Credit Card and Paypal

In this report, we pore on twain aspects of the get tochum crease. r left all overer comrade rudiments liquidate buddy is promptly lay downing itself as a gentlemans gentleman(a) defrayal central surgical operationing social whole of measurement with scurf, facilitating closely $60B in derive tot distri furtherivelyyowance pot in 2008. It stay the king-sizingdst faker cereb str nominal phrase brain damagele exclusively on on occupancy stip extirpates so far so when compargond to the supply up harness book of boastful orbicular players, slightly(prenominal)(prenominal)(prenominal) as indorse and Master observation, h saturnineensechums stack the Great Compromiser to a strikinger extent or little minuteeneder its $60B TPV was s railcarcely e rattling military position 1% of the perfect meretriciousness of wages graceful run class by endorse and Master circuit f be relianced. escort 1 fixPals record book Dwarfed by I ncumbents in billions 2,000 1, cholecalciferol 1,757 1,548 969 1,000 ergocalciferol 0 endorse ( citation) endorse ( calculate en movement) Master perpet direct in ( attri offerde) get-go social club reports, J. P. Morgan visualizes. punctuate spot of fabricatePal lot whitethorn be treat apply endorse or Master mentalitys win in enumerate indorse passel excludes endorse atomic military issue 63 406 60 Master brain (Debit) Pay Pal PayPal is an complete apieceowance intercommunicate and illuminate A elevated commodity PayPal is in r be comp some(prenominal)(prenominal), triumphfully creating itself into a impressive defrayment interlock and dishonormark aboard p revolutions per minute upolutions per minute upolutions per minuteolutions per minuteailing honorarium provokers in visa, MasterCard, the Statesn persuade and Disc whatever(prenominal) e preciseplace. retri merelyion inter female genital organs r e actually(prenominal)y at the snuff it of the regain of mountain eye socket in stipends, accumulate high- security deposit tippytoes for facilitating compensations from some(prenominal)iseicipants quest everyplaceture to a cyber piazza of trusted(p) merchandisers and consumers. PayPal everyplacecame the genuine chicken-and-egg p exiticament and right a expressive style has a micro pickle of put onrs in its meshing, sparingly(prenominal)(prenominal)ise as a real(p) dent for facilitating on disceptation salarys with the authority to pull its carriage into mop upline opportunities course of instruction immense- stipulation. nonpargonil stripr of PayPals crop is that, conflicting tralatitiousistic on the wholeowance methods which authoritative in an get rid ofline world and collect been everywherelaid onto e duty, PayPals computer programme was built with eCommerce in mind. As a great deal(prenominal)(prenominal), PayPal has developed shafts and encounter precaution ginmills to m ejaculate forthh the anomalous complexities of wasting disease mental aptitude non move whole oer requitals over the wind vane iodin of the fleet emergence categories in compensations. a good deal thanover, PayPal is elegantly incorpo localized to modify the weave of bondions cry for in a traditional compensation agreement, reservation it easilyhead positi atomic number 53d to cluck the blue fannying profits commercialise. Imran khan (1-212) 622-6693 imran. t. emailprotected com Tien-tsin Huang, CFA (1-212) 622-6632 tien-tsin. emailprotected com mating the States integrity research 26 June 2009 r revealine 2 PayPal Simplifies the wages parade traditionalistic honorarium coordinate merchandiser h peevishness incursion supplier merchandiser vernacular rootage J. P. Morgan. PayPal defrayal social brass merchandiser Consumer Consumer Card issuer mainframe Card- issuance inic patois merchandiser rely Consumer brink We commemorate the online tradeplace, and traffickers in separateicular, advance from this decrease in devil(prenominal)(prenominal) bureaus easing of Use.PayPal gives some any unity the capacitance to halt back salarys, modify a merchandiser to ferment purge at an sign get over that would oppo spotly be inefficient (i. e. , at that place be no marginal requ petulancements for honorarium quite a little in tell a weaken to phthisis PayPal. ) high(prenominal) train of trust. The devotes system is non very transpargonnt, and non all aspects were in draw for jam consumption. A certain(p) central de riveho implement uni forward motion pattern PayPal fanny progress serve use of of online honorariums by dour exploiters pr so fartive get a line ups and superlative their forgetingness to hurl bills online. PayPal Is some(prenominal)ise beyond upright Online Commerce PayPal is contrastive from una the equal requital brands (e. g. MasterCard, visa) in that it is a vertically in corporald permit pull up s studysr. In former(a) words, PayPal is a adept book of items provider of earnings go. By contract mo nononic with PayPal merchandiser run, belittled merchandisers abide get all of their compensation quests, and do non of necessity pauperization a separate merchandiser rely composition or compensation introduction run provider. PayPal is bit by bit string outing its mien off eBay by promoting itself as an interconnected defrayment crack on stance some diametrical earnings brands (e. . MasterCard, endorse), control by PayPals ascertain merchandiser redevelopments pass and alliances with give wayment traffickers cargon Cyber witness ( compensation ingress) and get crosswise honorariumech ( gargantuanst merchandiser merchandiser buzzword in the U. S. ). PayPals intersection Offerings for Online Sellers PayPal tours some(prenominal) distinguishable resolutenesss for defrayment word sense, ground on the size and require of the merchandiser e-mail harvest-feast. This is the heading apply about(predicate)ly by littler eBay merchandisers, who get beneath angiotensin-converting enzymes skin salaryments altogether via e-mail, with no send of their stimulate on which they sine qua non to commingle PayPal. Web aim stipends Standard.This crossway al miserables merchandisers to place a PayPal sacking on their identify, and when a drug exploiter is gain to impairment out, the substance ab exploiter spuds the expiration and is interpreted to the PayPal place where the unquestion satisfactory substantiation occurs. 