How does PayPal make Money

How does PayPal make Money – Unicorn Economy Analysis

How does PayPal Make Money
How does PayPal Make Money

About PayPal, Funders, Founders and Facts

Well PayPal is the name every one knows about because of its ultimate payment solution that works across currencies and countries.

But…

It should have been known for something else…

The PayPal Mafia… It is a group of Founders that started out from PayPal either as Founders, Employees etc.  and post PayPal started out either on their own or invested in other Tech Companies.  Following is the Mafia Info that every one should know about. (picture courtesy: WikiPedia)

PayPal Mafia
PayPal Mafia

PayPal Founders: PayPal was founded in December 1998 as Confinity, a company that developed security software for handheld devices by Max Levchin, Peter Thiel, Luke Nosek and Ken Howery. In March 2000, Confinity merged with X.com, an online banking company founded by Elon Musk.   Later after IPO in 2002, Ebay Purchased PayPal for 1.5$ Billion, and in 2014 Spun it off as a Separate Entity in 2014.

PayPal Funding: Now Defunct BlueRun Ventures.

How does PayPal Make Money

PayPal is a FinTech Product that was born out of the need to replace paper payment solutions like check and cash.

PayPal has evolved through a large cycle of Business Model Evolution until it figured out the current model of service fee for fund transfers.

It has the following streams of fee receipts:

  1. For Online Sales (Products)
  2. Fund Transfers (P2P)

How does PayPal Make Money via Online Sales

In US majority of products that are sold online – they use an Embedded PayPal button for accepting the payments from customers.

Being a part of E-Bay from 2003-2014 it received mammoth amounts of payments from people selling stuff on E-Bay and accepting PayPal as the valid mode of accepting payments.

PayPal Check out Button
PayPal Check out Button

Following is the Fee Structure for Online Sales:

How PayPal Earns Money
How PayPal Earns Money

How does PayPal Make Money via Fund Transfer

When People send their loved ones or any one else money via the internet just using their email id, PayPal takes a Cut of upto 4.4%+fixed fee.

Business Model of PayPal
Business Model of PayPal

PayPal Business Model

PayPal Business Model
PayPal Business Model

PayPal Business Model is exactly similar to that of payment gateway business model with the critical difference of being able to take payments in multiple currencies across the world.

That is what sets PayPal apart.  People from around the world can accept payments straight into their bank account with just an email id.

The architecture behind is similar to what a payment aggregator uses.  Any transaction that successfully passes through is subjected to a TDR (Transaction discounting rate) which is the fee for processing the payment for paypal.  PayPal charges a way high 4.4% kind of a fee which is way high as compared to TDR for paypal which is as low as 0.3-0.5% depending on the type of instrument for payment.

How PayPal Makes Money

How PayPal makes Money
How PayPal makes Money

How paypal makes money is essentially arbitrage.  Just read this example:

  1. Customers (1000 in number) accept / transmit fee worth 1000$ via PayPal
  2. PayPal retains this amount for 4-5 Days depending on the type of transaction.
  3. PayPal deposits these funds (1000*1000 = 1 Million USD) into interest bearing accounts which gives them arbitrage money which no one has a claim to
  4. PayPal charges transaction fee of upto 4.4% on the amount transmitted i.e. 44K USD

Disclaimer : How does PayPal make money is a view of the author, please use discretion while using this information and you agree to indemnify the author and the blog from any damage arising out of use of this information.

Unicorn Economy
Unicorn Economy is your answer to all startup related queries with respect to business strategy, business model analysis and consulting. One stop stop for business plan and financial model development.

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