September 30, 2002, 12:00 AM

What eBay Gets from Its New Best Friend

(Page 3 of 4)

But eBay also shelled out $43.5 million in February to buy out Wells Fargo’s equity position in Billpoint. For PayPal, eBay is offering 0.39 shares of its stock per outstanding share of PayPal stock, plus another $18 million in cash.

“EBay didn’t lose sight of PayPal and while they paid a lot to increase their cash flow and move into new segments of e-commerce, PayPal represents incremental profits and a way to build its core business,” says Soundview Technology’s Milne.

While eBay reportedly has the cash to cover the cost of buying out Wells Fargo, recovering the premium to acquire PayPal is not a slam-dunk.

First, PayPal has yet to receive a money transfer license in 14 of the more than 30 states requiring them. This is not considered a major obstacle, since the Federal Trade Commission recently ruled PayPal is not a bank, therefore making it eligible for such a license. But in February Louisiana banned PayPal from offering services within the state claiming it constituted an unauthorized banking service. Although Louisiana has since granted PayPal a money transfer license, PayPal is still awaiting approval for similar licenses in about 16 states.

“PayPal has won some big victories on this front of late with the FTC ruling and New York’s decision not to classify it as a bank, but there are still a lot of states from which to gain a money transfer license,” says Legg Mason’s Devitt. “So far they have a good track record of receiving approval.”

More nettlesome are the class action suits filed against the company by disgruntled users (Not everyone loves PayPal, p. 28). Although PayPal and eBay say only that the suits are without merit, the negative publicity surrounding them has the potential to steer wary non-PayPal customers away from the service.

The suits, one of which was filed in Santa Clara, Calif., in February, charges PayPal with illegitimately restricting customers’ access to their money and seeks an unspecified amount in damages. The plaintiffs argue that eBay’s fraud prevention strategy is heavy handed and guided by poor management strategies that freeze accounts without actual proof of fraudulent activity.

Keeping the magic

“It’s still possible for this and any other suits to be a problem,” cautions Robertson. “The concern is that fraud prevention practices may prove to be unreasonable. There is certainly some room for refinement in this area.”

Lastly, PayPal’s association with online gambling may come back to bite the company. Missouri and New York recently subpoenaed PayPal for records of its customers. While eBay says only that PayPal intends to exit the online gaming industry, whether regulators intend to use the requested data against PayPal remains a question.

Those problems aside, PayPal looks to be more than a good fit for eBay. After all, both companies were dot-com upstarts that devised a simple way to serve customers in a fast growing and lucrative segment of e-commerce and turn a profit. Now that the two companies are to become one, it remains to be seen if they can continue the magic that defined them separately. l


Peter Lucas is a Chicago-based business journalist.


Not everyone loves PayPal

Despite its popularity among users of consumer-to-consumer payments on the Internet, PayPal Inc. has its detractors. Most are small businesses upset with having their accounts unexpectedly frozen by PayPal for suspected security violations.

Angered by what they consider to be an unfounded action, several affected sellers are creating web sites to voice their opposition. The sites carry such contentious names as and

Content is usually a rebuttal to PayPal’s policy of shutting down accounts suspected of fraudulent activity and an online bulletin board for disgruntled users to air their gripes. The sites also update visitors on pending class actions suits against PayPal and in some cases provide advice on how to bring one against the company.

While the sites appear to be inconsequential at first glance, awareness of them is spreading, which some analysts say may soil the company’s image with prospective users. “There are a growing number of anti-PayPal sites on the web that make some pretty strong allegations,” says Scott W. Devitt, an analyst with Baltimore-based Legg Mason Inc. “I doubt they can cause damage to the business, but they are gaining notoriety.”

One Internet retailer whose PayPal account was frozen went so far as to send an e-mail to his eBay and web site customers stating he will no longer accept PayPal.

PayPal officials counter that such rhetoric is a knee-jerk response to what it considers to be solid fraud prevention techniques. Because of the pending suits, PayPal declines to discuss its fraud prevention policies, except to say users are clearly made aware of them.

“We outline our terms of use and security procedures for every new account,” says a PayPal spokesman. “Some people simply get upset because they become impatient waiting while we determine whether fraud has occurred.”

While some analysts say PayPal needs to be more responsive to customers-“PayPal needs to look harder at its fraud prevention policies so it can act quickly without freezing accounts for what users consider to be an unreasonable amount of time,” says Beth Robertson, senior analyst with Needham, Mass.-based TowerGroup Inc.-PayPal’s fraud prevention measures must be working. Analysts say PayPal’s fraud rate is about 0.5% of volume (50 basis points), down from 1.25% (125 basis points) a year ago.

Peter Lucas is a Chicago-based freelance writer.


Another innovation in online payment

Mostly by default, credit cards have become the preferred payment method on the Internet. No other payment vehicle matches the web so well.

Until now. Much as PayPal grew up because someone had the notion that consumers could exchange value without involving a card, a new product called Bill Me Later is a credit vehicle for the web without the card. Produced by I4 Commerce Inc., Bill Me Later, after six months of beta testing with a handful of merchants, this fall is implementing payment at a string of online merchants who will accept Bill Me Later in time for holiday shopping.

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