The past, present, and future of PayPal

How the payments giant started, grew, and continues to adapt to change

PayPal has long made a name for itself as a payments giant — and proven to be an efficient and adaptable company. In the early days, it focused on an entirely different product and has since molded itself in response to changing market demands, an endlessly mutable competitive landscape, and shifting business threats. Over the years, PayPal has demonstrated again and again the importance of being nimble when you play with how people pay.

How it all started

The payments giant was born out of a pivot.

PayPal was established in 1998 as Confinity, and, originally, it had little to do with payments; the company was focused on building security software for handheld devices. When the founders weren’t able to gain traction for the service, they started thinking about other mobile software opportunities, eventually landing on a very early digital wallet (a product they named PayPal, which was still under the Confinity umbrella). The early PayPal allowed users to “beam” money through their handheld devices and via email — and it soon caught on for eBay users, who were mostly settling payments via check or money order.

Despite the initial reluctance of Confinity’s co-founder Max Levchin — now founder of Affirm — about PayPal being used to settle online auction payments, it became clear that this product held more potential than the original security vision. What’s more, it turned out that eBay users were exactly the captive audience needed for the company to make its mark. So six months after launching, Confinity pivoted to focus on building out PayPal for the eBay community.

At the same time, Elon Musk’s online bank, X, was offering a similar email payment service, and the two companies were competing directly (and intensely). According to Confinity’s COO at the time, David Sacks (now chief executive of Zenefits), both companies might have “run out of money” had they continued paying the referral bonuses each was using to lure new users. In 2000, the companies merged — or, according to some, including Musk, X acquired Confinity — to combine forces. In 2000, Peter Thiel took over from Musk as CEO, and the combined company (called X after the merger) was renamed PayPal to better reflect the product. In the midst of everything, fraud was threatening to take down the company entirely, but being nimble and innovative allowed it to bounce back — in fact, PayPal’s anti-fraud measures are today regarded as revolutionary in the space.

Meanwhile, eBay was also attempting to build a payment solution of its own. In 1999, eBay purchased a startup called Billpoint, another peer-to-peer money transfer service, intending to offer Billpoint as an integrated payment solution for its auction site. However, PayPal was rapidly acquiring new users (by some accounts, at a rate of 7-10 percent per day) and Billpoint struggled to keep pace. Despite Billpoint’s high-profile partnerships with financial brands such as Wells Fargo and Visa and various attempts at promoting the solution, PayPal had a running start and undeniable network effects that resulted in Billpoint — and eBay — bleeding cash.

Auctions + payments - payments

PayPal went public in February of 2002 (its first of two IPOs to date) at $13 per share, raising a total of $16 million. Just five months later, eBay hung up its payment efforts, agreeing to acquire PayPal for $1.4 billion and shutting down Billpoint. At the time of acquisition, PayPal was already handling 70 percent of eBay’s electronic payments and had more than 15 million users.

Twelve years later (spanning a number of strategic acquisitions by PayPal, discussed below), in 2015, eBay announced that the two companies would split to focus on their respective markets, a reflection of the changing competitive landscape, diminishing returns on the partnership, and shareholder demands. According to the stock market, the split was great news for PayPal, but not so much for eBay, with PayPal’s post-IPO valuation landing at $13 billion above that of its previous owner.

Acquisitions and innovations

In some ways, PayPal typifies the old adage that if you can't beat 'em, join 'em — or at least acquire them. Though many fundamentals of the payments landscape have stood the test of time, a number of the companies making some of the biggest changes now fall under the PayPal umbrella. Today, peer-to-peer payments include much more than those between buyers and sellers on eBay; according to PayPal’s annual report for 2015, the company’s stated mission is “to democratize the movement and management of money.”

In 2013, PayPal acquired Braintree, a payments gateway that makes online and mobile payments seamless for buyers. When making a PayPal payment, users are directed to a new page to enter their card or PayPal account details, creating a layer of friction by taking the buyer away from the vendor’s website or app — a problem exacerbated by the rise in mobile commerce. Braintree, however, integrates directly into the merchant’s site or app, allowing merchants to accept cards, PayPal, Apple Pay, Android Pay, Venmo, and Bitcoin from within the merchant’s checkout flow.

Braintree, for its part, acquired peer-to-peer (P2P) payment company Venmo in 2012, so PayPal now also owns Venmo. Until recently, Venmo only offered the ability to make payments between individual consumers and made no money from these transactions — yet reports say that Venmo was a large part of what attracted PayPal to the acquisition of Braintree in the first place. PayPal’s strategy here is becoming clearer. It announced in early 2016 that Venmo would start piloting merchant payments for specific transactions. Now, select merchants using Braintree are able to accept payment via Venmo in the U.S. and on certain mobile platforms — and they pay the same fees as merchants using a more traditional PayPal account. From the merchant perspective, accepting Venmo is a value-add because of the social nature of the platform: Not only can users see where their friends are making purchases (effectively a form of social advertising), but they can also more easily split and share payments between groups.

Toward the end of 2015, PayPal also acquired Xoom, a service used for international P2P payments and remittances that is popular in international markets such as Mexico, India, the Philippines, China, and Brazil. In the 12 months prior to the acquisition, Xoom customers sent more than $7 billion — close to the amount sent by Venmo users in 2015. The service continues to operate independently. Strategically, bringing Xoom under its wing allowed PayPal to rapidly expand into new international geographies and gave it the opportunity to add to its suite of services without having to build a new product in-house.

The more things change

While innovations in the payments industry don’t necessarily lead to what one might think of as world-shaking (Mars missions, hybrid cars, and the human genome project come to mind), things have certainly changed for the better over the past several decades — imagine, for example, paying for an Amazon purchase by mailed-in check. And PayPal has put itself at the center of many of the biggest transformations in the way we pay, whether that looks like revolutionary anti-fraud measures, strategic mergers and acquisitions in a highly competitive landscape, or simply adapting to market demand at a given moment in time. Regardless of the industry, there’s much to learn from PayPal’s perennial ability to adapt, acquire, and anticipate what’s coming.

Related articles

Treasury Fintech Report Creates Call To Action for Industry Collaboration

2 Min Read

In China, a “techfin” approach wins out over “fintech”

3 Min Read

The rise of prepaid cards in America

4 Min Read
More Articles