How Did PayPal Grow and Changed the Rules

Reading Time: 6 minutes
How Did PayPal Grow and Changed the Rules

For most of human history, currency took the form sea shells or coins made of silver and gold. If you tried replicating that system in today’s world, however, you’re not going to have a good time. That’s why, today we’ll be looking at one of the companies that make the world such a convenient place: PayPal.

The Raise of Internet

The year is 1998, the beginning of the dot-com bubble. The stock market hasn’t gone crazy just yet, but investors are rushing to get in on the action. They have very good cause to do so: the rise of the Internet had opened up unprecedented possibilities to connect people, and where opportunity shows up, money is quick to follow. Entrepreneurs across the country flocked to Silicon Valley in the hopes of becoming instant billionaires.

Among them was Max Levchin, a Ukrainian-born immigrant who had graduated with a degree in computer science less than a year before that. When he arrived in Silicon Valley he started looking for a startup to join, but he couldn’t find a company that could inspire him. That’s when he stumbled into Peter Thiel, a disgruntled lawyer turned venture capitalist, who like Max was searching for good startups.

The First Idea of Online Payment System

Over the course of several weeks they met together and discussed a curious idea: a universal way of making payments to anyone, from global businesses to your friends and family. Such an idea seemed absurdly ambitious at the time, so the duo decided to tackle it in small steps.

The First Digital Wallet in History

The First Digital Wallet in History

The first one was to figure out a proper medium for the service: personal digital assistants, or PDAs, seemed like the perfect candidate. You can think of PDAs as proto-smartphones; they had the same idea, but with vastly inferior technology.

Of course, for their time PDAs were cutting edge, and so that’s what Max and Peter settled for. Their service, which they called Fieldlink, allowed users to store encrypted information onto their devices; essentially, it was one of the first digital wallets in history. Of course, because you had to own a PDA to use Fieldlink, its potential userbase was very small. And because payment services are only as valuable as the number of people who use them, Fieldlink quickly crashed and burned.

The Birth of PayPal

Less than a year, Max and Peter were back to the drawing board. They needed something more popular to be the medium for their service: no single device would do the trick, but the Internet, now that was big enough for their ambitions. They reincorporated as Confinity, backed by a $3 million investment from Nokia, and they called their service PayPal. Unlike Fieldlink, the PayPal system was both simplistic and brilliant: instead of needing PDAs, users could send money with nothing more than their email and credit card. The best part was that users could transfer money to anyone, even if they didn’t have an account; as long you knew their email they would get their money.

Then Peter and Max got an even better idea: Affiliate marketing. They would pay people to sign up and refer their friends. Want to open an account? Here’s $10. Want another $10? Get your friends to open their own accounts. You can probably guess what happened: people started signing up, a lot of them. Just three months after its release, PayPal had 12,000 active users.

PayPal’s eBay Integration

PayPal’s eBay Integration

What really kickstarted PayPal’s popularity, however, was its integration with eBay. Back then eBay was emerging as the premiere online marketplace, but there was a notable handicap to its usability: the only way you could pay for things was through checks and money orders. That was very inconvenient, and so when PayPal got released, eBay auctions became one of its primary uses.

How was eBay Started eCommerce Business

Ebay had tried to introduce their own online payment system, but PayPal was fifty times more popular. Of course, it’s worth noting that PayPal was far from being the only such company out there. At the height of the dot-com bubble there were dozens of electronic payment startups, one of which was X.com. It was founded by none other than Elon Musk and it was one of his earliest ventures.

Elon Mask’s Effect on PayPal

Surprisingly, the X.com office was located just four blocks away from PayPal headquarters. This made things personal, and pretty soon the two companies were engaged in bitter one-upmanship. Engineers on both sides would log 100-hour work weeks; things got so competitive that one engineer at PayPal allegedly designed a bomb as his final solution.

Then, in March of 2000, the fierce war ended abruptly, when Elon Musk and Peter Thiel shook hands and merged the two companies. The decision was questioned by employees on both sides, but it ultimately proved crucial, for that month was the beginning of the dot-com crash that would eventually destroy most of their competitors.

Thanks to the merger, the two competing teams could focus on maintaining the service and they managed to weather the storm. In fact, they were so successful that by August of that year the reborn PayPal had over two and a half million users. This early PayPal team would go on to found various billIon dollar enterprises, and today they are known as the PayPal mafia.

How Did PayPal Grow

In June the team added business accounts, which are now at the core of PayPal’s revenue stream, and by the end of 2001 PayPal’s userbase had ballooned to almost 13 million accounts.

Paypal Nasdaq

While the dot-com world crashed and burned around them, PayPal were getting ready for their next big move: just two weeks after 9/11, while the American economy was still in shock, PayPal announced that they’d be going public with an initial public offering on February 2002. Despite the horrible macroeconomic situation, PayPal’s IPO was a shining success, with the company’s shares soaring 50% above their target price. The IPO was a signal to everyone that PayPal had won: it was now, essentially, the payment system of the Internet.

PayPal Sold to eBay

The folks over at eBay knew that, so they shut down their Billpoint system and purchased PayPal for one and a half billion dollars. The acquisition made a lot of sense: PayPal was an integral part of eBay’s marketplace and eBay’s well-funded legal team could finally settle PayPal’s numerous class-action lawsuits.

Sadly, the acquisition would end up changing PayPal to its core; all the PayPal mafia members left, and with them the company’s libertarian philosophy also disappeared. Of course, that didn’t stop PayPal from expanding: by 2006 it had spread to 55 countries and by 2011 it had over 100 million users.

PayPal’s Fraud Issues

All of this growth, however, has not come without a price. PayPal had struggled with fraud and privacy issues since its very beginning, but its dramatic expansion greatly magnified these problems. Most of the horror stories you hear online of honest users getting their accounts frozen and their money drained are true, and occur with frightening regularity. Because PayPal isn’t regulated as a bank, their modus operandi is to seize accounts at even the faintest hint of fraud, and their Terms of Service allow for little recourse on the side of the consumer.

The Popularity of PayPal

Of course, despite these issues PayPal’s popularity kept on growing relentlessly. By 2014 it had grown too big for eBay to handle, and so PayPal was spun off. Today, it is once again a publicly traded company and its userbase is bigger than ever.

In March 2017, PayPal passed the 200 million user milestone, and it is showing no signs of slowing down. Over the past ten years it has acquired half a dozen companies related to online payments and fraud protection, and it’s on the lookout for more. Despite all of its issues, PayPal remains the world’s largest online payment service and it’s now part of the Fortune 500 index. The sheer convenience of the service, especially with the recent One Touch feature, is clearly enough to win over more customers than they lose through their shady policies. PayPal might not be regulated like bank, but at this point it sure is starting to look like one; it might already be too big to fail.