January 30, 2010


PayPal is an e-commerce business allowing payments and money transfers to be made through the Internet. PayPal serves as an electronic alternative to traditional paper methods such as cheques and money orders.

A PayPal account can be funded with an electronic debit from a bank account or by a credit card. The recipient of a PayPal transfer can either request a check from PayPal, establish their own PayPal deposit account or request a transfer to their bank account. PayPal is an example of a payment intermediary service that facilitates worldwide e-commerce.

PayPal performs payment processing for online vendors, auction sites, and other commercial users, for which it charges a fee. It sometimes also charges a transaction fee for receiving money (a percentage of the amount sent plus an additional fixed amount). The fees charged depend on the currency used, the payment option used, the country of the sender, the country of the recipient, the amount sent and the recipient's account type.[2] In addition, eBay purchases made by credit card through PayPal may incur a "foreign transaction fee" if the seller is located in another country, as credit card issuers are automatically informed of the seller's country of origin.

On October 3, 2002, PayPal became a wholly owned subsidiary of eBay.[3] Its corporate headquarters are in San Jose, California, United States at eBay's North First Street satellite office campus. The company also has significant operations in Omaha, Nebraska; Scottsdale, Arizona; and Austin, Texas in the U.S., Chennai, Dublin, Berlin and Tel-Aviv. As of July 2007, across Europe, PayPal also operates as a Luxembourg-based bank.


The current incarnation of PayPal is the result of a March 2000 merger between Confinity and X.com.[4] Confinity was founded in December 1998 by Max Levchin, Peter Thiel, Luke Nosek, and Ken Howery, initially as a Palm Pilot payments and cryptography company.[5] X.com was founded by Elon Musk in March 1999, initially as an Internet financial services company. Both Confinity and X.com launched their websites in late 1999. Both companies were located on University Avenue in Palo Alto. Confinity's website was initially focused on reconciling beamed payments from Palm Pilots[6] with email payments as a feature and X.com's website initially featured financial services with email payments as a feature.

At Confinity, many of the initial recruits were alumni of The Stanford Review, also founded by Peter Thiel, and most early engineers hailed from the University of Illinois at Urbana-Champaign, recruited by Max Levchin. On the X.com side, Elon Musk recruited a wide range of technical and business personnel, including many that were critical to the combined company's success, such as Amy Klement, Sal Giambanco, Roelof Botha[7] of Sequoia Capital, Sanjay Bhargava and Jeremy Stoppelman.[8]

To block potentially fraudulent access by automated systems, PayPal used a system (see CAPTCHA) of making the user enter numbers from a blurry picture, which they coined the Gausebeck-Levchin test.[9]

eBay watched the rise in volume of its online payments and realized the fit of an online payment system with online auctions. eBay purchased Billpoint in May 1999, prior to the existence of PayPal. eBay made Billpoint its official payment system, dubbing it "eBay Payments," but cut the functionality of Billpoint by narrowing it to only payments made for eBay auctions. For this reason, PayPal was listed in many more auctions than Billpoint. In February 2000, the PayPal service had an average of approximately 200,000 daily auctions while Billpoint (in beta) had only 4,000 auctions.[10][9][11][12] By April 2000, more than 1,000,000 auctions promoted the PayPal service. [13] PayPal was able to turn the corner and become the first dot-com to IPO after the September 11 attacks.[14]

Acquisition by eBay
n October 2002, PayPal was acquired by eBay for $1.5 billion.[15] PayPal had previously been the payment method of choice by more than fifty percent of eBay users, and the service competed with eBay's subsidiary Billpoint, Citibank's c2it, whose service was closed in late 2003, and Yahoo!'s PayDirect, whose service was closed in late 2004. Western Union announced the December 2005 shut down of their BidPay service but subsequently sold it in 2006 to CyberSource Corporation. BidPay subsequently ceased operations on December 31, 2007. Some competitors which offer some of PayPal's services, such as Google Checkout,Wirecard, Moneybookers, 2Checkout, CCNow and Kagi, remain in business, despite the fact that eBay now requires everyone on its Australian and United Kingdom sites to offer PayPal.[16][17] Eventually eBay moderated its position, and mandated that sellers on eBay Australia offer PayPal as one of the (but not necessarily the only) payment methods.[18] These accepted payment methods include bank deposit, cheques and money orders, escrow, and credit cards (processed by other than PayPal).[19]

