Online Extra: PayPal: More Than eBay's Best Friend

With most large e-tailers still potential clients for the service, President Jeff Jordan aims to make it the global Web-payment option

Jeff Jordan spent five years running Web marketplace eBay North America, where he was considered a possible heir apparent to Chief Executive Margaret C. "Meg" Whitman. His appointment last January as president of PayPal, eBay's Web payment system, indicates how strongly eBay (EBAY ) wants PayPal to turn into the premier method for online payments, on or off eBay.

To get there, PayPal is wooing large online merchants to offer its services as a payment option. PayPal has already signed up Apple Computer's (AAPL ) iTunes Music Store and Overstock.com (OSTK ). Some analysts speculate that PayPal could eventually challenge credit-card companies, perhaps even as a physical-world payment brand to rival Visa and MasterCard. In a recent conversation with Robert D. Hof, BusinessWeek's Silicon Valley bureau chief, Jordan revealed his plans for PayPal. Edited excerpts of their conversation follow:

Q: What merchants are you going after, and what can you offer them?

A:

The bulk of it is large merchants. We're in conversations with a lot of these guys. The merchants right now, from the largest to the smallest, are very concerned about the cost of payments. The cost of their credit-card accounts keeps going up, and the merchants aren't happy about this.

Half of our mix [of buyer payment sources] is noncredit-card sources such as checking accounts [which don't charge transfer fees]. That has created an interest in PayPal as a potential way to help [merchants] manage their costs. It's still an aspiration for us, frankly. We're not bulletproof in terms of the services large merchants need.

Q: What else can PayPal offer large merchants?

A:

The 72 million PayPal users. A lot of our users have a stored balance in their account -- money sitting in their wallet, burning a hole in it. And merchants have told us that when they integrated PayPal [into their sites], their sales jumped.

Q: PayPal's expansion to serve other sites could end up helping eBay's competition. How much of an issue is that within the company?

A:

PayPal's mission is to be the global standard for online payments. eBay is the largest e-commerce franchise in the world, but it's still less than 10% of global e-commerce payments. So if you want to be the global standard, you provide payment services to everybody.

There have been some highly aspirational comments floating around eBay that someday PayPal could be bigger than eBay. In our dreams. But that only happens if we service not only eBay's needs but also the other 90% of e-commerce's needs. If we don't service the market's needs, someone will.

Q: What are PayPal's main challenges now?

A:

One is execution. We're growing like crazy. We had about 500 people at PayPal at the time of the acquisition. Now, it's 2,600. And it's hard to grow so fast.

Second is the external environment -- lots of regulators, lots of associations, and the importance of compliance for a financial institution. Then there's competition. It's hard to think of a company that does exactly what we do. And yet, in terms of payments, we compete with everybody. So it's a much more openly competitive environment.

Q: Some analysts suggest that PayPal could become a true competitor to credit cards, even off the Web, especially with the deal PayPal has with GE Consumer Finance (GE ) to provide a buyer line of credit. Is that possible?

A:

Our horizon right now is that we want to be the standard for online payments. For a five-year-old company with a 9% share of the U.S. consumer e-commerce payments and a 5% share of global consumer e-commerce payments, we're flattered to be considered in the same breath with credit card companies. There's no Trojan horse in our plans.

Q: How are you fighting increasingly sophisticated criminals?

A:

There is a huge educational challenge. It's a bit of an arms race. As we get better and better, giving our users tools to avoid fraud, these people trying to take over members' accounts have to send out 10 times, 20 times, 50 times as many e-mails to get that same number of accounts, because their yields are going down so dramatically.

Q: Last year, PayPal's site went down for several days. What are you doing to make sure it's bulletproof?

A:

It was a bit of a wake-up call last year. If we are servicing iTunes Music Store as a payment mark, they expect 100% uptime. We're working toward our next-generation system to get there. There's a ton of work to get where we want to go.

Q: Will eBay ever spin off PayPal?

A:

We haven't seriously considered it. PayPal has helped eBay grow faster, and eBay has helped PayPal exist and grow faster. So we have no plans to spin it off.

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