Assignment Questions

• 1). What explains PayPal's early success ?

• 2). How vulnerable are Visa and MasterCard to share
erosion in e-commerce payments ? What, if anything,
should the card associations and their members do
about PayPal's "Off-eBay" initiative?
• 3).Does Google represent a serious threat to PayPal?
What strategy for Payments would you recommend for
Google ? For eBay/PayPal in defending against Google's
attack ?
• 4).What strategy should PayPal pursue for Merchant
Services ? How should PayPal allocate investments
between the merchant and consumer sides of its
network ? On the consumer side, should PayPal target
existing or new PayPal users ? Should it target large or
small Merchants ?
PayPal’s Early Success
 PayPal’s Early Success

• First, there Service found unanticipated demand

in a rapidly growing new market: online auction.
• Secondly, PayPal benefitted from eBay’s slow
response and flawed strategy in launching its own
e-mail payment services , Billpoint.
• Thirdly, PayPal managed to raise enough capital in
“irrationally exuberant” capital markets to fund
its aggressive growth strategy before the dot-com
bubble burst.
 Unanticipated Demand
eBay sellers found PayPal appealing for two reasons
:-
• PayPal was free through October 2000 as
compared to Auction Seller who use to charge
average 4% - 7% of transaction value. PayPal use
to charge only 2% to high volume users.
• Prior to PayPal, the favored payment mode for
online auctions-certified checks-was slow , which
allowed buyers & sellers to complete transactions
more quickly.
 eBay’s Mistakes
• eBay launched its e-mail payment services,
Billpoint, in March 2000- 16 months after PayPal
commenced operations.
• eBay charged high transaction fees of 4.75% of
transaction value whereas PayPal charged no
fees.
• Wells Fargo owned 35% Partnership in the
venture controlling Back end payment processing
& customer services and thus it increased the
odds that Billpoint’s operation would remain
under control in terms of exposure to Fraud &
Customer Service Problems.
 PayPal’s Accelerated Growth Strategy
• Network Effects :
When Users Willingness to Pay (WTP) increases
with network size, signing up a new user yields
future benefits along with current period benefits.
In E-Mail payment services, Buyers find it more
convenient to use a payment services that is
accepted by many users. Likewise, Sellers will worry
about losing business if rivals offer a popular
payment service and they do not.
PayPal’s Accelerated Growth Strategy
• Switching Costs :
PayPal gave a $10 Payment to account holders who
referred a new account.
Thus PayPal was compensating the customers for
switching costs.
Switching include time spent: 1) shutting down on
account; 2) Setting up a new account; & 3)
mastering the new service’s interface & policies.
Though this doesn’t take much time but buyers &
sellers might be deterred from switching if they
were uncertain about a new service’s transaction
security.
 E-Mail Payments: A Winner-Take-All
Market ?
• Networks Effects are Strong: When Network
effects are strong, users will want access to all
potential transaction partners.
• Multi-Homing Costs are High: “Homing” costs
include all the expenses incurred by network
users due to platform affiliation. When multi-
homing costs are high, users need a good reason
to affiliate with multiple platforms.
• Demand for intrinsically Inimitable Differentiated
Features is Limited: If there is little demand for
special features, then users will converge on one
platforms, until and unless, segments have
unique needs.
 E-Mail Payments: A Winner-Take-All
Market ?
• Due to Strong Network Effect, Auction seller
felt compelled to use a service employed by
large number of buyers.
• Buyers & Sellers, both, avoid the nuisance of
setting up and managing two different
payment services.
• Sellers prefer to concentrate with a single
service if volume discount was available.
• E-Mail payment services offered fairly
straightforward functionality.
Are Credit Card Companies Vulnerable
to PayPal ?
 Merchant Perspective
• First, PayPal reduces its cost of fund to the
extents that users funded payments through
Automatic Clearing House (ACH) bank account
transfers rather than credit cards. ACH –enabled
payments bypassed the 1.5% -2.0% interchange
fees levied by credit cards.
• Second, Fraud related costs were lower for PayPal
than credit card acquirers because PayPal require
dual-factor authentication (i.e. User Name &
Password).
• Third, PayPal had much lower customer
acquisition costs than credit card issuers, since
many PayPal users signed up as a consequence of
using eBay’s auctions.
 Merchant Perspective
Besides PayPal’s low fees, Merchants found it
appealing for two reasons :
• First, accepting PayPal increase their
Transaction Volume by offering payment
options for consumers who: 1) could not
qualify for a credit card; or 2) were reluctant
to divulge credit card information online –
especially to small, little known merchants.
• Second, Fraud Related costs were also
reduced for Merchants as low as 0.17% of
revenue versus 1.8% with Credit Cards.
 Consumer Perspective
• First, PayPal allowed consumers to make
payments without divulging credit card
information. Sharing Personal information was
