PayPal Merchant Services

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REV: MARCH 13, 2007

THOMAS EISENMANN LAUREN BARLEY

PayPal Merchant Services
In April 2006, PayPal executives closely monitored the launch of Google’s online payment service. Google offered a limited trial of its payment service alongside its beta test of Google Base—a searchable service that hosted user-posted listings for items such as products, apartments, jobs, and autos. Google’s much-anticipated payment service offered a convenient and secure way for Google Base (Base) buyers to pay using their credit cards and for Base sellers to process those payments. Google’s payment service was free to buyers and inexpensive for sellers, compared to other options. Analysts speculated that Google might extend its payment service beyond Base to the hundreds of thousands of merchants that used its paid search services. Google’s payment initiative posed a potentially serious threat to San Jose, California-based PayPal. Founded in 1998 and acquired in 2002 by the e-commerce giant eBay, PayPal allowed any individual or business with an e-mail address and a credit card or bank account to send or receive online payments. In 2005, PayPal earned revenue of $1 billion—a 47% increase over 2004—and processed $27 billion in total payments. As of February 2006, PayPal had 100 million registered users; 28 million accounts were “active,” that is, used in the previous three months. One-third of all U.S. online shoppers had PayPal accounts.1 PayPal’s success was the product of a three-phase strategy described by eBay CEO Meg Whitman: “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.”2 PayPal was a vital component of eBay’s growth strategy, generating 23% of eBay’s 2005 revenue. In turn, PayPal’s success was closely tied to that of eBay’s marketplaces: 78% of marketplace transactions were completed using PayPal,3 and more than 70% of PayPal’s 2005 revenue came from the auction site, up from 61% in 2002. International expansion remained a priority for PayPal, which offered local services in 14 countries and supported seven currencies. In 2005, PayPal earned 36% of its revenue outside the U.S., compared to 48% for eBay’s marketplaces. With growth slowing in eBay’s core U.S. marketplace, PayPal was also aggressively pursuing the 87% of U.S. e-commerce conducted off the eBay platform in 2005.4 PayPal Merchant Services, created in late 2003 to target this opportunity, had launched new products, forged strategic partnerships, and recruited large accounts such as Dell, Sharper Image, and United Way. Despite rapid growth, PayPal Merchant Services processed only about 3.5% of all “off-eBay” U.S. e-commerce transactions;5 traditional credit cards remained the dominant online payment vehicle. Over its short history, PayPal had vanquished many online payment rivals, including services from Yahoo!, Citibank, and eBay itself. However, some industry observers believed that Google could ________________________________________________________________________________________________________________ Professor Thomas Eisenmann and Research Associate Lauren Barley of the HBS California Research Center prepared this case. This case was developed from published sources. HBS cases are developed solely as the basis for class discussion. Cases are not intended to serve as endorsements, sources of primary data, or illustrations of effective or ineffective management. Copyright © 2006 President and Fellows of Harvard College. To order copies or request permission to reproduce materials, call 1-800-545-7685, write Harvard Business School Publishing, Boston, MA 02163, or go to http://www.hbsp.harvard.edu. No part of this publication may be reproduced, stored in a retrieval system, used in a spreadsheet, or transmitted in any form or by any means—electronic, mechanical, photocopying, recording, or...
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