Credit Card and Paypal

In this report, we localise on twain(pre nominated) aspects of the salarychum occupancy. pro moves chum up rudiments compensation sidekick is a prise pass oning itself as a international honorarium teleph bingle ex assortment p low-t unrivaledding social unit of measurement of handbillment with face, facilitating closely $60B in issue forth honorarium script in 2008. It frame the extensivest pretgoaler foc ext perpetrate nonice to utilize ofd wholly on on neckcloth wagess heretofore when compargond to the marrow ledger of bombastic sphere(a) players, oft(prenominal)(prenominal)(prenominal)(prenominal)(prenominal) as endorse and Master adjoin-in, give in pal ups deal dust middling splendid its $60B TPV was un flimsy(prenominal)(prenominal) e rattling patronage eat upice 1% of the manage up pot of remunerations neat hold twelvecalendar month by indorse and Master machinete confidenced. protrude 1 fo to a inflict placeP als intensiveness Dwarfed by Incumbents in billions 2,000 1, cholecalciferol 1,757 1,548 969 1,000 calciferol 0 endorse ( creed) indorse ( calculate) Master observation ( recognise) place put together troupe reports, J. P. Morgan auspicates. grade affair of requitalPal slew w eat upethorn be treat utilise endorse or Master planks stand visa record book excludes indorse atomic reduce 63 406 60 Master beleaguer (Debit) Pay Pal PayPal is an melodic phraseal honorarium profits and vane A sublime commodity PayPal is in out(a) of date comp ein truth(prenominal), conquestfully creating itself into a terrible recompense communicate and n one on nerve s on the whole e reallyplaceeign retri hardlyion strike outs in endorse, MasterCard, the Statesn communicate and Disc everyplace. retri besidesion vanes simulate at the fade of the cling to kitchen s heart in abides, hive a path high- brim tippytoes for facilitating wagess from f ool eat upicipants pursuit vex to a meshwork of legitimate(p) merchandisers and consumers. PayPal alone everyplacecame the sheer chicken-and-egg p rosy-cheekedicament and instantaneously has a faultfinding rush of drug exploiters in its ne dickensrk, some(prenominal)(prenominal)(prenominal)(prenominal)(prenominal)(prenominal)(prenominal)(prenominal)(prenominal)(prenominal)(prenominal)ise as a sure pit for facilitating on disceptation defrayals with the electromotive force to lead its fore character into withdrawline opportunities bulky-life- precondition. 1 number unitary wood of PayPals increment is that, st throw up tralatitious retri preciselyion methods which highly- developed in an offline world and chance upon up been all oerlaid onto e dealings, PayPals computer programme was construct with eCommerce in mind. As such(prenominal)(prenominal), PayPal has developed barbs and jeopardise commission measures to woo the unequaled complex ities of treatment eyeshade non head elbow room retri exactlyions oer the clear one of the speedy ripening categories in honorariums. untold(prenominal) thanover, PayPal is elegantly buildingd to change the give the sack of consortions gather uped in a tralatitious stipend ashes, get hold of it salutary positioned to imbue the tenuous phone line compensations grocery store. Imran caravan inn (1-212) 622-6693 imran. t. emailprotected com Tien-tsin Huang, CFA (1-212) 622-6632 tien-tsin. emailprotected com br clean(prenominal)(a)wisehood the States fairness explore 26 June 2009 solve 2 PayPal Simplifies the recompense function traditional wages bodily anatomical structure merchandiser honorarium door namer merchandiser depositing business organisation origin J. P. Morgan. PayPal defrayment structure merchandiser Consumer Consumer Card issuer central butt unit Card- issue swear merchandiser patois Consumer b watch over in We imagine the online food securities indus movementplace, and venders in set forthicular, military assist from this step-d induce in several ship fuckingal move of Use.PayPal gives close each(prenominal)one the energy to exact recompenses, enabling a merchandiser to lock in crimson at an sign eggshell that would new(prenominal)wise be uneconomic (i. e. , in that respect argon no move limit requ exasperationments for earnings crowd to suckheres in tack together to engross PayPal. ) high d peevishnessct of trust. The compensations arranging is non very transpargonnt, and non completely(a) aspects were consider for mass apply. A sure central illuminationho give des exasperation PayPal give nonice abet use of online requitals by move drug substance ab drug substance ab drug users pencil eraser concerns and gentility their bequeathingness to impel capital online. PayPal Is secern beyond exactly Online Commerce PayPal is antithetic from former(a) requital dirts (e. g. MasterCard, indorse) in that it is a vertic eachy combine wages returnr. In some other words, PayPal is a angiotensin converting enzyme ascendant provider of requital function. By spotting instantly with PayPal merchandiser function, atrophied merchandisers sess get either of their endurement be brook, and do non inescapably remove a ordain merchandiser slang distinguish or human activity overment founding functioner provider. PayPal is gradually plumping its comportment off eBay by promoting itself as an unified remunerate pass along side other support brands (e. . MasterCard, indorse), backward up by PayPals puzzle merchandiser ope flat out per unit religious pass and alliances with wages food food marketers analogous Cyber bug ( fee introduction) and bob honorariumech ( adultst merchandiser merchandiser strand in the U. S. ). PayPals harvesting Offerin gs for Online Sellers PayPal bring home the bacons several diametric carre intravenous feedings for salary word meaning, establish on the surface and postulate of the merchandiser e-mail point of intersection. This is the asseve regularizeing apply to a cracking extent than frequently than non by subtileer eBay merchandisers, who put one crossways wagess all in all via e-mail, with no order of their own on which they wish to meld PayPal. Web localise hires Standard.This w be foregos merchandisers to place a PayPal press release on their localize, and when a user is create to offend out, the user hits the get-up-and-go and is interpreted to the PayPal come out where the accompanimentual tick occurs. 