What is PayPal and how did PayPal help fuel Ebay's growth?

PayPal cut their teeth in the marketplace as a payment settlement provider to the online auction world, but in recent years they've been very aggressive about growing their off Ebay transaction volume.

They invented what is sometimes referred to as email payments, because you only need to know to make a payment to a PayPal subscriber is their email address. No sensitive financial information is ever exchanged between the payment sender and receiver.

Other providers, such as Citibank, have attempted over the years to emulate what PayPal does, but none have experienced the kind of success that PayPal has achieved.

PayPal and Online Auctions

In the early days of Ebay, buyers and sellers had no quick way to settle their transactions. Most auctions were settled by the buyer mailing a personal check or, more often, a money order to the seller.  Usually, the seller would hold the goods purchased and not ship the item until they were sure that the buyer’s funds would clear.

So, imagine the inconvenience to both parties in this flow:

  • Buyer bids on seller’s item and wins the auction on Monday.
  • Buyer visits local convenience store or post office on Tuesday and pays $0.85 for a money order.
  • Buyer mails money order to seller who receives it on Friday. Since they are receiving a money order, they know that the funds are good so they don’t have to wait to ship the goods. If this had been a personal check payment, add about 10 days to this process.
  • Seller ships goods to buyer on Saturday. If he is shipping UPS, the item does not start to make its way to the buyer until Monday morning.
  • Buyer receives goods on Wednesday.

Prior to PayPal, this was a best case scenario in the auction world. From auction close to receipt of goods averaged about 10 days at best. Of course, the nice thing about this from a seller perspective is that the payment cost and burden fell entirely upon the buyer, who bore the cost of the money order and the first class mail to get the payment to the seller.

After PayPal, the transaction changed this way:

  • Buyer bids on seller’s item and wins the auction on Monday.
  • Seller can send buyer a payment via PayPal within seconds of the auction closing, so the buyer can receive notification of payment virtually immediately. In our example, the seller receives payment on Monday.
  • Seller ships the item out to the buyer on Tuesday.
  • Buyer receives goods on Friday.

PayPal has lopped 5 days off the time it used to take to complete the auction transaction, and saved the buyer a rather inconvenient trip to the post office to buy a money order. It’s also saved the buyer some expense, since the cost of the PayPal transaction is borne by the seller instead. In addition, using PayPal has enabled the buyer to pay with his credit card, which was rarely an option for auction payment prior to PayPal coming on the scene.

PayPal was so successful in enabling payments for Ebay auction users that Ebay ended up buying PayPal in 2002.

Learn about using PayPal for Ebay Auctions


PayPal for Merchant Payments

Over the past several years, PayPal has been working hard to diversify their business away from just the online auction business, and have set their sites on enabling online payments for Internet merchants.

 Sign up for PayPal and start accepting credit card payments instantly.

There are several reasons why an online merchant may want to accept PayPal payments:

  • The PayPal brand is becoming quite well known as a payment provider. When consumers see the brand at the merchant website, it is easily recognizable.
  • PayPal has a large consumer user base of enrolled subscribers. Their overall subscriber numbers are in the 150+ million range, although it is hard to say how many of those subscribers are active with PayPal or just happened to have signed up with them at some point in time but don’t really use the service with any regularity.
  • A merchant can easily sign up for a PayPal account and avoid signing credit card processing agreements that commit them to monthly minimum fees or long term contracts.
  • PayPal has web tools that make it very easy for merchants to display the PayPal logo and accept PayPal payments on their website.
  • The merchant never has to store consumer credit card or bank account information on their internal database, which reduces their exposure to someone hacking into their database and stealing consumer credit card data.
Signing up for a PayPal merchant account is free, and for most of their account options, there are no required monthly fees.  You will pay transaction fees to them for any payments made using their service, and the fees are based upon a percentage of the transaction amount.  The PayPal pricing list shows transaction fees ranging from 1.9% to 3.1%.  On top of that, you'll also pay them around $0.30 per transaction as well.
The transaction percentage range is based upon monthly transaction volume, so the more PayPal payments you receive, the less you pay in transaction fees.  On the high end of their transaction fee schedule, expect to pay around  $3.20 on a $100 transaction.  If you are one of their high volume customers generating over $100,000 per month in PayPal payments, your cost for a $100 transaction goes down to $2.20.