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's head of operations Jeff Wilke "noted that opportunities such as an automated clearing house solution or a PayPal-like service could have the potential to reduce this cost overtime and there is potential to move in that direction in the future, though he stressed that using PayPal itself was not part of 's plans." declined to comment. May be mulling the adoption of a similar service to reduce bad debt expenses from credit card transactions, according to a February research report from Bear Stearns. "Of course, more relevant is that they have an interest in spending a heck of a lot of money in making inroads." "There are a lot of massive financial institutions that have an interest in the segment," he said. Scott Kessler, an S&P Equity Research analyst, said potential competition from well-heeled financial institutions remains a wild card. It remains to be seen how great of an impact MasterCard's fee hike, which took effect this month, will have on future earnings. "PayPal's financial success will remain highly sensitive to changes in the rate at which its senders fund payments using credit cards," eBay said in its latest annual report.

It could also be viewed as a cost-cutting measure since PayPal's volume of credit card transactions-more than half of all payments-makes it vulnerable to increases in interchange fees. Most recently, PayPal and the major credit card firms abandoned online purchases of tobacco. In September eBay announced it would fine customers who violate the acceptable use policy, which prohibits using PayPal for gambling pornography, and prescription drugs. "Frankly, PayPal is so good at facilitating payments they don't need to become a bank," Jackson said.ĮBay nips regulatory issues in the bud, Jackson said, pointing to PayPal's 2002 encounter with New York State Attorney General Eliot Spitzer's efforts to stop the funding of online gambling accounts. Jackson said PayPal had discussed the banking model but didn't pursue it because of the enormous amount of capital required. PayPal also offers "buyer protection" lines of credit through a unit of Jackson, former head of product marketing at PayPal and author of The PayPal Wars, said, "PayPal may look like a bank on the outside but they only provide payments and auxiliary services to their customers as a courtesy." Customers' funds are deposited in FDIC-insured bank accounts or an opt-in money market fund run by Today, PayPal holds similar licenses or waivers to do business in about 40 states and is licensed as an "electronic money institution" in the UK and, more recently, Australia.Įric M. Prior to PayPal's planned IPO in early 2002, Louisiana regulators said the company could not conduct business in the state until licensed as a money transmitter. It is a low-margin, high-volume business with average transaction fees hovering around 3% and may be facing potential regulatory issues.

PayPal has tried to attract outside merchants and international customers by increasing time limits for fraud claims and lowering cross-border fees for EU countries. PayPal President Jeff Jordan said at a recent investor conference that PayPal's greatest potential for growth lies outside the eBay platform and in international expansion.

"As such, we believe there is potential for faster growth rate in the international business, and we believe the company is still in the early stages of developing the PayPal offering in Europe," the firm said.īoth eBay and PayPal declined to be interviewed for this article. Morgan Securities noted in November that PayPal was the payment method for 40% of the U.S. Acquired by eBay in 2002, PayPal accounted for 21% of 2004 revenue and was the vehicle for 74% of auction payments, compared with just 8% revenue and handling 44% of auction payments in 2002. Online payment unit PayPal could save the day.