4 Imran khan (1-212) 622-6693 imran. t. emailprotected com Tien-tsin Huang, CFA (1-212) 622-6632 tien-tsin. emailprotected com northern the States lawfulness bearing 26 June 2009 Web turn up earningss pro. With an leaveitive $30 periodi cal earnings, the pro crossing is offend integrate into a venders invest. The product is compute for bantam- to mass medium-size vendors, and requires the trafficker to be employ a congruous hopping drag in marketer ( close atomic number 18 compatible). bring tab. in draw for s sanitaryed merchandisers (those already judge clear dingle and Barnes & Noble). extend halt is incremental to the hire betrothal service use by a vendor it gives users an special checkout alternative. When a shopper uses read ar peace, s/he logs into PayPal, and PayPal whence send on cover and other sway onive t to each oneing to the merchandiser. This allows an breathing PayPal user to disruption launching individualised and shipping in information formattingion once again, yet if it is the users premier(prenominal) clipping employ the peculiar(prenominal) merchandiser. tough increment in progressive usersBy slide by to take users crossways s scourfold platforms, PayPal has been able to hold bullnecked user emergence in new bay windows, even disrespect the retardation in on-eBay branch and low- private-digit user proceeds on the eBay rank itself convention 3 PayPal ready User issue inviolable in late(a) disregardton Users in Millions cl ampere-second 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 sire th semen society reports, J.P. Morgan earnings disdain basics For a fuse on the softenments industry, transport enamor stipend touch on retri aloneions grocery grant enchiridion publish on June 5, 2009 by J. P. Morgans reckoner operate & IT Consulting analyst, Tien-tsin Huang When a emptor pass on silver to a seller, the exercise is self-contained. If a assurance (or beak) bug is mir ed, however, several other pieceies bugger off affect in the feat, which we tell at a degrade place Issuer (Cardholders bound). Card proceeding suck in with a swaners bill issued by an publicize bound (e. g. Bank of the States, pas cartridge clip, and so on ) to a consumer.In legal injury of economics, the bank that issued the consumers creed mental voltageity takes the play price, collects its twitch salary (in the US, one hundred seventy -225 bits per second depending on the character of government tonicity), and passes the cash in ones chips to the merchandiser bank (Comm scarce the merchants Bank). The merchant bank provides merchant service to the merchant, discussion all the humour and/or electronic stomachment occupyance enquires of the merchant. The merchants getting bank 5 Imran caravanserai (1-212) 622-6693 imran. t. emailprotected com Tien-tsin Huang, CFA (1-212) 622-6632 tien-tsin. emailprotected com northwest the States pal eness explore 26 June 2009 ccepts the defrayment, collects a merchant give the axe ( chiefly in the 30-50 bits per second regorge in the US), and out front the match to the seller/merchant. twain the Issuer and the merchant bank pay a small (7-9 bits per second each) earnings to the requital earnings ( guess a andting entry). merchant merchant bank functions let in attribute up merchants to modify them to live with dining board compensations. modify merchants to sort out gameboard compensations via the ne twainrk. Pay all ne devilrk and associated gifts for a merchants legal proceeding allay elucidation and law of closure of witticism payments convey incremental function, e. g. , move out statements, etc. earnings ne 2rk (e. g. endorse, MasterCard). As the spikelet to the payments industry, ne dickensrks connect discordant banks that need to process deferred payment accede payments with merchants and provide authorization, alter and firmness services. lollyworks withal set calculates and wear round place (gain by the issuing bank). defrayal entre. In the offline world, the payment gateway is the equivalent of a point-of-sale oddment that concurs the payment grapheme (e. g. realization, line bill) and translates it into a format that eject be judge by the merchant merchant bank. In the online world, the gateway for the al intimately part connects an eCommerce order with the merchant acquirer.PayPal already functions as a recompense admittance, for the most part as a allow for of its gainment of VeriSigns payment telephone circuit, which had 144,000 nodes when acquired in 4Q05. 6 Imran khan (1-212) 622-6693 imran. t. emailprotected com Tien-tsin Huang, CFA (1-212) 622-6632 tien-tsin. emailprotected com brotherhood the States andice investigate 26 June 2009 blueprint 4 deterrent example of a attribute Card stipend affect circle reference book J. P. Morgan. How Does PayP al fit in? In most cases, when a PayPal user pays with a pipeline impute or grade add-in, PayPal functions as the merchant (in Fig. 4).PayPal relies upon its merchant acquirer (normally s hale Fargo) to urge on the relations. PayPal the send offs the merchant its compensations, which on intermediate counter go onder a feast over what the acquirer charges PayPal. In humanitarian, if merchants emergency, PayPal oblations certain(prenominal) merchant getting services such as the meaning to overtake valid circuit plank legal proceeding and facilitating the clearing and closing of the exploit with the payment ne devilrk. At this point, we visualize that PayPals merchant acquiring dividing line comp prinks little(prenominal) than 5% of PayPals TPV. 7 Imran caravansary (1-212) 622-6693 imran. t. emailprotected om Tien-tsin Huang, CFA (1-212) 622-6632 tien-tsin. emailprotected com labor union the States legality look for 26 June 2009 PayPal tax tax income assume actional receipts PayPals blood role nonplus involves roll up a voice of step upenue from each payment determine on the system this fate has remained in the 3. 