PayPal is a financial services company most notably known for allowing users and businesses to send and receive payments online.
The PayPal business model is a classic two-sided platform. On one side, some merchants use PayPal services to make financial transactions with security and trust. On the other side, the consumers, primarily individuals, will make payments through the platform inside the merchants’ websites.
If you think back some decades, sending money overseas was a big problem, and PayPal offered a revolutionary solution by allowing the transactions to be done in a much simpler and cheaper way than banks and other financial companies.
Let’s understand how PayPal’s business model has grown so much over the past years.
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A brief history of PayPal
PayPal was founded in 1998 and launched one year later as a money transfer system of Confinity. Back then, Confinity had a strong competitor, X.com, founded by Elon Musk. Instead of fighting for the market, both merged, grew, and took over the industry.
The great advantage of PayPal’s business model was using the dollar as an exchange currency and e-mail as a transfer medium. Thus, any customer could open an account online and deposit money or link it to a bank or credit card account.
Currently, PayPal has become the most powerful financial tool in the world, leading online payment solutions.
Terminology in PayPal Business Model – Merchants and Consumers
Digital wallet: you can save and access details of your debit and credit cards through your PayPal account, being able to shop and transfer money simply via PayPal ID and password.
One-Touch: PayPal technology allows you to save login details on your device, so you can checkout at websites without even typing your username and password.
Money transfer: you can transfer money to more than 200 countries and over 100 currencies, both to and from a bank account or a PayPal account.
Payment gateway: with a business account, you can sell online and offline and receive payments via PayPal.
Debit card: a PayPal debit card works just like any other bank’s, so it can be used to shop (online or offline), withdraw money, and earn rewards over your purchases.
Credit: you can get a no-interest credit of $99 – or more if the payment is finished within six months.
Capital loan: a daily payable loan with a lower fee than banks.
PayPal Business Model in a nutshell
Let’s take a look at the Paypal Business Model designed in the Business Model Canvas.
Now, let’s take a look at the elements of the PayPal Business Model.
Customer Segments: as PayPal is a two-sided platform, consumers and merchants have two customer segments. Consumers are the individuals who shop, send and receive money. Merchants are the businesses that accept payments, both online and offline.
Value Proposition: convenience, security, a trustful brand, and global scale.
Channels: the main channel is PayPal’s website, where the customer has most of the transactions. Moreover, there are the Paypal mobile app and Venmo and Xoom, two mobile payment subsidiaries.
Customer Relationships: PayPal is self-service, without interaction with the company’s team. Anyway, there are more than 8,000 employees in customer service. Besides, the company offers its Buyer and Sellers Protection Programs to ensure satisfaction and confidence on both sides.
Revenue Streams: the revenue streams are mainly transaction fees, but there’s much more than this. They are better described in the next item, about the sources of income of PayPal.
Key Activities: mainly platform management between three parties: consumers, merchants, and banks., both for its website and mobile app.
Essential Resources: its global technology platform, bank financing, and human resources.
Key Partners: banks, payment processors, software developers.
Cost Structure: PayPal has a cost-driven structure. Its highest cost is the transaction expenses. Moreover, customer support, sales and marketing, product development, operations, and general expenses.
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How Does Paypal Make Money – Paypal Business Model
Regarding individuals, PayPal charges a fee that changes according to the country each time you send and receive money online. This fee is calculated on the amount sent using a debit or credit card or PayPal credit.
As to business accounts, merchants who use PayPal to sell online pay a fee of 2.9% on the amount they receive for sale, plus US$ 0.30 per transaction. However, more significant amounts have their prices reduced.
When receiving payments from different countries, PayPal charges fees that include currency conversation costs besides the international payment fee-fees also vary according to the currency.
The Payment Pro-business accounts have some unique resources and services for $30 per month.
You can receive money through a custom link, but PayPal will charge you when you withdraw the amount. In the USA, the fee is 2.9% of the total received, plus $0.30.
Also, the company charges a fee for each time you withdraw money with your debit card.
The money kept in PayPal is deposited in liquid investments that provide interests as revenue.
Payflow is the gateway the merchant accounts can integrate into their websites. There is a free plan, by which the customer enters the payment details on a page hosted by PayPal, and there is a premium option, at the cost of $25 per month, by which the user may design their checkout page.
Moreover, PayPal charges a fee of $0.10 for credit card payments and offers other optional features, such as fraud protection, recurring billing, and buyer authentication.
You can borrow up to 15% of the last 12 months of sales (up to $85,000). There are no interests, and the fee is fixed, and the payments are made as a percentage of PayPal sales. So the more significant the rate allocated, the lower the price.
Business in a box
PayPal offers some solutions in association with Xero and Woo Commerce, and the company earns an affiliate commission on that.
If you use a credit of $99 or more, paid fully within six months, you don’t pay for it. But, for any other conditions, the annual percentage rate is 19,99%, counting from the posting date.
What can you learn from PayPal Business Model?
PayPal’s core business is an online payment service that allows individuals and businesses to transfer funds electronically. Here are some of the things you should adopt from the PayPal business model.
Focus on the customer
There is no feature in PayPal that is not a direct response to a customer problem.
PayPal is obsessively oriented toward its customers’ needs, day-to-day requirements, and view of the world. Nothing illustrates this better than how a customer’s e-mail address is effectively used instead of a traditional account number. An e-mail address is globally unique—the Internet guarantees this—and is highly customer-oriented. Contrast this with the clumsiness of bank routing numbers and demand deposit account numbers prevalent throughout the banking industry.
PayPal takes the e-mail address as account identification one step further by letting customers accept money at up to eight different e-mail addresses and control the primary e-mail address they use to send funds.
