by Peter Thiel. Most of the early engineers hailed from the University of Illinois at Urbana-Champaign, recruited by Max Levchin. In its initial incarnation, PayPal was a service for users to send money via PDAs, with actor James Doohan, Star Trek’s “Scotty,” as its spokesman. The PDA software was later discarded in favor of a web-based system that became popular with eBay’s millions of buyers and sellers. Coupled with aggressive marketing campaigns offering $10 (and later $5) for new users to sign up, the firm grew at a meteoric rate of 7–10 percent per day between January and March 2000.

Unknown to many people is the fact that PayPal is one of the few Internet companies which has a single letter domain name, (http://www.x.com) in use. As of Jan 2006, this URL still resolves to the PayPal home page. This name was acquired by PayPal in early 2000, when x.com merged with PayPal.

Though growing rapidly, PayPal was losing $10 million a month and was fraught with internal turmoil that led to three CEO changes in its first year of operations. Foreign Mafia rings found ways to steal millions from the young company. And worst of all, eBay launched a payments service named Billpoint to compete with PayPal. Yet the company was able to turn the corner and become the first dot-com to IPO after the September 11 attacks — an accomplishment that ironically backfired when PayPal’s new high profile status helped prompt a slew of class action lawsuits and regulatory probes, including one by NY Attorney General Eliot Spitzer. This paved the way for the company to eventually reconcile with its former rival, eBay. 

In October 2002 PayPal was acquired by eBay. PayPal had previously been the payment method of choice by over fifty percent of eBay users, and the service competed with eBay’s subsidiary BillPoint. eBay has phased out its BillPoint service in favor of retaining the PayPal brand. PayPal’s only substantially similar competitor is now BidPay, after Citibank’s c2it service closed in late 2003 and Yahoo!’s PayDirect service closed in late 2004. BidPay itself ceased payment operations on the 31st December 2005 but the site remains to carry out any remaining customer service issues .

Bank status

Due to the manner in which it operates, PayPal is not considered a bank. Therefore it is not required to abide by the legislation that governs banks.

In the United States, PayPal is licensed as a money transmitter on a state-by-state basis. PayPal is not classified as a bank in the United States, though the company is subject to some of the rules and regulations governing the financial industry including Regulation E consumer protections and the USA PATRIOT Act.

In 2007, PayPal Europe was granted a Luxembourg banking license, which, under European Union law, allows it to conduct banking business throughout the EU. It is therefore regulated as a bank by Luxembourg’s banking supervisory authority, the Commission de Surveillance du Secteur Financier (CSSF).

In Australia, PayPal is licensed as an Authorised Deposit-taking Institution (ADI) and is thus subject to Australian banking laws and regulations.

Criticism

PayPal is not subject to regular banking regulations. Because it considers itself to be an ‘electronic money transmitter’, user rights and safeguards vary.

Controversial aspects of PayPal include the terms of its User Agreement; particularly, for limiting account access and user access to funds. According to the PayPal user agreement, users agree to give PayPal the power to limit access to funds in the account for 180 days. This policy appears to protect PayPal from financial loss in the event of chargebacks or disputes. Banks and financial institutions provide chargeback rights for a specified period of time that varies by the institution. PayPal’s account access limitations prevent the movement of funds until discrepencies, or terms of the limitation, are resolved.

In March 2002, two PayPal account holders separately sued the company for alleged violations of the Electronic Funds Transfer Act (EFTA) and California law. Most of the allegations concerned PayPal’s dispute resolution procedures. The two lawsuits were merged into one class action lawsuit (In re PayPal litigation). An informal settlement was reached in November 2003, and a formal settlement was signed on June 11, 2004. The settlement requires that PayPal change its business practices (including changing its dispute resolution procedures to make them EFTA-compliant), as well as making a $9.25 million USD payment to members of the class. PayPal denies any wrongdoing.

In September 2005, PayPal suspended an account (opened by Something Awful owner Richard Kyanka) used to collect donations for the American Red Cross to help Hurricane Katrina victims. After receiving over $30,000 USD in donations in 9 hours, PayPal locked-down the account. To re-activate the account, PayPal demanded “proof of delivery”, even though no products were being sold. Kyanka asked PayPal to transfer the funds to the Red Cross; PayPal said they couldn’t do this, but could give the money to United Way (a rival charity collecting for the same cause, that had an undisclosed agreement with PayPal). Kyanka originally agreed to this, but after learning of the United Way’s prior legal troubles, he asked PayPal to refund all the donations. It’s unclear whether simply waiting for PayPal to reach a decision in regards to the account would have resulted in PayPal allowing the money to eventually reach the Red Cross.

PayPal’s Seller Protection policies do not cover intangible goods or goods that are “not as described”.

PayPal does not allow people from certain countries to use its services, and in some occasions where it does, it only allows the participants to send and not receive. This has brought criticism from people from within these countries.

Licensed under the GNU Free Documentation License. It uses materials from the Wikipedia.