PayPal 10 Year Anniversary

When PayPal first launched in the summer of 1998, some said it was too ahead of its time to take off. Founders Max Levchin, Peter Thiel and Luke Nosek conceived of the service as a vehicle for sending money between Personal Digital Assistants and other mobile devices. But, few people at the time had smart phones, and even fewer wanted to use PDAs to make payments. Later, the trio decided to turn the service into an online bank. That didn’t fly either.

Ten years later, however, PayPal is finally poised to fulfill its initial destiny. The company, which will celebrate its 10 year anniversary June 23 , has grown from a niche player in the payments market to the most popular alternative to long-established leaders Visa and MasterCard. Now, with a and a solid position in the fledgling mobile payments space, the company is truly ready to spread its wings and go after consumers. “You will see more from us,” says PayPal president Scott Thompson.

Since eBay purchased the company in 2002 for $1.5 billion, PayPal has dominated rivals such as Google Checkout and Bill Me Later in the alternative payments market. It now processes more than 9% of online payments worldwide and more than 12% of the US online payments market.

More than $14.4 billion flowed through PayPal in the first three months of 2008 alone, a 34% increase from the prior year. PayPal took in $582 million in fees from those payments, giving eBay a much needed revenue juggernaut as growth slows for the overall business. “PayPal remains on a fantastic trajectory,” said CEO John Donahoe during an April earnings call with analysts.

PayPal’s impressive growth promises to continue as small businesses in Asia and Europe begin moving online. Already, more than 43% of PayPal’s business comes from outside the US. A significant portion of that stems from cross border trade, particularly Europeans buying American goods, rendered relatively inexpensive by the weak dollar. In the future, Thompson expects more of PayPal’s foreign business will originate from smaller sellers who open online shops and need an alternative to merchant accounts from major banks, which can be difficult to obtain. “The phenomenon that has happened in the US of small businesses coming online hasn’t happened yet in all of these markets,” says Thompson. “It is just beginning to happen in Asia… and our payment system is perfect for them.”

PayPal is well positioned in many foreign markets, thanks in part to eBay’s success abroad. About 54% of PayPal transactions happen on eBay. Starting next month, eBay will require all sellers to use PayPal on its Australian site. The requirement, which eBay says is to help ensure transactions are completed safely, has had a mixed reaction among sellers, some of whom want to use other payment systems with lower fees. Regardless of the reaction, however, the move is likely to drive up PayPal adoption in those countries, since many small sellers see eBay as one of the few ways to get their products seen by large numbers of shoppers.

Thompson says the company has no plans to expand its PayPal requirement to other markets. But, eBay does plan to continue to push PayPal adoption among its sellers.

PayPal’s mobile payments business also helps give the company an edge. While MasterCard just announced that they will offer a mobile payment solution this month, PayPal has had one since 2006. Juniper Research estimates that the global mobile transaction market will reach $587 billion by 2011, according to a Jan. report, with much of the payment volume coming from Asia. “Outside of the US there is a lot of mobile payment opportunity,” says Thompson.

In the US, PayPal plans to fuel growth by focusing more on reaching consumers with its bank-like services. To date, most buyers use PayPal primarily as a method of hiding their underlying credit card or bank account information from sellers, helping decrease the risk of identity theft. PayPal also enables buyers to purchase items with their primary credit or debit card from smaller sellers and individuals without major bank merchant accounts. PayPal’s additional services, such as its debit card, credit card, and money market fund are primarily used by eBay sellers.

This year, PayPal will focus more on alerting consumers to those products. It will particularly focus on its money market fund, which has long offered higher interest rates than many banks. “You will see more from us on the Web site as it relates to the money market fund, debit card, and credit card product,” says Thompson. “We are going to make it much more prominent and visible.”

With so many growth prospects, the biggest threat to PayPal’s continued strength is not another alternative payment service stealing share. It’s eBay. Should growth slow dramatically in eBay’s business, PayPal would suffer. It still relies on eBay to help provide the critical mass that spurs adoption off eBay’s site. A strong eBay means a much stronger PayPal. A weak shopping business on the site would slow PayPal’s growth and ability to take full advantage of its future strategy.

Thompson, however, is confident that the next ten years will be even better than the last decade. “You will continue to see fabulous things from us,” he says.