Learn Me about PayPal Business Model
 

Hey guys, I'm a long time Ebay / Paypal online transaction kinda guy. Lots of buying and selling. I know Paypal is the big bear in the woods of online payment and sometimes their fees seem ...........a little high.

But the one issue I have is the amount of time they 'hold' my $$$ receivables on goods that I have sold. When I purchase something and use my PPl account the money seems to be debited immediately from my bank account. However when I sell something and the buyer pays immediately, it takes up to 5 business days to hit my account. A little one-sided don't ya think?

I've had, in the past, some heated discussions via phone with PayPal reps who some long winded story involving the Treasury dept. I Know they must be making money off of my and everyone else receivables.

Learn me please - thanx:)

This is something I've thought about as well. Lately, I've been wondering what the regulatory hurdles are to start your own version of Paypal. I'm sure they are significant, just would like to know what they are.

It's part of what every large financial institution/entity does when moving huge amounts of money around. Early in my career I worked for a large megabank (IT guy), and when you are literally moving tens of BILLIONS through each day, even hours matter and I mean big $. The Federal Reserve has several "windows" per day...making/missing a window (by seconds) on Billions means literally millions in profit or loss for "someone" in the path. It i$ what it i$...

ps: Bottom line...they keep the money in their account for as long as possible (going in or out).

It is an old trick in the banking world. What they do is to take your money and hold it somewhere where they themselves earn (or save) interest for as long as they can stretch it. Sure, when considering only the money they owe you personally the interest is very little, when however you compound the interest across all the people to whom they owe money, you'll see that it is really a great source of income for them, even if the average holding time is very short.

I thought it must be something like this where they; PayPal are holding a very large amount of cash very short-term to earn interest.......................

It also depends on the payment method. You can fund a PayPal account through an ACH transfer or from a credit card. Credit card payments take longer to clear and therefore slows funds transfer to the buyer.

My company uses PayPal for vendor payments (1099 contractors) to the tune of well over a few million a year. I think that's where the basis points for payment fees really makes them their money.

Actually what they have is a very good business model:

The three main income sources are:

• Commission on both the buy-side and sell side
• Interest on funds held in escrow
• Currency arbitrage (and further commission) on international transactions

All the things you need to print money I guess...

You left out the near-monopoly that they have, and being almost full exempt from any sort of regulation or oversight.

It will be interesting to see what happens to them in the next 10 years. I am sure they have a plan, and some of it is in public documents.

I haven't looked at the financials, but I am sure you could spend a long time studying their business practices. There are and have been quite a few folks hankering to take a slice of their pie I reckon.

My college classmate is the CEO of Ebay/Paypal. I think his package exceeds $40 million per year. I am sure their shareholders feel he earns it.

Is Paypal simply automated ACHs?

I recall the first six months when they started. I forget and might be incorrect but they had something like 40,000 users. I set-up an account and they sent me a t-shirt.

Anyhow, I think some of the big box stores - H.D., Walmart will have their own banks and perhaps sights on working thru Paypal.

I'm not sure I buy the interest argument. Interest earned on money held in escrow for three days can't be anywhere near as significant as the 3% transaction fees charged for most of their transactions.

and if you are carrying a 'paypal balance' you are letting them hold on to the money even longer - they will use that to make more money in overnight transactions.

side note - the guy who managed the money (short term balances) for a large multinational I was working for in the UK came into my office one day on the way to the golf course at 11am - with a big smile. "What's up?" I asked - turns out he had exceeded the company's ANNUAL profit on one overnight deal he had just done in the foreign exchange markets....hence earning the right to go play golf with the CEO on a tuesday afternoon!

there's big money in big money!

td

You may be surprised! Firstly, the 3% is taxable, the escrow funds not. Secondly, the 3% carries their operational overhead, whereas the escrow can't. Then let's put the escrow funds in context. Perhaps "interest" is too broad a term. Firstly consider that the escrow fund never gets flushed empty. Rather look at it as a massive dam full of other peoples money. Even though funds flow in and out, the dam always remains at a near capacity level. This means that Paypal has a massive cash reserve at all times, that they can use for investment in all sorts of wonderful highly leveraged investments most prominent of which is probably playing the forex market, which they use to arbitrage international transactions.