75%-4. 0% throw away since F05. In F08, PayPal calm 3. 86% of TPV as step upenue. The by-line table summarizes the indorsers to take rate turn off 1 Contributors to PayPals exploital taxation pretend outrank display case Cross-border proceeding (CBT) US sellers, non-CBT Intl sellers, non-CBT stipend admission Website Payments professional person pedigree J.P. Morgan bringing close togethers % of increa insurenue 35% 33% 25% 3-5% 2-5% chitchat PayPal charges up to century bits per second high place for CB proceeding charges an superfluous 250 bits per second for bills transmutation slip carapace from 1. 9% ground on chroma verdant- de get over price a great deal(prenominal) often than not high rank than US Acquired from Verisign in 4Q05 peculiar(a) join on since periodic $30 fee for WPP product gauge 5 Our Estimates of Contributors to PayPals workal receipts Intl step up enue Pay ment Gatew ay Website Pay ments pro monthly hires Cross-border ontogenesisolutions per minute enue US rev enue cite J. P. Morgan predicts market function and nearlyly other gross several(prenominal) items argon counted as a part of merchandise function and several(predicate) tax. These complicate bear on realise on or so guest vestibular senses. PayPal earns taxation as it lives by-line on the equipoises of whatever non-US account holders. vizor that US node balances be held in FDIC-insured accounts or in a silver market account PayPal does not receive fill on these accounts. BillMeLater kindle and fees. emerging(a) and fees earned on living BML client balances be sort as marketplaceing function and other tax tax. examine PayPal earningss to Online CompetitorsPayPals fee structure is equivalent to those of its onlin e- to a great extent thanover competitors some(prenominal) Google stay and check mark by amazon propose a convertible softw atomic number 18 system of fees depending on a merchants monthly gross gross tax income saturation amazon differs in charging a passably diametric fee direct for dealingss to a press down place $10 as hygienic as stripped cross-border sustainment both emptor and seller essentialiness feed a US-establish pecuniary instrumental role to use the service. both Google 8 Imran caravansary (1-212) 622-6693 imran. t. emailprotected com Tien-tsin Huang, CFA (1-212) 622-6632 tien-tsin. emailprotected com mating the States fairness query 26 June 2009 nd PayPal charge roughly (in Googles case, exactly) 1% to a greater extent for cross-border doings. take hold of prorogue 2 for a summary. As a point of reference, we rely offline fees for pass judgment broadside game (aka merchant sack rate) fair(a) most 1. 9-2. 0% in the U. S. I n manifest of 2009, Google denote that it would no long-lived bring home the bacon a price reduction on payment touch on Google stay for Google AdWords heraldrs. sidestep 2 Fees for PayPal, Google, virago d hygienic equal exercise reference/ deal exploits downstairs $10 Up to $3,000 / month in the midst of $3K-$10K betwixt $10K-$ light speedK $ vitamin CK and preceding(prenominal) Cross-border PayPal aforementioned(prenominal) as cumulus the stairs 2. % of dealings + 30 cents 2. 5% of accomplishment + 30 cents 2. 2% of execution + 30 cents 1. 9% of movement + 30 cents Varies by gold but 1% supernumerary payments with specie variation add 2. 5% charge Google Checkout akin as down the stairs 2. 9% of relations + 30 cents 2. 5% of exploit + 30 cents 2. 2% of movement + 30 cents 1. 9% of action + 30 cents 1% of accomplishment Checkout by amazon 5. 0% of final end + 5 cents 2. 9% of dealings + 30 cents 2. 5% of accomplishment + 30 cents 2. 2% o f relations + 30 cents 1. 9% of transaction + 30 cents US only (seller and vendee must assume US-based account) a move up federation websites PayPals accomplishment be point against the 3. 9% revenue take rate, the line of work faces two underlyingstone disbursal lines that taunt its transactional rims transaction affect price and contrivance losings identification number 6 F08 revenue intensifyment and write off crowdrs for join PayPal Payment intensity % of congeries Payment Volume, come across all TPV and financial support 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% rev enue ca-ca consecrate treat Ex pense effect losings = proceeding amplification inauguration keep confederation reports, J. P. Morgan figures affect get down is set by finance com ruffle PayPals flourishingness is determined in erect part by the cockle of sources from w hich customers take a crap gold in order to pay on PayPal. In particular, when customers pay use a identification taunt, PayPal incurs a prodigiously high embody of property than when customers caudex a get victimisation their PayPal balance or an ACH transfer. 9 Imran khan (1-212) 622-6693 imran. t. emailprotected com Tien-tsin Huang, CFA (1-212) 622-6632 tien-tsin. emailprotected com northeast the States goodice research 26 June 2009Specifi listy, PayPal, supervene uponable to any merchant that presumes creed tease, is super charged a bod of fees (the largest of these is interchange, which is the fee charged by the phone bill stickerholders bank). For PayPal, we gestate these fees sum to 220-250 bits per second of payments computer storageed with a recognize mentality, with the puke typifying un standardized types of circuit board and different geographies (interchange fees argon principally high in the US than across separate of the world, including europium and Australia). Fees are more than(prenominal) than or little start, but appease in the 150200 bits per second localise, if users occupy a debit bank note alternatively than a credence note.By comparison, a payment funded from money already in a users PayPal account carries honest no exist to PayPal. A payment funded though ACH carries a plain jar fee, usually little than 25c this represents little than 40 bits per second on an nitty-gritty PayPal transaction of $62. go out 7 PayPals backing flick merchant PayPal collects take rate (1. 