When the Internet appeared, everyone realized pretty quickly just how vast a change it could make to consumer habits - from changing the way we consume content and gather information to creating high-speed communications channels linking different parts of the globe. However, buying and selling online was one option which looked, at least to begin with, inapplicable, or even risky. Paying via the Internet? At the time, it looked utterly absurd. But in 1998, the year PayPal was founded, the picture changed. (continued below)
Video Scott Thompson talks to GlobesTV at the IVA conference
PayPal changed reality by creating a reliable platform for the transfer of money online, and the flourishing e-commerce industry worldwide has been based to a large extent on its success. It was subsequently acquired in 2002 by online retailer eBay Inc. (Nasdaq: EBAY) for $1.5 billion.
In an exclusive interview with "Globes", Scott Thompson, who took over as president of PayPal in January after previously serving as senior VP and CTO, says online payment business now runs into trillions of dollars and that PayPal still has substantial room for further expansion. "Just 10% of all payments through the Internet are made through PayPal, and in the US the rate is 12%. We have room for growth," he says. Thompson was in Israel to speak at the IVA conference in Tel Aviv.
Are we moving towards an era where consumers will only pay through the Internet?
Thompson:"Most consumers still pay offline, like in restaurants or stores. But I have no doubt that in future all these businesses will be connected to the Internet and then, virtually all payments will be made online. Total online payments will jump twenty fold. It will take three to five years until it really starts increasing by which time it will also be possible to pay through cellular networks."
PayPal services can now be used in 190 countries and in 17 different currencies. The number of PayPal accounts now stands at 150 million. "In the last two years, we invested a lot of effort in simplifying the process of opening an account, and in the final quarter of 2007, 11 million new accounts were opened. There are a lot of businesses that accept payments through our service, such as Ferari, Starbucks, and Harrods," says Thompson.
In Israel, the service is still limited. Israelis can open an account using an international credit card, and buy products. The problem arises when they want to withdraw money from their account after selling items, which they are currently unable to do due to the lack of an arrangement with local commercial banks. "We're aware of this problem. We'll resolve it, although I can't say when," says Thompson.
As far as PayPal's acquisition by eBay is concerned, Thompson claims the advantages are enormous. "eBay's trading platform gives buyers and sellers from across the world an opportunity to meet, and PayPal's payments system enables millions of small traders to receive payment through the Internet." PayPal has room to grow within eBay as well. Just 54% of all products purchased through eBay were paid for through PayPal in the fourth quarter of 2007. As to the rumors that eBay could offload Skype, which it acquired for $3.1 billion in a deal now considered a failure, Thompson says he is unauthorized to comment.
PayPal operates in a highly competitive market, with credit card companies such as Visa, Mastercard, and American Express, as well as start-ups all keen to benefit from the growing e-commerce sector. Search giant Google is also keen to take share in this market, and in June 2006 it launched its own online payment service Google Checkout. However, a survey by research and consulting firm Jupiter Research revealed that PayPal had a 23% share of the online payments market, compared with just 4% for Google Checkout.
How are you coping with the high rate of competition in the sector?
"We have a lot of competitors throughout the world, and the online payments sector is a huge market that moves trillions of dollars. Because of the market's size and the tremendous opportunities for profit, many companies are entering the field. We realize that there are a lot of enterprises that would like to take away our growth momentum."
According to Thompson, the company's biggest challenge is, ironically, its own rapid growth rate. "We're focusing on expanding our support network and hiring additional employees. This is the real challenge."
PayPal's business model is quite similar to that of the banking system. Each user can deposit money into an account or transfer money to other accounts. PayPal charges a commission ranging from 3-5% on each sale made through its service. The commission is charged to the seller, so as not to deter people who only want to spend small amounts. The average payment is less than $100.
Total payments volume made through PayPal reached $150 billion, and some analysts believe that given its rate of growth, the company's value could soar to $20 billion.
FraudSciences - a perfect match
Recently, PayPal acquired Israeli fraud detection start-up FraudSciences Corp. for $169 million. "I couldn't have been happier when we got the opportunity to acquire this company," says Thompson. "When we first met the entrepreneurs (Saar Wilf and Shvat Shaked), we were really impressed with their approach to solving security problems, and it complemented ours. I knew right from the first moment, that the company had to be part of PayPal."
Thompson recalls that he heard about the company through a venture capital fund in Silicon Valley, "and I felt lucky there and then. I thought to myself, if they do what they say they do, PayPal simply has to acquire it. The negotiations weren't quick, but we realized early on that it would happen."
Eli Barkat, who invested $7 million through BRM Capital reveals a bit more about the negotiations. "The process was drawn out because it happened too soon. The company had not been on the road long enough to prove its value and it was sold at a very early stage, with only a few hundred thousand dollars in sales."
Barkat adds that the company wasn't even on the shelf, but the opportunity suddenly cropped up. "I would have rather the sale had taken place a year later, since there is a gap in terms of price between what the company is really worth, and what it has been able to prove in a so short a period. But both sides realized that PayPal is the right home. Had it been another buyer I doubt if we would have gone through with the sale."
Do you believe the company is worth more than $170 million?
Barkat: "It isn't fair to say that it was worth more at the time it was sold, but the point is that it should, perhaps, have been sold at a later stage, despite the risk that would have entailed. Relative to the investment, the company was sold at a very high multiple, and the entrepreneurs were very keen to sell, so I think it was the right decision. That said, it won't do our industry any harm to think about the longer-term as well."
Security is becoming an increasingly important element in the development of the Internet, and this is one of the reasons why Thompson is visiting Israel now - to meet Israeli specialist start-ups which develop security products.
Are you considering further acquisitions in Israel?
Thompson: "If there are companies that do something special, if they have an interesting technology or a product that could save us time, I'd be really happy if they become part of PayPal. There are a lot of Israeli companies at the IVA conference and I'm sure I'll have time to talk to some of them. I'm looking forward to it very much."
Published by Globes [online], Israel business news - www.globes-online.com - on May 22, 2008
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