In January 2008, PayPal agreed to acquire Fraud Sciences, a privately-held Israeli start-up company with expertise in online risk tools, for $169 million, in order to enhance eBay and PayPal's proprietary fraud management systems and accelerate the development of improved fraud detection tools.[20] In November 2008, the company acquired Bill Me Later, an online payments company offering transactional credit at over 1000 online merchants in the US.[21]

PayPal's total payment volume, the total value of transactions, was US$ 60 billion in 2008, an increase of 27 percent over the previous year.[22] The company continues to focus on international growth and growth of its Merchant Services division, providing e-payments for retailers off eBay.

Business today
Currently, PayPal operates in 190 markets, and it manages over 184 million accounts, more than 73 million of them active. PayPal allows customers to send, receive, and hold funds in 19 currencies worldwide[22]. These currencies are the Australian dollar, Canadian dollar, Chinese renminbi yuan (only available for some Chinese accounts, see below), Euro, pound sterling, Japanese yen, Czech koruna, Danish krone, Hong Kong dollar, Hungarian forint, Israeli new sheqel, Mexican peso, New Zealand dollar, Norwegian krone, Polish zloty, Singapore dollar, Swedish krona, Swiss franc and U.S. dollar. PayPal operates locally in 13 countries.

Residents in 194 markets can use PayPal in their local markets to send money online. These new markets include Peru, Indonesia, the Philippines, Croatia, Fiji, Vietnam and Jordan. A complete list can be viewed at PayPal's website.

PayPal revenues for Q1 2009 were $643 million, up 11 percent year over year. 42 percent of revenues in q1 2009 were from international markets. PayPal's Total Payment Volume (TPV), the total value of transactions in Q1 2009 was nearly $16 billion, up 10 percent year over year.[23]

In 2008, PayPal's TPV off eBay exceeded volume on eBay for the first time. PayPal's Total Payment Volume in 2008 was $60 billion representing nearly 9 percent of global e-commerce and 15 percent of US e-commerce[24]

At an analyst day on March 11, 2009, eBay CEO, John Donahoe announced that PayPal could be a larger driver of revenue than the eBay marketplaces business.[25] RIM announced that PayPal will be the only payment mechanism for its Blackberry App World, which launched on April 1, 2009.[26]

In China PayPal offers two kinds of accounts:

* PayPal.com accounts, for sending and receiving money to/from other PayPal.com accounts. All non-Chinese accounts are PayPal.com accounts, so these accounts may be used to send money internationally.
* PayPal.cn accounts, for sending and receiving money to and from other PayPal.cn accounts.

It is impossible to send money between PayPal.cn accounts and PayPal.com accounts, so PayPal.cn accounts are effectively unable to make international payments. For PayPal.cn, the only supported currency is the renminbi.

Although PayPal's corporate headquarters are located in San Jose, PayPal's operations center is located near Omaha, Nebraska, where the company employs more than 2,000 people as of 2007.[27]. PayPal's European headquarters are in Luxembourg and international headquarters in Singapore. The company also recently opened a technology center in Scottsdale, Arizona, and Chennai India.

PayPal's innovation environment, Paypal-Labs.com[28], hosts several outreach and experimental projects such as the storefront application[29], the Myspace and Facebook donation widgets, and the PayPal blog.[30]

Bank status
In the United States, PayPal is licensed as a money transmitter on a state-by-state basis.[31] 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.[32] On May 15, 2007, PayPal announced that it would move its European operations from the UK to Luxembourg, commencing July 2, 2007 as PayPal (Europe) S.à r.l. & Cie, S.C.A.[33] This would be as a Luxembourg entity regulated as a bank by the Commission de Surveillance du Secteur Financier (CSSF), the Luxembourg equivalent of the FSA.[34] PayPal Luxembourg will then provide the PayPal service throughout the European Union (EU).