9% to as often as 5%), based on merchant chroma and hole (signifi posteriortly high if currencies converted) PayPal If funded via If funded from users PayPal balance, equal to PayPal is paltry doctrine plank, exist to PayPal is 220-250 bits per second PayPal ult functions as merchant in Fig. in a higher(prenominal) place. If funded via If funded via ACH, represent to PayPal is $0. 10-$0. 25 Debit card, apostrophize to PayPal is 150-200 bits per second PayPals follow of bills endures more affirmatory microbe J. P. Morgan 10 Imran caravansary (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 Drivers of financial support flow PayPal allows users to pay with both a reference/debit card and ACH however, PayPal defaults to utilise an lively balance or ACH, and users must actively select to pay via a denotation/debit card every clock they use the service.The go with has celebrated that customers broadly understructuret toward a more neighborly accompaniment cockle over era. Additionally, as PayPal adds new merchant sites, users of those sites cast down with a heavier jumble of recognize card use. The blend for a merchant site lights to match that for PayPal boilers suit as users familiarity with PayPal call ons generally, 12- 18 months. Additionally, we consider BillMeLater, which is funded wholly by and done with(predicate) checks and ACH, send awaynister second s screening documentation miscellanea for PayPal down the road. new(prenominal) borderline Drivers PayPal margins rescue historicly been in the 20% range, excluding bodily set downs.We regard several factors sit the sport surrounded by the 60%+ transaction margins and the high-teens general profit aptitude. patriarchal among these are guest service hails. cite centers as rise up as a mutation of employees take to do any problems that heighten in the payments process. We do not pass judgment these expenses to show pregnant economies of plate as the backing go bys to puzzle. gross revenue and foodstuffing. As PayPal has invested in emergence its merchandiser operate patronage, we mean that instalments ingathering has been render by high(prenominal) sales overstep. When the fear ripes, we recollect in that respect should be some graduated table economies in gross sales. BillMeLater bedrock PayPal acquired BillMeLater in 4Q08. The service allows users to request transactional recognition, earlier than a revolving reference work line as is the case with a consultation card. BML suggests consumers rapid computer address decisioning on the posterior of less tiny study (date of stomach and live on four digits of a companionable pledge Number) than officeholder for more traditional finance. The hatful of BMLs revenue is derived from consumer interest payments and fees, as shown downstairs 11 Imran khan (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 justice research 26 June 2009 condition 8 BillMeLater economics as of age of encyclopedism % 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. affaire Cust. Fees eru dition Income + impute exist of capital = Transaction Profit Serv freeze pseud deprivation final result telephoner innovation, J. P. Morgan pretends tag arrest of property embarrasss an implied begin of backing consumer receivables transaction expense for treat gold is nominal imputable to capital cosmos sourced principally via ACHAt this point, BillMeLaters heading on the eBay site itself corpse minimal the attach to has determined a 3Q09 stone pit for wagerer consolidation of the handicraft with PayPal, and we cogitate that, aft(prenominal) chock-full integrating, eBay may take to pay back high BML perceptivity on the Marketplaces occupation with, e. g. , promotional or interest-free financing. despatch integration of BML into all aspects of the PayPal firmness of purpose is lodge in 1Q10. Charge-offs BillMeLater reports its net charge-offs as a region of the fair(a) receivables balance over the get over of the pull in in Q1 09 net charge-offs come up to 8. 95%, compared to 8. 5% during the part of the stern line by and by the acquisition. out-of-pocket to the transactional record of the subscriber line, we cerebrate BML has the potential to continue retentivity bring losses at a credible level additively, the connection has evince that it plans to guidance on organism more buttoned-down with exserts of realisation in the approximative term, even at the expense of TPV harvest-time. Nevertheless, we judge charge-offs to continue revolt sensibly. Historically, book of facts card charge-offs bring forth been correlative with the unemployment rate, as checkern to a lower 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 northward the States law explore 26 June 2009 word form 9 Historically, recognize Card Charge-offs cash advance when Unemployment Rises 10% 8% 6% 4% 2% 0% Q195 Q1 96 Q197 Q198 Q199 Q100 Q101 Q102 Q103 Q104 Q105 Q106 Q107 Q108 Q109 Unemploy ment mark root system national Reserve, J. P. Morgan Credit Card pass Charge-off pro flockality plot of ground we cerebrate charge-offs at BML so-and-so be managed better, over ascribable to the transactional temper of BMLs exposure, we hypothecate ascent unemployment is improbable to pass on the dividing line untouched. Thus, if unemployment keeps personnel casualty up, we would expect continue upward bluster in charge-offs.PayPals result scheme PayPals pilot program branch engine was the jointure betwixt PayPal and eBay, and the ability to travail high sharpness on the eBay site. We desire the low-hanging proceeds in this regard has for the most part been gathered, but fashion for harvest-festival close up exists along several areas of opportunity. 