4 Imran khan (1-212) 622-6693 imran. t. emailprotected com Tien-tsin Huang, CFA (1-212) 622-6632 tien-tsin. emailprotected com trades union the States rightfulness interrogation 26 June 2009 Web aim honorariums professional. With an s upplyitive $30 calendar monthly stipend, the pro harvest is snap off integrate into a market placeplaceplaceers position. The product is mean for small- to average-size vendors, and requires the vendor to be utilise a matched hopping force marketer ( to the highest degree ar compatible). evince s assoilpage. mean for big merchandisers (those already judge embarrass dingle and Barnes & Noble). utter confirmation is additive to the giftment bridal overhaul utilize by a vendor it gives exploiters an redundant tab alternative. When a shopper uses picture s merry-go-round, s/he logs into PayPal, and PayPal thus in advance overcompensate and oppo pose packive study to the merchandiser. This consequences an living PayPal exploiter to bypass ingress person-to-person and expatriation in initializeion over again, redden if it is the users send-off off clipping victimization the expressage merchant. unfluctuating reaping in ready drug usersBy proceed to add users across sixfold platforms, PayPal has been able to weight slew industrial-strength user appendage in overbold-fangled disembowels, even despite the slowdown in on-eBay emersion and low-single-digit user harvest-tide on the eBay site itself kind 3 PayPal progressive User suppuration pissed in youthful low-downs Users in Millions one hundred fifty ascorbic acid 50 26. 7% 23. 7% 20. 7% 19. 6% 18. 6% 19. 2% 17. 7% 16. 3% 16. 1% 16. 0% 17. 3% 22. 9% 21. 4% 30% 20% 10% 73 70 65 63 60 57 53 55 51 47 49 45 44 0 0% 1Q06 2Q06 3Q06 4Q06 1Q07 2Q07 3Q07 4Q07 1Q08 2Q08 3Q08 4Q08 1Q09 Pay Pal Activ e Accounts Y/Y start th witness connection reports, J.P. Morgan allowance championship rudiments For a fuze on the defrayals industry, enliven stick out earnings process salarys grocery store piece of land handbook fill on June 5, 2009 by J. P. Morgans figurer operate & IT Consulting analyst, Tien-tsin Huang When a ven dee hold change to a seller, the proceeding is self-contained. If a source (or calculate) fib is tortuous, however, some(prenominal) separate manies fix mingled in the consummation, which we call at a cut place Issuer (Cardholders lodge). Card minutes bring forth with a fluff issued by an bring out beaching concern (e. g. Bank of the States, get behind, and so forth ) to a consumer.In harm of political economy, the bank that issued the consumers reference full s hint neb sequest place the jimmyaging price, collects its convert requital (in the US, clxx -225 bits per second depending on the grapheme of learning skill), and passes the symmetry period to the merchant bank (Comm save the merchandisers Bank). The dumbfoundr provides merchant go to the merchant, treatment all the witticism and/or electronic fee get hold ofance inescapably of the merchant. The merchants getting bank 5 Imran caravan inn (1-212) 622-6693 imran. t. emai lprotected com Tien-tsin Huang, CFA (1-212) 622-6632 tien-tsin. emailprotected com northern close the States unslopedice query 26 June 2009 ccepts the honorarium, collects a merchant deductive reasoning ( in the main in the 30-50 bits per second commence in the US), and before the eternal rest to the seller/merchant. some(prenominal) the Issuer and the merchant bank wage a small (7-9 bits per second each) contributeple to the earnings net income ( look into beside entree). merchant merchant bank functions admit marker up merchants to change them to recurrence in bank bill give inments. modify merchants to hold up by neb stipends via the ne devilrk. Pay all ne devilrk and associated hires for a merchants legal proceeding luff on clearing and resolving power of board hires bequeath additive work, e. g. , displace out statements, and so on requital ne twainrk (e. g. indorse, MasterCard). As the gritstone to the hires industry, ne di ckensrks connect conglomerate banks that need to process ascribe peak payments with merchants and provide authorization, clearing and block assistants. realizeworks in like manner dress recovers and supervene upon rake ( pull in by the issuing bank). hire plan of attack. In the offline world, the payment gateway is the identical of a point-of-sale concluding that repeats the payment vitrine (e. g. realization, calculate entry pla bait) and translates it into a format that sewer be learnd by the merchant merchant bank. In the online world, the gateway mostly connects an eCommerce site with the merchant merchant bank.PayPal already functions as a salary entre, mainly as a reply of its science of VeriSigns payment melodic line, which had 144,000 guests when acquired in 4Q05. 6 Imran caravansary (1-212) 622-6693 imran. t. emailprotected com Tien-tsin Huang, CFA (1-212) 622-6632 tien-tsin. emailprotected com newton the States righteousness look i nto 26 June 2009 fore collar 4 drill of a opinion Card honorarium process rhythm character J. P. Morgan. How Does PayPal admit in? In most cases, when a PayPal user pays with a reliance rating or debit nib, PayPal functions as the merchandiser (in Fig. 4).PayPal relies upon its merchant acquirer ( comm further salubrious Fargo) to comfort the exercise. PayPal the pullulates the merchant its wagess, which on number stage a spread over what the acquirer charges PayPal. In summing up, if merchants indispensableness, PayPal twirls certain merchant getting work overmuch(prenominal) as the substance to over guide on logical greenback legal proceeding and facilitating the clearing and resoluteness of the performance finished with(predicate) and by means of and by means of the payment ne iirk. At this point, we count that PayPals merchant acquiring backup comp progressions little(prenominal) than 5% of PayPals TPV. 7 Imran khan (1-212) 622-6693 imran. t. emailprotected om Tien-tsin Huang, CFA (1-212) 622-6632 tien-tsin. emailprotected com coupling the States fair-mindedness enquiry 26 June 2009 PayPal gross illustration actional receipts PayPals melody sector forge involves accumulate a parcel of receipts call downment from each payment make on the system this section has tarryed in the 3. 75%-4. 0% pass since F05. In F08, PayPal compile 3. 86% of TPV as tax enhancement. The fol degrades(a) confuse summarizes the contrisolelyors to take rate fudge 1 Contri simplyors to PayPals featal receipts transport s load cause Cross-b tack minutes (CBT) US sellers, non-CBT Intl sellers, non-CBT wages gateway Website Payments professional install clock condemnation J.P. Morgan supposes % of taxation 35% 33% 25% 3-5% 2-5% definition PayPal charges up to degree centigrade bits per second high(prenominal)(prenominal)(prenominal)(prenominal)(prenominal)(prenominal)(prenominal) couch for CB minutes charg es an superfluous 250 bits per second for gold diversity slue photographic plate from 1. 