the prime concern of 61% of respondent in
2005.
• Second, PayPal was the only online payment
option for a small share of consumers.75% of
U.S. households had credit cards, and 91% had
debit cards, 64% of which were “check cards”
which could be used online.
 Consumer Perspective
PayPal also imposed some costs :
• Setting up and managing a PayPal account too
time and introduced a new intermediary to
deal with in the event of transaction disputes.
• Also, if consumers funded PayPal transaction
through bank transfers, they forfeited rewards
link to Credit Cards spending.
• Finally, PayPal users could not “revolve”, that
is, differ payments, unless they took the time
to apply for a PayPal credit line provided
jointly with GE Consumer finance.
 PayPal Merchant Services Threat to
Credit Card Companies
• Discount Fee Cuts : Card issuers earn healthy
profits and probably could afford to accept
lower interchangeable fees, which would
allow card acquirers to cut discount fees to
online merchants.
• Fraud Management : PayPal would be less
appealing to online merchants if credit card
companies could find a way to reduce fraud-
related losses.
Is Google a Serious Threat to PayPal ?
 Advantages for Google
• Extending Market Powers : If Google can
leverage its position in search to enter e-mail
payments, then it should be able to capture
profits in that otherwise well-sheltered
market.
• Increasing Entry Barriers in Search : Google
may hurt it search rivals by bundling e-mail
Payment and paid search services.
 Advantages for Google
• Quality Improvement : Bundling could reveal
whether ads sold by Google resulted in actual
sales facilitated by Google’s payment service. This
data could be used to improve the targeting of
future ad campaigns . Google could gain share if
it could offer marketers a better return on their
investments in paid search ads.
• Avoidance of Double Marginalization : Google
and PayPal both dominated their respective
markets, and their services were often consumed
in tandem. In this context, a bundle’s optimal
price will be lower than independent monopolist.
 Disadvantage for Google
• “Fear of Google” : Google’s dominance is
alarming to many companies, including marketers
who might worry about forfeiting their customer
relationships if they relied too heavily on Google
for advertising and payment services.
• eBay Boycott Threat : eBay, a very large Google
advertiser, could threaten to boycott Google’s
paid services if Google aggressively attacked
PayPal.
 Disadvantage for Google
• Conflict with values : If Google incorporated
Base listings into its web search results , it
risked compromising its neutrality and thereby
violating its famous dictum, “Don’t be evil,”
which proscribed search for commercial gain.
• Consistency with Mission : Google’s mission
was to “organize the world’s information”.
Matching buyers and sellers was consistent
with Google’s mission, but more mundane
aspects of e-commerce seemed to fall outside
the firm’s mandate.
 Google Strategy
• Bundling : If Google offered a bundle that included
paid search ads and/ or Base listings plus payment
processing services for less than 11% of transaction
value, it could capture share from eBay.
• Penetration Pricing for Merchants : Google would
probably wish to offer discounted processing fees to
attract merchants during its launch phase.
• Promotion to stimulate consumer spending : Google
would need to provide promotional inducements to
encourage consumers to use its new payment service.
• Operational Capabilities : Google would require new
set of skills , for eg., helping online retailer
merchandiser, fraud detection, & adjudicating disputes
between merchants & consumers.
 eBay/PayPal Response
• Matching the Bundle : Firms may be able to
counter an envelopment attack by assembling a
comparable bundles but Bundle versus Bundle
may be fierce.
• Mergers & Alliances : eBay/ PayPal can make an
alliance with Microsoft and Yahoo.
• Antitrust Litigation : Antitrust law for networked
industries is still under dispute, so dominant
platform providers that offer bundles risk being
charged with illegal tying.
What Strategy Should Merchant
Services Pursue ?
 Merchant Focused Initiative
• Lowering transaction fees for high volume
merchants from 2.2% to 1.9%.
• Encouraging users to recruit non-eBay merchants
by increasing its maximum referral bonus from
$100 to $1000.
• Making non-eBay merchants eligible for its
Preferred Rewards Program which gave qualifying
business accounts 1% cash-Back rewards.
• Persuading Credit Card Gateway, including
CyberSource & Retail Decision USA, to include
PayPal among their offering to online merchants.
 Merchant Focused Initiative
• Securing an agreement whereby Paymentech, a
leading U.S. merchant acquirer/ processor with many
online retailing client, would build a dedicated sales
team to resell PayPal’s service.
• Acquiring VeriSign’s payment Gateway business,
which helped 144000 small to mid sized merchants
process $40 billion in online credit card transactions.
• Hiring a new sales force to acquire large merchants
such as Dell, Apple’s I Tunes & Yahoo stores.
• Introducing Website Payments Pro, which allowed
merchant to accept credit cards from buyers who did
not have PayPal accounts, then process those
payments through the PayPal system.