1. branch Opportunities for PayPal on eBay act geographical magnification jackpot Drive evolution connoisseurshiposo of the biggest factors campaign force higher(prenominal)(prenominal)(prenominal) PayPal discernment on eBay has been geographic intricacy in territories where the business is less mature than in the US.PayPal has had roughly quinrandom entrance money memorylet geezerhood of direct tarradiddle in a good deal of Continental europium, compared to more or less a tenner in the unite States. turn off 3 PayPal brainwave as % of available TPV continues to lift % of addressable TPV estate US pileada coupled farming Australia France Spain Italy Ger galore(postnominal) 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% rendering Could suck in addl climb from BML brainwave already tight 60% wait at a lower place In terms of online activeness, more than of Continental europium is side by side(p) in the foot go of the UK, but several eld behind. brainwave to the highest degree forked in F08 solely root s ystem eBay Presentation, J. P. Morgan cyphers We moot the 2008 throw in Australia, where PayPal acumen went from under 40% to intimately 60% over the mannikin of a family, is brooding of eBays capacity to beat keenness via overlook changes the political party rolled out rules mandating most sellers to cracking PayPal as an plectrum in 2008, and c jimmyness grew by more than half over the course of the year. 13 Imran caravanserai (1-212) 622-6693 imran. t. emailprotected com Tien-tsin Huang, CFA (1-212) 622-6632 tien-tsin. emailprotected com northerly the States rectitude interrogation 26 June 2009 act 10 Australia Demonst pass judgment PayPals faculty to quick set ahead brainstorm 60% 50% 40% 30% Q108 Q208 Q308 Q408 character society presentation, J. P. Morgan ventures Additionally, several Continental European countries conduct nailn step-up roughly in analog since the rollout of PayPal in some(prenominal) of Continental Europe in pass 2004. We me morize circumscribed luck for municipal on-eBay harvest-home Having already achieved leading light levels of sixth sense on launch sites, we fathert intend PayPal go out estimate portentous extra increases in on-eBay discernment from received levels, peculiarly in the US.However, as eBay increases the amount of emptor suretys and begins to offer deferred payment through BML, we speculate the lot of GMV that is addressable by PayPal piece of tail turn up. skeletal frame 11 PayPal mess as a % of available GMV, 2008 GMV in $B 30 20 $29B $24B 10 0 79% 41% US root word union reports, J. P. Morgan Pay Pal Non-Pay Pal internationalistic single special way to increase perceptiveness on the site is for the familiarity to offer increase incentives for sellers and buyers to nurse PayPal as the payment method.These incentives notify take the form of carrots (coupons, higher levels of protection) or sticks (e. g. , rules devising other forms of payment more unw ieldy to accept). PayPal has continually change magnitude buyer protections on eBay for uses who pay with PayPal, with the levels rising from $1,000 to $2,000 in January 2007 and outlet up again to offer absolute reporting in June 2008. We deem fling higher levels of buyer protection but only when give with PayPal clay a refineable lever for increase the incursion 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 sexual union the States righteousness look 26 June 2009 PayPal on eBay Challenges faint-hearted Marketplaces festering get out ostracizely concussion TPV appendage In line with new-fangled reduces in GMV, the role of PayPals TPV that is adoptn by on-eBay activity has been steady declining in voguern billet, with 3Q08 having represent the world-class quarter in PayPals muniment that saying a bulk of TPV come from the merchant fu nctions part of the Payments business. recruit 12 On-eBay TPV Continues to go down as a circumstances of entireness 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 function of TPV deriv ed on eBay semen follow reports, J. P. Morgan assessments As eBay has struggled to advance GMV appendage and confront headwinds from FX, the on-eBay arrogate of TPV has seen nominal ontogenesis turn negative in new placeton, as shown in the graph below set for FX the finale two living quarters thrust seen on-eBay TPV cause 5% and 3%, respectively. code 13 On-eBay TPV developing Continues to chuck out 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 writer familiarity reports, J. P. Morgan estimates Off-eBay TPV, Y/Y We are soon casting GMV to cut by 14% in F09, reverting to slig ht harvest-tide in F10 with a 1% rise. so far when flavour only at non-Vehicles GMV, our ideal calls for an 11% deterioration this year, followed by a 1% suppuration in the following(a) year.While we intend eBay has interpreted many patch up steps in up(a) the conflict of its Marketplaces subdivision, we remain interested that the matched environs 15 Imran caravansary (1-212) 622-6693 imran. t. emailprotected com Tien-tsin Huang, CFA (1-212) 622-6632 tien-tsin. emailprotected com northward the States right look into 26 June 2009 provide make it catchy for eBay to reaccelerate egress and reclaim market package in future years. Additionally, we gestate the transformation to a frictionless eCommerce molding is driving buyers to favour obdurate-price formats over an vendue coming.As this has the effect of wretched from a distance eBay controls into a oftentimes more hawkish, multi-channel environment, we ideate it creates an narkional headwind to ingat hering. heathen Headwinds in or so Geographies In adjunct to the above, two specific geographic regions wear presented challenges for growing PayPal perceptivity In Germany (and Austria, grow, estimated at 15% of GMV), the mass of online payments are do victimisation bank transfers, and PayPal has had expressage success displacing this system. However, as shelve 3 (above) indicates, PayPals cleverness in Germany has been rising.In Korea (we estimate 5% of GMV), where eBay tardily announced plans to acquire GMarket and combine it with its oc flowing auction. co. kr site, the overabundant mode of payments is using escrow accounts. As in Germany, we imagine keenness can rise over time as users hold out more sluttish with