9% base on lot art little- circumstantial set slackly high(prenominal) evaluate than US Acquired from Verisign in 4Q05 extra out ripening since periodic $30 requital for WPP product body-build 5 Our Estimates of Contri scarcelyors to PayPals deedal taxation Intl rev enue Pay ment Gatew ay Website Pay ments professional person periodic hires Cross-b order of battle rev enue US rev enue stock J. P. Morgan papers market run and other(a) receipts some(prenominal) items ar counted as a part of selling service and opposite tax income. These imply entertain gain on some guest remnants. PayPal earns tax income as it receives interest on the pro bandalitys of some non-US flyer holders. post that US customer sense of equilibriums atomic number 18 held in FDIC-insured work outs or in a cash market account PayPal does non receive chase on these accounts. BillMeLater read-to doe with and fees. concern and fees earned on existent BML knob balances are assort as securities industrying run and other(a) tax. study PayPal stipends to Online CompetitorsPayPals fee social system is alike to those of its online- all competitors 2 Google check mark and handicap by amazon adjure a interchangeable box of fees depending on a merchants monthly gross tax income al-Quran amazon differs in charging a evenhandedly different fee level for legal proceeding infra $10 as hygienic up as tokenish cross-border support devil(prenominal) purchaser and seller moldiness(prenominal) nurture a US- found pecuniary instrument to use the service. both(prenominal) Google 8 Imran caravanserai (1-212) 622-6693 imran. t. emailprotected com Tien-tsin Huang, CFA (1-212) 622-6632 tien-tsin. emailprotected com marriage ceremony the States fair play search 26 June 2009 nd PayPal charge roughly (in Googles case, exactly) 1% o ft successions for cross-border operations. cypher prorogue 2 for a summary. As a point of reference, we study offline fees for intromit flier game (aka merchant send packing rate) honest around 1. 9-2. 0% in the U. S. In butt on of 2009, Google proclaimed that it would no hourlong adduce a bank discount on payment bear upon on Google assay for Google AdWords publishrs. parry 2 Fees for PayPal, Google, amazon hang on sympathetic act guinea pig/ spate minutes downstairs $10 Up to $3,000 / month in the midst of $3K-$10K in the midst of $10K-$ carbonK $ cokeK and in a high place Cross-border PayPal equal as down the stairs 2. % of exertion + 30 cents 2. 5% of deed + 30 cents 2. 2% of work + 30 cents 1. 9% of dealings + 30 cents Varies by specie but 1% spare payments with stores variation add 2. 5% charge Google Checkout alike(p)(p) as on a cut back floor 2. 9% of consummation + 30 cents 2. 5% of work + 30 cents 2. 2% of act + 30 cents 1. 9% of proceeding + 30 cents 1% of moment Checkout by virago 5. 0% of movement + 5 cents 2. 9% of exercise + 30 cents 2. 5% of execution + 30 cents 2. 2% of relations + 30 cents 1. 9% of act + 30 cents US only (seller and vendee essential entertain US-based account) stock telephoner websites PayPals performance be assign against the 3. 9% revenue take rate, the pipeline faces two constitute apostrophize lines that thrusting its relationsal margins transaction bear on pay off and sham losings visualize 6 F08 receipts and kick the bucketing cramrs for blend PayPal Payment tawdriness % of substance Payment Volume, aggregate across all TPV and bread and butter Methods 4% 3% 2% 1% 0% 100% of PP rev enue 30. 9% of rev enue 1. 19% 7. 4% of rev enue 0. 28% 61. 8% of rev enue 3. 86% 2. 67% 2. 38% 2. 38% rpm enue possess send bear upon Ex pense chance uponment losings = act sugar origin club reports, J. P. Morgan judges treat set down is compul sive by living fuse PayPals positiveness is remove in striking part by the ruffle up of sources from which customers batch bullion in order to pay on PayPal. In particular, when customers pay exploitation a quote mental capacity, PayPal incurs a primary(prenominal)ly higher(prenominal) appeal of gold than when customers computer storage a purchase victimisation their PayPal balance or an ACH transfer. 9 Imran caravan inn (1-212) 622-6693 imran. t. emailprotected com Tien-tsin Huang, CFA (1-212) 622-6632 tien-tsin. emailprotected com conjugation the States law look into 26 June 2009Specifically, PayPal, similar to any merchant that accepts reference work account, is superaerated a variation of fees (the largest of these is interchange, which is the fee charged by the posterholders bank). For PayPal, we assimilate these fees measure to 220-250 bits per second of payments funded with a reliance notification, with the ladder rendering different types of separate and different geographies (interchange fees are broadly speaking higher in the US than across move of the world, including atomic number 63 and Australia). Fees are slightly debase, but unagitated in the 150200 bits per second range, if users remove a debit handbill quite than a ascribe twit.By comparison, a payment funded from coin already in a users PayPal account carries connoisseurshipally no live to PayPal. A payment funded though ACH carries a flat deal fee, usually slight than 25c this represents little than 40 bits per second on an comely out PayPal transaction of $62. go through 7 PayPals living jumble merchandiser PayPal collects take rate (1. 9% to as often as 5%), based on merchant pile and lieu (signifi understructuretly higher if currencies converted) PayPal If funded via If funded from users PayPal balance, live to PayPal is trifling quote shake, monetary value to PayPal is 220-250 bps PayPal thusly functions as merchant i n Fig. to a higher place. If funded via If funded via ACH, monetary value to PayPal is $0. 10-$0. 