The Evolution of Paypal

The beginning of the dot-com bubble the stock market hasn't gone crazy just yet but investors are rushing to get into 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

Intrapreneurs 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.

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 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 Field Link 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 field link its potential user base was very small. And because payment services are only as valuable as the number of people who use them field link quickly crashed and burned.

Less than a year later 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.

They reincorporate it as Confinity backed by a $3 million investment from Nokia and they called their service PayPal.

Unlike field link, the PayPal system was both simplistic and brilliant. Instead of needing PTA’s, 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 as you knew their email they would get their money.

Then Peter and Max got an even better idea. They would pay people to sign up and refer their friends. Want to open an account ? Here’s 10 bucks ! If you 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.

What really kick-started PayPal's popularity however was its integration with eBay. Back then, eBay was emerging as the premier 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.

eBay had tried to introduce their own online payment system but Paypal was 50 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.

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 lock one hundred hour work weeks. Things got so competitive that one engineer at PayPal allegedly designed a bomb as his final solution. Then in March 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 2.5  million users. This early PayPal  team would go on to found various billion-dollar enterprises and today they are known as the PayPal mafia.

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 user base hit balloons to almost 13 million accounts.

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 too in shock PayPal announced that they'd be going public with an Initial Public Offering(IPO) 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 could win. It was now essentially in the payment system of the internet. The folks over at eBay knew that. So they shut down their bill point system and purchased PayPal for one and a half billion dollars. 

The acquisition made a lot of sense as PayPal was an integral part of eBay marketplace and eBay's well-funded legal team could finally set up 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. All of this growth however has not come without a price

Paypal had struggled with fraud and privacy issues since it's very beginning but it's 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 they used 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

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 Pin off.

Today it is once again a publicly traded company and its user base 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 10 years it has acquired half a dozen companies related to online payments and fraud protection and it sounds a lookout for more.

Despite all of its issues PayPal remains the world's largest online payment service and it is 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 a bank but at this point it sure is starting to look like one. It might already be too big to fail.

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