In January,The Banker celebrated 10 years of the euro (see January issue, page 102). What you may have missed is that there was another 10-year celebration taking place at the same time – of a currency that has been just as successful as the euro, if not more so. This is the internet currency of PayPal.
PayPal does the processing for its owners, internet buy and sell site eBay and in eBay’s results for the third quarter of 2008, PayPal managed $14.81bn-worth of payments, which represents 28% year-on-year growth. It is also noteworthy that, having slipped to 71% of purchases being through eBay at the end of 2004, PayPal’s Q3 2008 results showed that purchases made outside eBay are now greater than through eBay. In other words, PayPal is not eBay’s payment system any more. It is the internet’s payment system.
All this, and only 10 years old. Yet PayPal was conceived in December 1998 at a time when there were many other contenders for the online payments crown. PayPal succeeded for three major reasons.
Impeccable timing
The first reason was timing, because there was no way to support person-to-person buying and selling on the internet back in 1998. The second is the viral nature of PayPal or ‘the network effect’. There is nothing like an e-mail saying, “you’ve got money” to get people to sign up. The final success is that it made online payments cheap by minimising the cost of transactions and authentication. But PayPal cannot afford to sit back – there is plenty of competition around.
First, there are the big internet competitors to PayPal, such as Google CheckOut and Amazon’s Flexible Payment Services. Second is a whole raft of other pretenders, such as Alert Pay, WorldPay, PayFlow, LinkPoint, Authorize.Net, Nochex, 2CheckOut, or PayByCheck. Third are the big regional players, such as Alipay in China, owned by Alibaba.
And then there are battles that PayPal is entering into as it expands its own franchise, such as the deferred payment service, ‘Pay Later’, which competes with CIT Bank’s ‘Bill Me Later’.
So, times may be good for PayPal, but it is still being just as challenged by competitors a decade on as it was in 1998.
Chris Skinner is an independent commentator and chairman of London-based The Financial Services Club.www.thefinanser.com