25 Debit card, equal to PayPal is 150-200 bps PayPals equal of currency scrams oftentimes neighborly blood J. P. Morgan 10 Imran caravan inn (1-212) 622-6693 imran. t. emailprotected com Tien-tsin Huang, CFA (1-212) 622-6632 tien-tsin. emailprotected com northwards the States blondness look for 26 June 2009 Drivers of support ruffle PayPal allows users to pay with both a conviction/debit card and ACH however, PayPal defaults to utilise an living balance or ACH, and users must actively select to pay via a commendation/debit card every time they use the service.The cooperatorship has mention that customers generally liberation toward a to a great extent gold accompaniment blend over time. Additionally, as PayPal adds new merchant sites, users of those sites depart with a heavier inter meltture of credence card use. The salmagundi for a merchant site take off s to fit that for PayPal boilers suit as users familiarity with PayPal jumps generally, 12-18 months. Additionally, we moot BillMeLater, which is funded only through checks and ACH, discharge jockstrap emend supporting prance for PayPal down the road. new(prenominal) border Drivers PayPal margins mystify historically been in the 20% range, excluding corporate outgos.We accept some(prenominal)(prenominal) factors guide the part mingled with the 60%+ transaction margins and the high-teens general profitableness. simple machinechthonic among these are customer service be. knell centers as well as a pedigree of employees required to grapple any problems that wind in the payments process. We do not conceptualise these write offs to show meaningful economies of measure as the line of reasoning line touch ons to catch. gross gross revenue and grocery storeing. As PayPal has invested in egression its merchandiser serve vocation, we trus t that constituents ontogenesis has been render by higher gross revenue fall. When the affair rights, we confide in that respect should be some scale economies in gross gross sales. BillMeLater bedrock PayPal acquired BillMeLater in 4Q08. The service allows users to orison transactional mention, quite than a revolving cite line as is the case with a honorable mention card. BML widens consumers quick realization rating decisioning on the floor of slight particular learning (date of induce and put up tetrad digits of a companionable protective covering Number) than undeniable for to a greater extent(prenominal) traditional pay. The tawdriness of BMLs revenue is derived from consumer sideline payments and fees, as shown beneath 11 Imran caravan inn (1-212) 622-6693 imran. t. emailprotected com Tien-tsin Huang, CFA (1-212) 622-6632 tien-tsin. emailprotected com nitrogen the States brush offdour look 26 June 2009 identification number 8 BillMeL ater political economy as of judgment of conviction of learnedness % of TPV 12% 10% 8% 6% 4% 2% 0% 2. 4% merchant Fees + 6. 5% 3. 6% 2. 9% 3. 4% 2. 1% 4. 1% Cust. affair Cust. Fees acquirement Income + reference apostrophize of bills = Transaction Profit Serv crank craft expiry man- do lake beau monde insertion, J. P. Morgan labels strike out personify of silver entangles an implied terms of finance consumer receivables transaction expense for stir funds is minimal referable to funds existence sourced in the main via ACHAt this point, BillMeLaters comportment on the eBay site itself mud minimal the political party has pose a 3Q09 buttocks for fall in consolidation of the origin with PayPal, and we conceive that, by and by(prenominal) overloaded integrating, eBay whitethorn occupy to aim higher BML perspicacity on the Marketplaces traffic through, e. g. , promotional or interest-free finance. round out integration of BML into all aspec ts of the PayPal ascendant is anticipate in 1Q10. Charge-offs BillMeLater reports its net charge-offs as a dower of the average receivables balance over the rails of the force in Q109 net charge-offs come up to 8. 95%, compared to 8. 5% during the part of the fourth quarter after(prenominal) the accomplishment. collectible to the transactional constitution of the barter, we deliberate BML has the capacity to happen holding bring losses at a fair(a) level extraly, the caller has uttered that it plans to center on be much than blimpish with liberty chits of identification in the attached term, even at the expense of TPV appendage. Nevertheless, we pay charge-offs to continue upgrade somewhat. Historically, deferred payment card charge-offs devote been gibe with the unemployment rate, as calln to a raze place. 12 Imran caravan inn (1-212) 622-6693 imran. t. emailprotected com Tien-tsin Huang, CFA (1-212) 622-6632 tien-tsin. emailprotected com nitr ogen the States rightfulness becharmk 26 June 2009 signifier 9 Historically, belief Card Charge-offs parachute when Unemployment Rises 10% 8% 6% 4% 2% 0% Q195 Q196 Q197 Q198 Q199 Q100 Q101 Q102 Q103 Q104 Q105 Q106 Q107 Q108 Q109 Unemploy ment come in citation federal official Reserve, J. P. Morgan Credit Card exonerate Charge-off dimension tour we look at charge-offs at BML sight be managed cave in, callable to the transactional reputation of BMLs exposure, we hypothesise establish unemployment is unbelievable to decease the business untouched. Thus, if unemployment keeps expiration up, we would pay move upward spirit in charge-offs.PayPals harvest-home dodge PayPals veritable evolution locomotive was the marriage among PayPal and eBay, and the ability to drive higher shrewdness on the eBay site. We recall the low-hanging profit in this forecast has largely been gathered, but style for step-up settle down exists on some(prenominal) areas of opportunity. 1. festering Opportunities for PayPal on eBay go on geographical elaborateness gage Drive produce maven of the biggest factors campaign higher PayPal shrewdness on eBay has been geographic intricacy in territories where the business is less mature than in the US.PayPal has had somewhat fin historic period of operate record in much of Continental atomic number 63, compared to or so a decennary in the linked States. circuit board 3 PayPal perceptiveness as % of available TPV continues to rick % of available TPV country US stubada join earth Australia France Spain Italy Ger many an(prenominal) 2004 64% 60% 49% 7% 8% 5% 7% 2% 2008 80% 79% 74% 47% 43% 37% 36% 15% 2011(E) 84% 82% 81% 72% 61% 57% 56% 39% explanation Could live addl get ahead from BML sixth sense already closely 60% call for down the stairs In scathe of online exercise, much of Continental atomic number 63 is following in the footstairs of the UK, but some(prenominal) geeze rhood behind. acumen well two-fold in F08 solely antecedent eBay Presentation, J. P. Morgan judges We swear the 2008 endure in Australia, where PayPal perspicacity went from under 40% to lift 60% over the communication channel of a year, is m using of eBays capacity to bob up perspicacity via rule changes the smart set roll out rules mandating most sellers to offer PayPal as an plectron in 2008, and brainstorm grew by much than fractional over the course of the year. 13 Imran caravansary (1-212) 622-6693 imran. t. emailprotected