Safety and protection policies
The PayPal Buyer Protection Policy states that customers may file a buyer complaint within 45 days if they did not receive an item or if the item they purchased was significantly not as described. If the buyer used a credit card, they might get a refund via chargeback from their credit card company.

According to PayPal, it protects sellers in a limited fashion via the Seller Protection Policy.[35] In general the Seller Protection Policy is intended to protect the seller from certain kinds of chargebacks or complaints if seller meets certain conditions including proof of delivery to the buyer. PayPal states the Seller Protection Policy is "designed to protect sellers against claims by buyers of unauthorized payments and against claims of non-receipt of any merchandise". Note that this contrasts with the consumer protection they offer. This policy should be read carefully before assuming protection. In particular the Seller Protection Policy includes a list of "Exclusions" which itself includes "Intangible goods", "Claims for receipt of goods 'not as described'" and "Total reversals over the annual limit". There are also other restrictions in terms of the sale itself, the payment method and the destination country the item is shipped to (simply having a tracking mechanism is not sufficient to guarantee the Seller Protection Policy is in effect).[36] A class-action lawsuit was filed against PayPal, days after the company's successful initial public offering. [37]

Security key
In early 2006, PayPal introduced an optional security key as an additional precaution against fraud. A user account tied to a security key has a modified login process: the account holder enters their login ID and password, as normal, but is then prompted to press the button on the security key and enter the six-digit number generated by it. This two-factor authentication is intended to prevent an account from being compromised by a malicious third party without access to the physical security key. However, the user (or malicious third party) can alternatively authenticate by providing the credit card or bank account number listed on their account. Thus, the PayPal's implementation does not offer the security of true two-factor authentication.

The key currently costs US$5.00 for all users with no ongoing fees.[38] The option of using a security key with one's account is currently available only to users registered in Australia, Germany, Canada, the United Kingdom and the United States.[39]


It is also possible to use a mobile phone to receive an MTAN (Mobile Transaction Authentication Number) via SMS[40] , however this security scheme has known vulnerabilities.[41]
[edit] Regulation

In Europe, PayPal is registered as a bank in Luxembourg under the legal name PayPal (Europe) Sarl et Cie SCA, a company regulated centrally by the Luxembourg bank authority, the Commission de Surveillance du Secteur Financier (CSSF)[42] (note that all of the company's European accounts were transferred to the PayPal's bank in Luxembourg on July 2, 2007.[43]) Prior to this move, PayPal had been registered in the UK as Paypal (Europe) Ltd, an entity which was licensed as an Electronic Money Issuer with the UK's Financial Services Authority (FSA) from 2004. This ceased in 2007, when the company moved to Luxembourg,[44][45] however the Luxembourg entity is still regulated by the FSA, as it is an entity from the European Economic Area which conducts regulated activities in the UK.[46]

In the US, although PayPal has an extensive User Agreement, [47] PayPal is not directly regulated by the U.S. federal government, because it serves as a payment intermediary.[48] The law is unclear as to whether PayPal is a bank, narrow bank, money services business or money transmitter. PayPal could also be subject to state regulation, but state laws vary, as do their definitions of banks, narrow banks, money services businesses and money transmitters. The most analogous regulatory source of law for PayPal transactions comes from P2P payments using credit and debit cards. Ordinarily, a credit card transaction, specifically the relationship between the issuing bank and the cardholder, is governed by the Truth in Lending Act (TILA) 15 U.S.C. §§ 1601-1667f as implemented by Regulation Z, 12 C.F.R. pt. 226, (TILA/Z). TILA/Z requires specific procedures for billing errors, dispute resolution and limits cardholder liability for unauthorized charges. [49] Similarly, the legal relationship between a debit cardholder and the issuing bank is regulated by the Electronic Funds Transfer Act (EFTA) 15 U.S.C. §§ 1693-1693r, as implemented by Regulation E, 12 C.F.R. pr. 205, (EFTA/E). EFTA/E is directed at consumer protection and provides strict error resolution procedures. [50] However, because PayPal is a payment intermediary and not otherwise regulated directly, TILA/Z and EFTA/E do not operate exactly as written once the credit/debit card transaction occurs via PayPal. Basically, unless a PayPal transaction is funded with a credit card, the consumer has no recourse in the event of fraud by the seller.[citation needed]
[edit] Fraud