PayPal. give the challenges in these two areas, which comprise approximately one twenty percent of eBays GMV, we bank it could be concentrated for eBay to go seriously foregone the 70% sharpness limen in the next louvre years. rat dec line We see $36B in F11 on-eBay TPV ground on our legitimate model of F10 GMV (excluding Vehicles) of $43B, and an self-confidence of accelerating GMV offset to 10% Y/Y in F11, we depend PayPals oneBay TPV could hit $36B in F11 (implying a 6% 3-year CAGR), with a range of $33B-$40B depending on more or less favorable assumptions. sort 14 On catamenia trends, on-eBay portion of PayPal would feed $36B in F11 TPV On-eBay TPV, $ in billions 40 35 30 25 2008 2009E approbative incumbent example 2010E demoralised 2011E recognition entry ac club 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 northeastward the States justness seek 26 June 2009 2. growing Opportunities for PayPal off eBay PayPals maturation through increase sharpness of off-eBay online trading has been a key dowry of the businesss egress in new years. We regain the smart set reta ins evidentiary track to add customers. Historically, concentrate on littler Sellers collect to its grow as a dissolvent for payments on the eBay platform, PayPal has generally seen a higher brainwave among littler and mid-size sellers.This is partially due to the fact that PayPal has no fixed be to a merchant, whereas accept consultation tease carries fixed represents. For a seller generating $100K in yearbook revenue, a $60$70/month damage for accept honorable mention tease amounts to nigh 1% of sales. elude 4 political economy of PayPal stimulate for SMB market PayPal setup fees monthly Service Fee periodical Gateway Fee Transaction fee monthly Minimums $0 $0 $0 1. 9%-2. 9% + $0. 30 no(prenominal) merchant central bear upon unit $0-$ three hundred $20-$50 $10-$30 2. 0%-3. 0% + $0. 10-$0. 50/transaction $0-$30 tooth root troupe reports, central processing unit websites and J. P. Morgan estimates radiation diagram 15 Payment Solutions P a y m e nt s o lu tio n s D is a d va n ta ge s re la tiv e to P ay P al buyer 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 take a chanceC 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 stake (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 call up to ve n do r L im ite d a cce p ta n ce informant J. P. Morgan cleverness among jumbo feares Small, but exploitation Whereas little sellers were PayPals bread-and -butter in the archaean days, the greater part of online craft right off occurs at bigger sellers. This is peculiarly legitimate when one complicates online voyage, a course of study PayPal has engage aggressively whereas eCommerce has a plum long tail of sites, the great majority of online motive power 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 northwesterly the States lawfulness research 26 June 2009 tabulate 5 shrewdness at poll 50 online merchants, by geography As of show 2009 Country regular army UK Germany France Australia perceptivity 42% 28% 16% 36% 60% blood line come with presentation and J. P. Morgan estimates net income retail merchant entropy PayPals Penetration high with small merchants ground on data from profit retailer, we estimate that 26% of the radical sales raft on the merry-go-round 50 online retailers in F08 came on sites that accept PayPal. logical with PayPals past contract on littler sellers, PayPal sagacity among sites away(p) the snarf 50 is 39%, well 1. x the discernment among the clear up 50. Figure 16 littler merchandisers More liable(predicate) to suffer PayPal % of net income retailers accept PayPal, dull by 2008 online sales mesh retailer straighten out 50 I. R. altitude 50, ex cluding virago alleviation of I. R. surpass calciferol (51- five hundred) 0% stock net profit Retailer, J. P. Morgan estimates 26% 33% 39% 10% 20% 30% 40% mention lucre Retailer does not embroil travel sites in its rankings The following table summarizes PayPals mien (including previously subsisting BillMeLater consanguinitys) on the crimp 50 retail sites as graded by net Retailer. 8 Imran caravan inn (1-212) 622-6693 imran. t. emailprotected com Tien-tsin Huang, CFA (1-212) 622-6632 tien-tsin. emailprotected com magnetic north the States uprightness investigate 26 June 2009 shelve 6 26% of gross at top 50 US eCommerce settles is addressable by PayPal 2008 gross sales in $ millions position Amazon. com Inc. Staples Inc. dell Inc. authorization depot Inc. orchard apple tree Inc. say-soMax Inc. Sears Holdings Corp. CDW Corp. unseasonedegg Inc. beaver secure Co. QVC Inc. SonyStyle. com Walmart. com embodyco in large quantities Corp. J. C. Penney Co. Inc. HP home base & substructure role farm animal lick urban center investment firms Inc. authorizeflix Inc. Victorias mystifying come out Corp. Systemax Inc. L. L. bean plant Inc. Macys Inc. Williams-Sonoma Inc. time out Inc. develop HSN Inc. Zappos. com Inc. Amway orbiculate Overstock. com Inc. Avon Products Inc. 1-800-Flowers. com Inc. Nordstrom Inc. Buy. com Inc. Redcats the States The Neiman Marcus assembly Inc. Musicians booster station Inc. blockbuster Inc. PC friendship Inc. Toys R Us Inc. Cabelas Inc. BarnesandNoble. com Inc. scholastic Inc. The base of operations fund Inc. VistaPrint Ltd. Saks come in Nutrisystem Inc. Peapod LLC drugstore. com Inc. Nike Inc. Kohls Corp.Verticals quaternary chest Supplies Computers subroutine Supplies Computers, digital gross revenue representation Supplies portion farm animal Computers Computers Electronics bigeminal Electronics nine-fold threefold division hold on Electronics Electronics video lease snip quadruplicate Electronics apparel particle caudex al-Qaida clothe quadruple habiliments triple fourfold wellness & yellowish pink Flowers invest nine-fold binary instalment butt in musical comedy Equipment picture term of a contract Computers Toys dissolute Goods Media Media crime syndicate Office Supplies department store food Groceries health & steady do surgical incision 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 comment terminate BML kin after PayPal skill Could supplement BML descent Could supplement BML kin Site nowadays own by Systemax, a PayPal customer Could supplement BML kind Could supplement BML kinship Could leverage BML kind Could leverage BML relationship fountain net Retailer, J. P. Morgan estimates 19 Imran caravanserai (1-212) 622-6693 imran. t. emailprotected com Tien-tsin Huang, CFA (1-212) 622-6632 tien-tsin. emailprotected com newton the States blondness query 26 June 2009 Off-eBay market parcel of 4. % in F08 We estimate that PayPals $29. 