Select your localized edition:

Close ×

More Ways to Connect

Discover one of our 28 local entrepreneurial communities »

Be the first to know as we launch in new countries and markets around the globe.

Interested in bringing MIT Technology Review to your local market?

MIT Technology ReviewMIT Technology Review - logo


Unsupported browser: Your browser does not meet modern web standards. See how it scores »

{ action.text }

Trouble-Free Transactions

 Both senders and receivers of cash have primarily been drawn to PayPal not for its safety but for its speed and simplicity, especially when it comes to completing messy eBay transactions. In the past, the seller of a vintage guitar, a rare book or any other eBay item had two ways to receive payments-either via a check sent through the mail or by accepting credit cards. Before PayPal arrived in October 1999, 90 percent of eBay transactions were completed by check, a process that typically takes five to 10 business days, as sellers generally wait for the check to arrive and clear before they ship their merchandise. Credit cards, although timely, are impractical and too expensive for part-time merchants and individual sellers, as account charges and transaction fees can consume upwards of six percent of each payment.

PayPal promised a way to solve this conundrum by making it possible to instantly complete transactions, a feat that prompted thousands of eBay sellers to begin offering it as a payment option. When the first million buyers responded to PayPal’s offer of a $10 incentive (since cut to $5) just to sign up, the service quickly achieved critical mass.

A user enrolls at the company’s Web site by linking an existing credit card or checking account to a new PayPal account. A valid e-mail address for the recipient is all one needs to send someone else money; her name and physical location aren’t required. The recipient receives a message letting her know that her money has arrived. If she is not already a PayPal member, she must sign up to claim her funds, which can be transferred to an existing checking account (or sent by check). PayPal’s process has made sending money as instantaneous and convenient as e-mail itself. Since anyone can pay anyone else this way, PayPal’s service has rapidly transcended eBay and is now accepted at more than 20,000 Web sites-and can even be used to pay debts incurred offline. If you owe a friend $6.50 for lunch, you can use PayPal to e-mail him the cash using any Internet-enabled device, from a cell phone to a palmtop gadget.

So far, the best proof of PayPal’s success is its viral rate of growth, from virtually nothing two years ago to more than 200,000 transactions completed each day. That’s still a far cry from Visa’s aggregate volume of over 200,000 transactions every minute, and it represents less than five percent of all e-commerce. But PayPal, in short order, has become the most visited Web site for personal finance, and it processes payments for one out of every four eBay auctions.

Unlike many popular dot coms, PayPal is supported by a business model that Peter Thiel, PayPal’s 34-year-old CEO, says will bring in nearly $100 million in revenue in 2001, making the company profitable. While PayPal was free for both buyers and sellers during its first year in business, sellers who accept credit card payments now must pay a 2.9 percent fee, plus a flat 30-cent-per-transaction surcharge, which adds about another half a percent to the tab for the average PayPal transaction of $50. Volume continued to explode even after PayPal imposed these fees. That’s because traditional credit card companies charge online merchants even more-as much as six percent. Thiel claims that PayPal can turn a profit on such low transaction fees because of its success minimizing fraud.

0 comments about this story. Start the discussion »

Tagged: Business

Reprints and Permissions | Send feedback to the editor

From the Archives


Introducing MIT Technology Review Insider.

Already a Magazine subscriber?

You're automatically an Insider. It's easy to activate or upgrade your account.

Activate Your Account

Become an Insider

It's the new way to subscribe. Get even more of the tech news, research, and discoveries you crave.

Sign Up

Learn More

Find out why MIT Technology Review Insider is for you and explore your options.

Show Me