Trust me, I would love nothing more than to have this sort of business model at my disposal!

Mr. Fick is spot on...

What is stopping anyone from duplicating it? People hate Paypal. Seems like if you could duplicate the service while improving on it, someone could do well.

I started using Square for local transactions. Swipe the card on your IPhone 2.7%

Works well

Paypal + eBay fees have made getting rid of stuff just not worth it to me anymore. I haven't sold anything in quite a while and I was shocked to discover that the combined cost of paypal and ebay fees was over 12% of the revenue from selling + shipping.
I used to sell fairly regularly and there is always a percentage of sales that don't go well. By the time I deal with the hassle of listing and shipping, occasional buyer's complaints and pay the fees it's looking more attractive to just throw anything worth less than $100 away.
I'm gotten some good deals though. Looks like eBay is basically a buyer's tool anymore.

Exactly. I'm about ready to quit selling for those reasons and the 100% one-sided favoritism to buyers. There is no such thing as stating 'as is / no refunds' on anything sold anymore. eBay/PayPal will force you to refund full purchase price if a buyer complains. The buyer need not prove anything. There is absolutely no recourse for sellers (even though we are eBay/PP's so-called customers who pay the fees). Great for buyers - you can buy a piece of electronic equipment, tools, clothing, or whatever, use it/wear it for a while (I think it is 60 days?), file a complaint and get a 100% refund. The buyer completely controls the outcome of any dispute.

You can't leave negative feed back anymore. And the new 'user agreement' supposedly puts the burden of shipping insurance on the seller too! They used to call this type of operation racketeering :mad:

I'm giving eBid a shot. No seller fees and they're growing. If enough disgruntled eBay sellers jump ship, it might become a good alternate.

Credit card is actually much faster. ACH is batch and Credit Card is authorized in real time.

If your company is paying millions each year, you'll save a lot of money going to your business' bank for an AP solution. They offer invoicing and electronic AP solutions using Credit Card, ACH or check. The fees are much lower than Paypal since there is little to no risk for the payment being processed.

Square and Paypal run on the same backend that I helped develop. Ironic in the end no matter who you use it comes back to us in the end for settlement.

As far as Paypal holding money, that's a temporary account condition The 21 day hold is reviewed every 35 days and if you meet volume and sales amounts set at a particular limit they remove the hold.

The 21 day hold will return if you enter into a dispute, or are reported negatively to Ebay on a transaction involving Paypal.

As far as starting your own Paypal goes you would need to do like they did and caption a large market like Ebay. For that you would need to develop a transaction and settlement platform that outperformed Paypal in some way as to make it attractive.

I can tell you the mathematical engineering that goes into a platform like this is somewhat stunning. Transactions don't really exist until settlement happens, so everything is done on a calculated margin that involves risks and about a thousand other factors.

Millions of dollars in float - or maybe a locked account due to a dispute - at even 1% interest, every day... eventually adds up to some pocket change.

Holding onto money and delaying payment is just good working capital management. "Get paid as quickly as possible and delay payment for as long as possible." It helps with cash flow and in better economic times it can make money in the overnight money market accounts.

Not only can it make money through investments, but there is another concept working here, it's called the time value of money. As the money supply increases it encourages inflation. Inflation and time value of money means a dollar earned today is worth more than a dollar earned tomorrow. So payment is really less the longer I wait to pay.

As long as deflation doesn't occur, this will hold true.

No sooner did I reply to this thread then I got another dispute notice from PayPal :rolleyes: Sold an item 2 months ago. Buyer just now claims he never received it?! Unfortunately, I don't think I tracked it because it was only $45 and seemed like an easy sale. I'm sure I've got the postal receipt, but no Tracking #. In the end, I will be forced by PayPal to refund the money and the guy has my item (likely to be resold by him on eBay at a later date). Welcome to PayPal-eBay 2013.

Another way they hold your money, is once a dispute is settled it takes PayPal weeks to restore the disputed amount to your account.

The reality of these actions by PayPal is there is no incentive for any seller to describe an item accurately, pack it well, ship it promptly or attempt to resolve any issues directly with a buyer. Because, it makes no difference if you do those things or not. PayPal will not consider these things as a defense in a dispute.