090 – Paying on the Net – 2000

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The young do not know enough to be prudent, and therefore they attempt the impossible,
and achieve it, generation after generation.  Pearl S Buck

In 1999 Peter Thiel, Max Levchin, Luke Nosek and Ken Howery founded Confinity to process payments through Palm Pilots, sending money tokens that could be cashed in or reconciled through a website.  The website was named paypal.com. 

X.com was founded in 1999 by a close Palo Alto neighbour.  Elon Musk, a South African, established it as an Internet financial services company which was backed by Barclays Global and First Western National to give it a banking status.

The two organisations merged in March 2000, retaining the X name.  With funding from Sequoia and others it became PayPal in 2001.  PayPal saw eBay as its major target.  It offered new users a free $10 balance and $10 for anyone they introduced.  PayPal was valuable to those smaller eBay traders unable to obtain merchant status with credit card companies.  And for buyers there was no need to give out credit or debit card numbers.

PayPal assumed it would earn interest on the balances held on PayPal accounts but it found users kept these to an absolute minimum.  Also users often paid by credit card and PayPal had to meet the card companies’ fees while allowing the users full value on their accounts.  Other revenue sources were needed.

PayPal moved away from offering its service free and introduced a transaction fee; fortunately by then the penetration into the eBay space was relatively secure.

One of PayPal’s innovations was the way in which it authenticated a user’s bank account.  It made two low deposits into the account and this created a four digit password for the user.  This not only gave positive feedback that the user and account were genuine but made the user predisposed towards paying into PayPal from this account rather than using a credit card.

July 2002 eBay acquired PayPal and phased out its own service.

In 2010 PayPal signed a deal with China UnionPay, accessing fourteen major Chinese banks and several smaller ones.

By 2011 PayPal had around 90million active users operating 230million accounts.  There were localised websites for twenty markets and it operated in twenty-four different currencies in 190 markets.  It worked with millions of merchants, achieving over a third of eBay revenues.

The careers of the PayPal innovators are worthy of note:

Musk founded SpaceX developing rockets to be used by NASA, and was also responsible for the Tesla Motors electric sports car.

Max Levchin had helped develop the Gausebeck-Levchin, a cryptographic routine that displayed a blurry picture for a user to read and enter; this eliminated any automatic access by computer.  The system came into general use as Captcha.

He founded Slide.com in 2004, providing services for social networking sites.  This was acquired by Google for $182m and Levchin became a VP of Engineering.

Peter Thiel launched Clarium as a hedge-fund business.  As an angel investor he placed $500,000 in Facebook for 5.2%. 

Thiel, Howery, Nosek, Parker

He also invested in Friendster, LinkedIn and others.  In 2005 he and Ken Howery, PayPal’s CFO, created the Founders Fund with $50m assembled from angels and entrepreneurs.  Luke Nosek and Sean Parker joined them in 2006. 

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