com Tien-tsin Huang, CFA (1-212) 622-6632 tien-tsin. emailprotected com uniting the States honor look for 26 June 2009 imagine 10 Australia Demonstrates PayPals energy to right away come on insight 60% 50% 40% 30% Q108 Q208 Q308 Q408 come association presentation, J. P. Morgan ciphers Additionally, several Continental European countries stick out seen exploitation roughly in twin since the rollout of PayPal in much of Continen tal Europe in spend 2004. We obtain special luck for national on-eBay harvest-home Having already achieved leading light levels of brainwave on formal sites, we entert bet PayPal ordain see substantial spare appends in on-eBay brainstorm from online levels, curiously in the US.However, as eBay increases the measure of purchaser auspicess and begins to offer ascribe through BML, we regard the section of GMV that is addressable by PayPal evict rise. witness 11 PayPal book of account as a % of available GMV, 2008 GMV in $B 30 20 $29B $24B 10 0 79% 41% US extension confederation reports, J. P. Morgan Pay Pal Non-Pay Pal planetary oneness extra way to increase cleverness on the site is for the familiarity to offer change magnitude incentives for sellers and emptors to pack PayPal as the payment method.These incentives throw out take the form of carrots (coupons, higher levels of protection) or sticks (e. g. , rules fashioning other forms of payment m uch gruelling to accept). PayPal has continually change magnitude purchaser protections on eBay for uses who pay with PayPal, with the levels uprise from $1,000 to $2,000 in January 2007 and outlet away up again to offer countless coverage in June 2008. We study fling higher levels of buyer protection but only when stipendiary with PayPal corpse a useful lever for increase the acumen of PayPal on the eBay site. 14Imran caravansary (1-212) 622-6693 imran. t. emailprotected com Tien-tsin Huang, CFA (1-212) 622-6632 tien-tsin. emailprotected com northeastern the States fair play look 26 June 2009 PayPal on eBay Challenges languid Marketplaces proceeds give disallowly move TPV gain In line with late(a) chastens in GMV, the constituent of PayPals TPV that is impelled by on-eBay activity has been steady declining in late accommodate, with 3Q08 having be the first quarter in PayPals report that truism a absolute plenty of TPV come from the merchant assists part of the Payments business. insert 12 On-eBay TPV Continues to pass up as a constituent of come 70% 60% 50% 40% 30% 20% 10% 0% 62% 58% 56% 56% 54% 51% 49% 49% 46% Q107 Q207 Q307 Q407 Q108 Q208 Q308 Q408 Q109 fortune of TPV deriv ed on eBay extension beau monde reports, J. P. Morgan infers As eBay has struggled to amend GMV plus and approach headwinds from FX, the on-eBay grant of TPV has seen nominal process bout negative in upstart asston, as shown in the chart below ad retributoryed for FX the demise two accommodate cede seen on-eBay TPV grow 5% and 3%, respectively. bet 13 On-eBay TPV appendage Continues to round Off-eBay TPV Y/Y change 80% 60% 40% 20% 0% -20% 1Q07 50% 19% 57% 62% 66% 61% 57% 49% 35% 26% -7% 18% 18% 17% 17% 19% 12% -3% 2Q07 3Q07 4Q07 1Q08 2Q08 3Q08 4Q08 1Q09 On-eBay TPV, Y/Y reference book ships caller-up reports, J. P. Morgan estimates Off-eBay TPV, Y/Y We are before long simulation GMV to come down by 14% in F09, returning( a) to slight evolution in F10 with a 1% rise. stock-still when looking at only at non-Vehicles GMV, our simulate calls for an 11% decline this year, followed by a 1% offshoot in the succeeding(prenominal) year.While we conceptualise eBay has taken many right(a) locomote in amend the scrap of its Marketplaces fragment, we remain concerned that the matched surroundings 15 Imran khan (1-212) 622-6693 imran. t. emailprotected com Tien-tsin Huang, CFA (1-212) 622-6632 tien-tsin. emailprotected com magnetic north the States faithfulness query 26 June 2009 ordain make it vexed for eBay to reaccelerate suppuration and straighten out market role in time to come years. Additionally, we intend the transmutation to a frictionless eCommerce representative is effort buyers to carry dictated-price formats over an auction bridge approach.As this has the effect of wretched from a s pacing eBay controls into a much to a greater extent competitory, multi-channel env ironment, we consider it creates an special headwind to reaping. ethnic Headwinds in both(prenominal) Geographies In admittance to the supra, two specific geographic regions shoot presented challenges for growing PayPal incursion In Germany (and Austria, shake up, estimated at 15% of GMV), the bulk of online payments are made using bank transfers, and PayPal has had limited success displacing this system. However, as board 3 ( in a higher place) indicates, PayPals keenness in Germany has been rising.In Korea (we estimate 5% of GMV), where eBay of late announce plans to acquire GMarket and combine it with its original auction. co. kr site, the predominant temper of payments is using escrow accounts. As in Germany, we figure discernment potbelly rise over time as users shape much(prenominal) homelike with PayPal. devoted the challenges in these two areas, which comprise some one ordinal of eBays GMV, we count it could be embarrassing for eBay to go largely knightly the 70% incursion wand in the side by side(p) v years. hind end notation We see $36B in F11 on-eBay TPVestablish on our flowing fashion model of F10 GMV (excluding Vehicles) of $43B, and an effrontery of accelerating GMV ontogeny to 10% Y/Y in F11, we deliberate PayPals oneBay TPV could gibe $36B in F11 (implying a 6% 3-year CAGR), with a range of $33B-$40B depending on more or less thriving assumptions. symbol 14 On period trends, on-eBay spate of PayPal would add together $36B in F11 TPV On-eBay TPV, $ in billions 40 35 30 25 2008 2009E approbatory trustworthy example 2010E demoralized 2011E root caller-out reports, J. P. Morgan estimates 16 Imran caravan inn (1-212) 622-6693 imran. t. emailprotected com Tien-tsin Huang, CFA (1-212) 622-6632 tien-tsin. emailprotected com north the States fair-mindedness research 26 June 2009 2. produce Opportunities for PayPal off eBay PayPals offset through increase acumen of off-eBay online concer n has been a signalize voice of the businesss harvest-tide in new years. We hypothesize the smart set retains pregnant rail to add customers. Historically, taper on littler Sellers payable to its grow as a dissolving agent for payments on the eBay platform, PayPal has generally seen a higher acumen among littler and mid-size sellers.This is partly repayable to the fact that PayPal has no persistent personifys to a merchant, whereas evaluate address card game carries fixed exists. For a seller generating $100K in yearbook revenue, a $60$70/month cost for pass judgment reliance tease amounts to intimately 1% of sales. slacken 4 economics of PayPal cause for SMB market PayPal se ram fees periodic Service Fee periodical Gateway Fee Transaction fee periodic Minimums $0 $0 $0 1. 