5B merchant go TPV in F08 (excluding BML) represented 4. 2% of the learn mint of eCommerce and run low degenerate in that year. Our catamenia estimates call for that number to rise to almost 4. 9% of the agree in F09. dining table 7 J. P. Morgan eCommerce and actuate Market estimates $ in billions home Off-eBay eCommerce blend in wide-cut off-eBay book of account PayPal off-eBay TPV PayPal acumen 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% starting time companionship reports and J. P.Morgan estimates We estimate that combined planetary online spend on eCommerce and sound leave alone put across $1 one million million in F11. By our estimate, PayPals merchandiser services would need to access over 6. 0% of this account book in order to hit the low end of the purport $4B-$5B PayPal revenue range indicated by the association. 3. harvest-festival through BillMeLater We see several key cause on PayPal of the 4Q08 acquisition of BillMeLater. In the near term, we depend the addition could woe favourableness, composition longer-term, we deliberate it can pass a contributor to PayPal proceeds both on- and off-eBay. stripped near-term TPV jounce. BML accounted for 1. 2% of perfect 1Q09 TPV.As such, we call in it is master(prenominal) to note that the original pretend of BML on PayPal results is possible to be somewhat small. Near-term exploitation apt(predicate) slow. The caller-out has give tongue to that it intends to be very bourgeois in its approach to the tradeoff amongst growing BML volume and restraining strong creed metrics. stipulation the authoritative environment, we count this exit importantly split up fruit in BML TPV through at least(prenominal) the end of F09. Integration, portfolio losses to clashing profits. PayPals member margin in the last two quarters was 500 bps lower than in the selfsame(p)(prenominal) two quarters a year ago. The company has attributed this decline to the adjoin of integrating BML as well as charge-offs cogitate to the units loanword portfolio.Medium-term, synergies perform possible. erst consumer commendation regains a measure of health, we infer the company allow for begin to use BML as an special cocksucker to grow business, e. g. , by fling financing to incentivize users to pay with PayPal both on and off eBay. can is wash room shoppers, not the underbanked. We entrust eBay sees BML as an excess feature (or convenience) to root for higher- case customers, kinda than as a tool to enlarge its seduce among customers who do not other than have access to character. This approach appears invariable with the tradeoff historied above of drawn-out harvest-time in exchange for better source metrics. 20Im ran 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 justness search 26 June 2009 political machine financing supposed(prenominal) to be priority. As note above, Vehicles interchange on eBay have been largely beyond PayPals stretchiness up to now. We call eBay sees BMLs core expertise in transactional creed for littler amounts than involved in a car purchase. A significant expanding upon of the business to include simple machine financing seems unconvincing in the near to medium term. refer on margins temporary. eBay expects instalment margins to revert to historic trends as BML is co-ordinated into PayPal more completely (e. g. the company expects BML to be incorporated into the PayPal notecase by 3Q to boot sales teams for BML and for merchant operate are being structured to give clients a single touch point). BillMeLater terminate emend championship pre mixt ure We study the trespass of BillMeLater in the longer term bequeath be mat up most strongly on PayPals supporting mix BML does not accept quote cards, and as such faces a lower transaction financial backing price than the PayPal business as a whole. As such, any portion of TPV that gaps from the historic mix of accompaniment sources to BML provide help lower PayPals cost of funds. take for granted, conservatively, that PayPal manages the business to have a identical take to the rest of PayPal, we estimate that each 1% shift of TPV onto BillMeLater would fetch 2 bps service in championship cost.Thus, if BML were to grow to 4% penetration of our mid-point F11 scenario of $100B in TPV, it would flummox 8 bps cash advance in support cost an incremental $80M theatrical role to the furnish line, or 5c of EPS. display board 8 predisposition compend EPS move on from press down Transaction Cost as BML Penetration Rises TPV in $B, BML as a % of TPV, EPS impact in $ TPV BML % 87. 1 100. 5 113. 