Listening to customers’ requests who needed to settle with many different affiliates, PayPal extended its original service to support mass payments. By developing the payee field to support distribution lists, PayPal provided a low-tech solution to a pressing customer need. Likewise, several customers preferred to accept payments at their Web sites without invoice buyers via e-mail.
In response to this problem, PayPal developed WebAccept—a low-tech solution with no merchant software to install. In addition, to pick up ideas for new services or the need to improve existing services, PayPal passively monitors discussion boards and other forums where customers talk about how to accept payments, how to handle fraud and the best way to work around the problems with existing online payment services. PayPal’s customer-support organization, comprising more than two-thirds of the company, also directly contributes product and service ideas based on customer feedback.
Could you keep it simple?
PayPal is conceptually simple; a current user can easily describe it in one or two sentences to a potential user.
PayPal’s service itself is straightforward to use. The account activation process can be completed in a few minutes. Recognizing that customers will have different requirements, the company has tiered its registration process, asking for no more information than is necessary to open a non-verified, spending-limit-enabled account. Although high-volume sellers are eventually asked to divulge their social security numbers, this information is not required to open a low-end account.
Combined with SSL, simple passphrase authorization provides the level of protection required for a low-end payment service. Client certificates are not required, nor is the presence of a smart-card reader assumed. Additionally, there is no assumption that the customer even owns or controls the personal computer or cellular phone used to access the payment services.
Keeping it simple not only accelerates user adoption but also maximizes the service coverage in the marketplace and mitigates downstream customer-support problems.
Exploit the Internet
Play by Internet rules; develop new features that leverage the Internet; use the Internet as the dominant go-to-market channel.
PayPal’s process for sending and receiving money embraces both the Web and e-mail, with all account management handled online, and most payment notifications dealt with via e-mail. Payment requests can be sent through e-mail, embedded in e-mail, or cut-and-pasted into Web pages. In addition, both buyer and seller fraud are partially mitigated by delivering reputation information to the other party in real-time.
Design for adoption
Eliminate as many adoption dependencies as possible; make it easy for target customers to become registered users; keep providing compelling reasons for registered users to increase their service use. Ingrained in PayPal are the notions of viral adoption and market pull, which affordably push most go-to-market spending out to the service users.
Of all the innovations behind PayPal, breaking through the customer-adoption barrier is perhaps the most significant. The viral adoption inherent in person-to-person payments was critical in the company’s explosive first-year user growth. But others, notably Microsoft’s Hotmail, have successfully demonstrated the merits of viral adoption. PayPal excelled, either by design or good fortune, in eliminating the dual buyer/seller ramp-up problem, often characterized as the early-market chicken-and-egg problem—no buyers when there are no sellers and no sellers when there are no buyers.
PayPal eliminated the problem by removing the distinction between buyer and seller, replacing it with the single notion of a user that could both buy and sell. Thus, instead of 300,000 buyers and 100 sellers, there were simply 300,100 users. Effectively, PayPal collapsed two independent adoption variables into a single parameter, which could be increased through viral marketing, through seller demand-pull, and by building overall awareness.
Start small, get market feedback, and then incrementally make it a little better. Remember, those big things grow from lots of little things. With dozens of different payment mechanisms and services to build on, PayPal creates value by linking existing payment services and Internet technologies together in innovative ways.
PayPal did not invent a new way to fund purchases, authorize payments, or settle transactions. Instead, it built a new service on the back of the current price and Internet infrastructures. And rather than thinking big and undertaking a massive multi-year development program, the company started small, got real-world feedback from actual users, and incrementally made the service better on a month-by-month basis.
Not really knowing how users would attempt to defraud the payment network, PayPal put an initial stake into the ground regarding fraud prevention and then incrementally adjusted it, successfully bringing its fraud rate down to a manageable level.
Not only did this approach give PayPal a better chance of getting to the market sooner—and establishing a first-mover advantage—it also assures that the final functionality directly matches what the marketplace and business model require of a successful business. As a result, as PayPal evolved its payment service, what started as bare-bones became good enough. And good enough is all that is required.
Price the service to reach critical mass first; adjust the pricing for profitability later; obsessively drive down internal costs at every opportunity. As price competition proliferates throughout online payment services, PayPal continues to look for ways to drive recurring costs out of the system.
PayPal understands the difference between early market development and long-term profitability. The first six months of operation provided free service to all customers and spent tens of millions on structured incentives, with little regard for cost containment. As millions of visitors registered and began using the system, PayPal scaled back incentives, slowly introduced a fee structure for power sellers, and focused on operational costs.
While the company initially relied heavily on credit cards to fund accounts, it quickly moved away from an exclusive credit card orientation and processing cost structure. As a result, for the past year, PayPal’s transaction processing expenses—what it costs the company when users move funds into and out of PayPal accounts—have dropped from 2.1% to 1.4% of payment volume.
Efforts to combat online fraud have also had a dramatic effect on PayPal’s cost structure. In the last year, while the company’s total payment volume increased by 76%, fraud losses as a percentage of payment volume decreased by 55%. In addition, due to the adjustments made to service policies and procedures, fraud losses directly absorbed by PayPal decreased consistently on a quarter-to-quarter basis, moving from a high of 1.28% to 0.33% of payment volume—and saving the company more than $20 million.
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By continually driving recurring costs out of the system, PayPal hopes to maintain its ability to price services competitively in response to new market entrants or in anticipation of entering new markets.
If you plan on investing in the financial services industry, it may be hard-pressed to replicate PayPal’s success by duplicating its functionality. However, the company’s attitude is instructive and can serve as a guidepost for developing and introducing your online payment services in today’s market.