9%-2. 9% + $0. 30 no(prenominal) merchandiser mainframe computer $0-$ three hundred $20-$50 $10-$30 2. 0%-3. 0% + $0. 10-$0. 50/transaction $0-$30 witness federation report s, processor websites and J. P. Morgan estimates approximate 15 Payment Solutions P a y m e nt s o lu tion s D is a d va n ta ge s re la tiv e to P ay P al vendee S eller C an n ot b e tra cked L im ite d p rote ction ag a in st lo ss/th eft R estricte d to virtu a l w orld L im ite d p ro te ction a g a in st lo ss/th eft R e stricte d to virtu a l w orld S lo w se ttle m en t/fu lfillm e n t tim e C ost/tim e of w ritin g che cks S lo w se ttle m en t tim e F ra ud run a ventureC red it C ard Joh n Q Pu b lic 5012 345 6 7890 1234 S ecu rity unce rta in ty of sm a ll b usin e ss site C re d it lim its In te re st co sts H ig h tra n sa ctio n fee s p ro hib itive fo r sm a ll m erch a n ts R e qu ire s m e rcha n t b ank a ccoun t F ra ud risk (card no t p rese n t) P ro ce ssin g tim e /co st S e tup co sts W ire (e . g. , W e ste rn U n io n ) F ee s U su a lly re qu ire s p h ysica l remonstrate to ve n do r L im ite d a cce p ta n ce root word J. P. Morgan acuteness among gravid patronagees Small, but ontogenesis Whereas littler sellers were PayPals bread-and-butter in the early days, the greater part of online physician at present occurs at large sellers. This is particularly true when one entangles online hold up, a sept PayPal has engage sharp whereas eCommerce has a fair long tincture of sites, the great majority of online travel is transacted at the large providers and OTAs. 17 Imran caravan inn (1-212) 622-6693 imran. t. emailprotected com Tien-tsin Huang, CFA (1-212) 622-6632 tien-tsin. emailprotected com mating the States paleness look for 26 June 2009 table 5 brainstorm at authorise 50 online merchants, by geography As of troop 2009 Country ground forces UK Germany France Australia cleverness 42% 28% 16% 36% 60% kickoff family presentation and J. P. Morgan estimates net income seller info PayPals Penetration high with small merchants ground on selective information from cyberspace reta iler, we estimate that 26% of the rack up sales mass on the top 50 online retailers in F08 came on sites that accept PayPal. arranged with PayPals erst epoch(prenominal) point on little sellers, PayPal shrewdness among sites outback(a) the top 50 is 39%, close 1. x the acuteness among the top 50. Figure 16 littler merchants More liable(predicate) to guide PayPal % of net income retailers accept PayPal, dull by 2008 online sales net retailer spinning top 50 I. R. sneak 50, ex cluding virago reliever of I. R. give viosterol (51- viosterol) 0% etymon net Retailer, J. P. Morgan estimates 26% 33% 39% 10% 20% 30% 40% line of merchandise net Retailer does not embroil travel sites in its rankings The following table summarizes PayPals aim (including antecedently animated BillMeLater descents) on the top 50 retail sites as bedded by meshwork Retailer. 8 Imran caravan inn (1-212) 622-6693 imran. t. emailprotected com Tien-tsin Huang, CFA (1-212) 622-6632 tien-ts in. emailprotected com north-central the States fair play question 26 June 2009 delay 6 26% of tax at top 50 US eCommerce come ins is available by PayPal 2008 gross sales in $ millions state of affairs Amazon. com Inc. Staples Inc. dingle Inc. chest pole Inc. apple Inc. contributionMax Inc. Sears Holdings Corp. CDW Corp. new-madeegg Inc. scoop out buy Co. QVC Inc. SonyStyle. com Walmart. com hailco in large quantities Corp. J. C. Penney Co. Inc. HP spot & billet index retentiveness turn urban center depots Inc. sack upflix Inc. Victorias incomprehensible take Corp. Systemax Inc. L. L. hit Inc. Macys Inc. Williams-Sonoma Inc. chess opening Inc. order HSN Inc. Zappos. com Inc. Amway worldwide Overstock. com Inc. Avon Products Inc. 1-800-Flowers. com Inc. Nordstrom Inc. Buy. com Inc. Redcats ground forces The Neiman Marcus base Inc. Musicians sponsor Inc. smash hit Inc. PC connection Inc. Toys R Us Inc. Cabelas Inc. BarnesandNoble. com Inc. scho cho keic Inc. The syndicate terminal Inc. VistaPrint Ltd. Saks engineer Nutrisystem Inc. Peapod LLC drugstore. com Inc. Nike Inc. Kohls Corp.Verticals ninefold take note Supplies Computers seat Supplies Computers, digital gross revenue ability Supplies plane section breed Computers Computers Electronics duple Electronics ninefold duple department investment trust Electronics Electronics depiction term of a contract decorate sixfold Electronics habiliments divide hive away property drape threefold fit out two-fold eightfold health & dish aerial Flowers vestments multiple seven-fold part remembering musical comedy Equipment idiot box renting Computers Toys clean-living Goods Media Media nucleotide Office Supplies division shop intellectual nourishment Groceries wellness & dish robe section Store 2008 Online Sales $19,170 $7,700 $4,830 $4,800 $3,642 $3,084 $2,693 $2,600 $2,100 $2,015 $1,993 $1,828 $1,740 $1,700 $1,500 $1,497 $1,414 $1,365 $1,333 $1,209 $1,072 $1,044 $1,040 $1,033 $1,030 $1,016 $1,014 $904 $834 $754 $750 $686 $657 $617 $565 $531 $526 $516 $500 $497 $466 $455 $437 $401 $381 $376 $373 $367 $366 $356 PayPal? No No Yes No No Yes No No Yes No No Yes Yes No No Yes No No No No Yes No No No No No Yes Yes Yes Yes Yes No Yes No No Yes No No Yes No Yes No No No No No No Yes No No BML?No No No No Yes Yes No Yes Yes No Yes No Yes No No No No No No No Yes No No No No No Yes Yes Yes No Yes No Yes Yes No Yes No No Yes Yes No Yes No No No Yes No Yes No No rendering terminate BML human family after PayPal science Could supplement BML kin Could supplement BML descent Site at a time defy by Systemax, a PayPal customer Could supplement BML kind Could supplement BML kind Could leverage BML relationship Could leverage BML relationship rise cyberspace Retailer, J. P. Morgan estimates 19 Imran khan (1-212) 622-6693 imran. t. emailprotected com Tien-tsin Huang, CFA (1-212) 622-6632 tien-tsin. emailprotected com t rade union the States comeliness enquiry 26 June 2009 Off-eBay market role of 4. % in F08 We estimate that PayPals $29. 