Money transfers via PayPal create an inherent risk of fraud due to the impersonal nature of internet commerce and the gap in regulatory treatment of PayPal transactions. The existing fraud protection regulations, EFTA/E and TILA/Z, do not apply to P2P account holders as they do debit/credit card transactions outside of a P2P payment service.

If an unauthorized third party obtains and uses someone's PayPal login information and completes a transaction using the accountholder's debit or credit card, EFTA/E and TILA/Z make PayPal responsible for the breach. There are, of course, fact specific exceptions to this rule. One is if funds are illicitly withdrawn from a PayPal deposit account. In that situation, neither PayPal nor the bank is required to return the funds, because the agreement between a consumer and PayPal makes those types of transactions authorized. [51]

PayPal account holders' private information is marginally protected under one federal law. Since PayPal is a financial institution under the Gramm-Leach-Bliley Act (GLB), it cannot disclose its account holders' non-public personal information to third parties unless account holders opt in to those disclosures. [52]

If an account is subject to fraud or unauthorized use, PayPal puts the "Limited Access" designation on the account. At this point, the account holder must:

* Log in
* Reset their password
* Develop a set of security questions (based on the hypothetical and not fact — e.g. "What is your favorite ice cream?" not "What is your mother's maiden name?")
* Verify location by landline phone or by mail

PayPal has developed substantial anti-Phishing resources,[53] for identifying and reporting phishing. PayPal encourages consumers to report all phishing emails to them, to better equip them in fighting this phenomenon.
[edit] Entrepreneurship by former employees

A number of companies have been started and funded by former PayPal employees. This trend prompted The New York Times to publish a story entitled, "It Pays to Have Pals in Silicon Valley," that analyzes the connections between several PayPal employees who went on to become influential.[54]

* The Founders Fund, a venture capital firm, was founded by Peter Thiel, Ken Howery, and Luke Nosek. The Founders Fund has invested in companies founded by fellow PayPal alumni, including Slide, Geni, and Yammer.
* LinkedIn was founded by Reid Hoffman, a former VP at PayPal.
* Facebook received its first angel investment from Peter Thiel.
* Clarium Capital Management is a hedge fund run by Peter Thiel. Principal partners at Clarium include Ken Howery and Luke Nosek, both of whom were among the earliest employees at PayPal.
* Slide was founded by Max Levchin, Jared Kopf, and former PayPal board member Scott Banister.
* Yelp was founded by Jeremy Stoppelmann, former VP of Engineering at PayPal, and Russ Simmons, one of the first employees at PayPal. Yelp is funded by Max Levchin.
* YouTube (now owned by Google) was founded by Chad Hurley, Steve Chen, and Jawed Karim, all of whom were early employees at PayPal. YouTube is funded by Sequoia Capital. Roelof Botha, the former CFO of PayPal, is a partner of Sequoia Capital who sits on YouTube's board of directors.
* Room 9 Entertainment, which produced the movie Thank You for Smoking, was founded by David O. Sacks, who founded PayPal's Product Group and later served as Chief Operating Officer (COO).
* Geni.com and Yammer.com were also founded by David O. Sacks.
* SpaceX was founded by Elon Musk, who founded X.com and served as the CEO following its merger with PayPal.
* Anchor Intelligence is run by Ken Miller, who was VP of Risk Management at PayPal and the architect of PayPal's anti-fraud system.
* Tesla Motors' principal owner and newly minted CEO / Chairman of the Board is Elon Musk.
* HourTown was founded by Ryan Donahue, an early product designer at PayPal.
* TradeVibes was founded by several early PayPal employees

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