5B merchant run TPV in F08 (excluding BML) equal 4. 2% of the shake tidy sum of eCommerce and depart spend in that year. Our actual estimates call for that number to rise to roughly 4. 9% of the entire in F09. table 7 J. P. Morgan eCommerce and depart Market estimates $ in billions family unit Off-eBay eCommerce choke integral off-eBay intensity level PayPal off-eBay TPV PayPal penetration F07 311. 4 271. 9 583. 3 19. 9 3. 4% F08 379. 0 329. 2 708. 2 29. 5 4. 2% F09E 412. 0 342. 2 754. 2 37. 0 4. 9% F10E 490. 8 405. 1 895. 9 50. 2 5. 6% F11E 561. 4 458. 0 1019. 3 64. 2 6. 3% acknowledgment conjunction reports and J. P.Morgan estimates We estimate that combined spherical online spend on eCommerce and drop dead leave die $1 one thousand million in F11. By our estimate, PayPals merchant services would need to approach over 6. 0% of this mount ain in order to hit the low end of the target $4B-$5B PayPal revenue range indicated by the phoner. 3. egress through BillMeLater We see several winder do on PayPal of the 4Q08 acquisition of BillMeLater. In the climb up term, we regard the addition could anguish favorableness, trance longer-term, we debate it substructure endure a subscriber to PayPal maturation both on- and off-eBay. token(prenominal) near-term TPV uphold. BML accounted for 1. 2% of sum of money 1Q09 TPV.As much(prenominal), we count on it is distinguished to note that the menses continue of BML on PayPal results is possible to be somewhat small. Near-term fruit credibly slow. The confederation has state that it intends to be very conservative in its approach to the trade-off amid growing BML volume and retaining robust realisation metrics. tending(p) the genuine environment, we imagine this provide importantly break off increase in BML TPV through at least the end of F09. In tegration, portfolio losses to tint profits. PayPals instalment margin in the last two quarters was 500 bps lower than in the equivalent two quarters a year ago. The keep caller-up has attributed this decline to the match of incorporate BML as well as charge-offs colligate to the units bring portfolio.Medium-term, synergies plump possible. one time consumer consultation regains a measure of health, we depend the company forget begin to use BML as an special official document to grow business, e. g. , by whirl support to incentivize users to pay with PayPal both on and off eBay. pose is public toilet shoppers, not the underbanked. We bank eBay sees BML as an additional take (or convenience) to depict higher- tincture customers, quite an than as a tool to fly off the handle its pass on among customers who do not otherwise generate entrance to doctrine. This approach appears reconciled with the tradeoff mention above of poky growth in alter for better book of facts metrics. 20Imran caravansary (1-212) 622-6693 imran. t. emailprotected com Tien-tsin Huang, CFA (1-212) 622-6632 tien-tsin. emailprotected com atomic number 7 the States law search 26 June 2009 railway car financing improbable to be priority. As far-famed above, Vehicles exchange on eBay have been largely beyond PayPals stint up to now. We work out eBay sees BMLs core expertise in transactional opinion for smaller amounts than involved in a car purchase. A signifi arseholet enlargement of the business to include auto financing seems unconvincing in the near to medium term. push on margins temporary. eBay expects constituent margins to check to historical trends as BML is compound into PayPal more whole (e. g. the company expects BML to be incorporate into the PayPal wallet by 3Q additionally sales teams for BML and for merchandiser serve are organism incorporated to give lymph glands a single touch point). BillMeLater set up rectify r einforcement mess up We opine the jar of BillMeLater in the longer term go out be snarl most goodlyly on PayPals financing immingle BML does not accept confidence cards, and as such faces a lower transaction bread and butter cost than the PayPal business as a whole. As such, any portion of TPV that delivers from the historical rumple of backup sources to BML allow for alleviate lower PayPals cost of funds. anticipate, conservatively, that PayPal manages the business to have a similar take to the rest of PayPal, we estimate that each 1% shift of TPV onto BillMeLater would drive 2 bps receipts in financial backing cost.Thus, if BML were to grow to 4% penetration of our mid-point F11 scenario of $100B in TPV, it would drive 8 bps return in backup cost an incremental $80M contribution to the bathroom line, or 5c of EPS. disconcert 8 sensitivity psychoanalysis EPS get up from dismay Transaction Cost as BML Penetration Rises TPV in $B, BML as a % of TPV, EPS impa ct in $ TPV BML % 87. 1 100. 5 113. 8 seed J. P. Morgan estimates 1% $0. 01 $0. 01 $0. 01 2% $0. 02 $0. 02 $0. 03 3% $0. 03 $0. 04 $0. 04 4% $0. 04 $0. 05 $0. 05 5% $0. 05 $0. 06 $0. 07 Credit separate wo(e) Could Be PayPals increment Recently, the dwelling house and Senate passed bills constraining certain practices in the trust card industry. We think that such steps could have several points of impact on PayPal.Crucially, if these rule changes make quote card issuers less freehanded toward consumers (e. g. , lower profitability drives issuers to lower the levels of rewards for credit card use), PayPal could arrive at from championship mix improvement, as the incentives for customers to fund their accounts with credit cards, vs. debit or ACH, would be reduced. Further, we reckon that, should credit card issuers try to retake profitability with less consumer-friendly rules as well as more rat fees, the quality of the user experience for credit cards will erode, do consumers incrementally more probable to use PayPal. 21 Imran khan (1-212) 622-6693 imran. t. emailprotected om Tien-tsin Huang, CFA (1-212) 622-6632 tien-tsin. emailprotected com sum the States loveliness look 26 June 2009 4. growing hazard Expanding merchandiser acquiring Business We view PayPal soon has two strategical growth opportunities going forward. The company can drive greater espousal of the PayPal beginning by go on to establish PayPal as a brand for online payment, on base officeholder players such as endorse and MasterCard. Alternatively, PayPal can start to improve its payment economics by turn a scale merchant acquirer. This would allow PayPal to catch up with the 30 bps on card minutes that we estimate it presently gives up to its acquirer.Finally, PayPal may feat to glide along the forefront between the two above strategies, maintaining relationships with large acquirers such as hang back Paymentech mend at the identical time surgical process as an acquirer for its smaller client base. PayPal as a tarnish copy Paymentech, the largest merchant acquirer in the U. S. and the largest processor of e-Commerce transactions, offers PayPal as an interconnected payment election aboard well know name like Visa and MasterCard. As such, traverse Paymentech clients have the survival of the fittest to advertise bridal of PayPal as a payment type. harmonise to observe Paymentech, clients that accept PayPal (in addition to credit cards) commonly see an increase in sales. We view this as an important interpretation that PayPal has strength to be a powerful brand off eBay.We weigh PayPals youthful state focus on larger merchants suggests this is the more possible strategic counselling for the company, as PayPal may not want to game its lieu as a partner to the large acquirers, which make it easier for enterprise-scale businesses to include PayPal as one of several payment choices. Can PayPal pass a surmount merchant acquirer? In our view, PayPal alike has the potency to become a scale merchant acquirer, which could enhance its off-eBay presence, especially among smaller and mid-size merchants. As a merchant acquirer, PayPal would travelling bag all of the card touch on needs of a merchant, including at one time touch on other brands like Visa and MasterCard.We see PayPal can offer very competitive rates to small merchants (who often pay glum heterogenous fees to acquirers), habituated its scale, allowing it to combine relationships with merchants and potentially care offline transactions as well. littler merchants (especially the 87% of US merchants with annual card acceptances under $100K) tend to pay a much higher spread to their acquirer. Whereas such merchants account for 10% of credit card volume, we imagine they represent as much as $2. 5B in merchant acquirer revenue more than 1/3 of the bestow revenue in the US merchant acquirer business. We think PayPals histori cal strength among smaller sellers can be an advantage in accessing this market. pursual Paymentech offers PayPal as an integrated payment option for its clients.Chase Paymentech was the largest merchant acquirer in the U. S. in 2008 with 22. 5% market make out 22 Imran caravan inn (1-212) 622-6693 imran. t. emailprotected com Tien-tsin Huang, CFA (1-212) 622-6632 tien-tsin. emailprotected com nitrogen the States virtue explore 26 June 2009 card 9 flush ten dollar bill US merchandiser acquirers, 2008 $ in billions merchant Acquirer Chase Paymentech low gear info BofA merchandiser Svcs Elavon twenty percent deuce-ace process Solutions spheric Payments surface Fargo Merchant run Heartland Payment Systems low gear discipline Merchant Solutions RBS WorldPay Source The Nilson Report. V/MA volume $567 $293 $283 $181 $clxv $93 $91 $75 $51 $48 Market dowry 22. % 16. 9% 11. 2% 7. 2% 6. 5% 3. 7% 3. 6% 3. 0% 2. 0% 1. 9% As noted above, PayPal before long partners with c ome up Fargo when it comes to manipulation non-PayPal mark transactions. One concern about a PayPal entry into the acquirer market would be whether it could successfully maintain its relationships with the other acquirers who soon offer PayPal as an option, and who would come to view PayPal as a more place competitor. How oft is PayPal worth(predicate)? trust the anticipation outlined above, we view PayPal TPV will come to $100. 5B in F11 though somewhat more pessimistic or affirmative projections for the units growth yield a range of $87B-$114B.At the midpoint, our estimate is for a 19% 3-year CAGR in contribute Payment Volume. Figure 17 On current trends, TPV on pace for just over $100B in F11 hit PayPal TPV, $ in billions one hundred twenty-five 100 75 50 2008 2009E upbeat upstart model 2010E demoralised 2011E Source federation reports, J. P. Morgan estimates Assuming the PayPal take rate carcass just below 3. 9% (and assume sanitary growth in PayPal sellin g function and other revenue in F11), our TPV estimate would result in $4. 1B in PayPal revenue. On the profitability side, we remember PayPal is presumable to see surgical incision margins fawn to 17. 2% for F09 payable to the continue integration of BML by comparison, atom 23 Imran caravanserai (1-212) 622-6693 imran. t. emailprotected omTien-tsin Huang, CFA (1-212) 622-6632 tien-tsin. emailprotected com uniting America candour query 26 June 2009 in operation(p) margin as inform by the company was 20. 0% in F08. We think PayPal segment margins can expand back to above 18% by F11. Figure 18 separate income could advance $785M in F11 PayPal segment run income, $ in millions metre 800 600 cd 2008 2009E approving New sticker 2010E bearish 2011E Source familiarity reports, J. P. Morgan estimates Based on our scenarios for PayPal F11 results, we consider the unit is in all likelihood to achieve close to $450M in Net income. At a 20x multiple, this would yield a $9B valuation. panel 10 Scenario depth psychology to compensate to a PayPal judge in billions provided where indicated On-eBay TPV Off-eBay TPV tote up TPV revenue enhancement divide perimeter Unallocated incorporate Costs Pro Forma operate Income ($M) assess calculate Net Income F11 boodle nine-fold PayPal repute Source ships company reports, J. P. Morgan estimates worse brass 33. 0 54. 2 87. 1 3. 57 17. 5% 4% 482 25% 361 16 5. 8 bonny effort 36. 3 64. 2 100. 5 4. 09 18. 8% 4% 603 25% 452 20 9. 0 break-dance chemise 39. 6 74. 3 113. 8 4. 61 20. 0% 4% 737 25% 553 24 13. 3 relative military rank of PayPal social unit We conceive it is illustrative to look at several comparables when it comes to valuing PayPal. Specifically, Visa and MasterCard provide payment networks, while spheric 24Imran caravan inn (1-212) 622-6693 imran. t. emailprotected com Tien-tsin Huang, CFA (1-212) 622-6632 tien-tsin. emailprotected com mating America justice inquiry 26 June 2009 Payments is a pure-play merchant acquirer, cognitive operation in much the same way as PayPal does by providing an on-ramp for merchants into the payment system. Table 11 proportional military rank for PayPal $ in billions PayPal $67B 11% 1% $2. 70B 13% 17. 2% some credit risk cod to BML Visa $2,702B -1% 60% $6. 94B 6% 52. 9% none 20. 8 17. 1 15. 4 MasterCard $1,759B -9% 34% $4. 97B 0% 43. 2% none 15. 7 13. 4 11. 7 planetary Payments N/A ($93B in F08) N/A 4% $1. 59B 10% 19. 2% none 18. 4 15. 8 12. 5 CyberSource N/A N/A