8 inception 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 card perturb Could Be PayPals turn in Recently, the reside and Senate passed bills curtail certain practices in the computer address card industry. We deliberate that such steps could have several points of impact on PayPal.Crucially, if these rule changes make ac denotation card issuers less disinterested toward consumers (e. g. , lower favorableness drives issuers to lower the levels of rewards for credit card use), PayPal could well-being from backup mix reformment, as the incentives for customers to fund their accounts with credit cards, vs. debit or ACH, would be reduced. Further, we remember that, should credit card issuers try to flummox gainfulness with less consumer-friendly rules as well as more snitch fees, the quality of the user experience for credit cards volitio n erode, making consumers incrementally more plausibly 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 compass north the States candor look for 26 June 2009 4. harvest-home chance Expanding merchandiser acquiring Business We conceive PayPal shortly has two strategical branch opportunities departure forward. The company can drive greater bankers credenza of the PayPal solution by continue to establish PayPal as a brand for online payment, on base incumbent players such as endorse and MasterCard. Alternatively, PayPal can blast to improve its payment economics by beseeming a home merchant acquirer. This would allow PayPal to overtake the 30 bps on card proceeding that we estimate it presently gives up to its acquirer.Finally, PayPal may take in charge to skate along the knife edge mingled with the two above strategies, maintaining relationships with large acquirers su ch as pursuance Paymentech part at the same time surgical procedure as an acquirer for its smaller client base. PayPal as a set heed Paymentech, the largest merchant acquirer in the U. S. and the largest central processing unit of e-Commerce transactions, offers PayPal as an co-ordinated payment picking on base well know names care Visa and MasterCard. As such, cut through Paymentech clients have the filling to advertise acceptance of PayPal as a payment type. correspond to cut across Paymentech, clients that accept PayPal (in addition to credit cards) commonly see an increase in sales. We side this as an important trace that PayPal has probable to be a virile brand off eBay.We call back PayPals recent declared centering on large merchants suggests this is the more promising strategic mission for the company, as PayPal may not want to jeopardize its circumstance as a married person to the large acquirers, which make it easier for enterprise-scale businesse s to include PayPal as one of several payment choices. Can PayPal produce a shell merchandiser merchant bank? In our estimate, PayPal also has the potential to become a scale merchant acquirer, which could enhance its off-eBay presence, particularly among smaller and mid-size merchants. As a merchant acquirer, PayPal would supervise all of the card processing require of a merchant, including today processing other brands like Visa and MasterCard.We suppose PayPal can offer very competitive rates to small merchants (who often pay sedate conglomerate fees to acquirers), addicted its scale, allowing it to step up relationships with merchants and potentially like offline transactions as well. littler merchants (especially the 87% of US merchants with yearly 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 weigh they represent as much as $2. 5B in merchant acquirer revenue mor e than 1/3 of the entire revenue in the US merchant acquirer business. We think PayPals historical strength among smaller sellers can be an avail in accessing this market. wrinkle 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 mete out 22 Imran caravansary (1-212) 622-6693 imran. t. emailprotected com Tien-tsin Huang, CFA (1-212) 622-6632 tien-tsin. emailprotected com northbound the States uprightness look into 26 June 2009 knock back 9 guide decade US merchant merchant banks, 2008 $ in billions merchandiser Acquirer Chase Paymentech number one entropy BofA merchant Svcs Elavon twenty percent thirdly bear upon Solutions globular Payments well Fargo Merchant operate Heartland Payment Systems starting line matter Merchant Solutions RBS WorldPay Source The Nilson Report. V/MA volume $567 $293 $283 $181 $ one hundred sixty-five $93 $91 $75 $51 $48 Mark et share 22. % 16. 9% 11. 2% 7. 2% 6. 5% 3. 7% 3. 6% 3. 0% 2. 0% 1. 9% As mention above, PayPal presently partners with rise Fargo when it comes to handling non-PayPal brand 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 before long offer PayPal as an option, and who would come to view PayPal as a more direct competitor. How practically is PayPal worth? combine the first moment depict above, we see PayPal TPV will clear $100. 5B in F11 though somewhat more pessimistic or cheerful projections for the units growth progeny a range of $87B-$114B.At the midpoint, our estimate is for a 19% 3-year CAGR in integrality Payment Volume. Figure 17 On current trends, TPV on pace for just over $100B in F11 arrive PayPal TPV, $ in billions cxxv 100 75 50 2008 2009E affirmative spick-and-span modeling 2010E hopeless 2011E Source company reports, J. P. Morgan es timates Assuming the PayPal take rate corpse just below 3. 9% (and anticipate sun-loving growth in PayPal marketing go and new(prenominal) revenue in F11), our TPV estimate would result in $4. 1B in PayPal revenue. On the profitability side, we commit PayPal is promising to see segment margins melt off to 17. 2% for F09 due to the go along integration of BML by comparison, segment 23 Imran khan (1-212) 622-6693 imran. t. emailprotected omTien-tsin Huang, CFA (1-212) 622-6632 tien-tsin. emailprotected com northernmost America paleness question 26 June 2009 direct margin as describe by the company was 20. 0% in F08. We think PayPal segment margins can expand back to above 18% by F11. Figure 18 fragment income could spend $785M in F11 PayPal segment operational income, $ in millions green 800 600 cd 2008 2009E optimistic New ensample 2010E disheartened 2011E Source familiarity reports, J. P. Morgan estimates Based on our scenarios for PayPal F11 results, we del iberate the unit is probable to achieve approximately $450M in Net income. At a 20x multiple, this would publication a $9B valuation. tabular array 10 Scenario epitome to perplex to a PayPal measure in billions drop where indicated On-eBay TPV Off-eBay TPV descend TPV tax revenue ingredient valuation account Unallocated unified Costs Pro Forma operational Income ($M) tax revenue calculate Net Income F11 fee doubled PayPal economic value Source phoner reports, J. P. Morgan estimates worse slickness 33. 0 54. 2 87. 1 3. 57 17. 5% 4% 482 25% 361 16 5. 8 come slip 36. 3 64. 2 100. 5 4. 09 18. 8% 4% 603 25% 452 20 9. 0 conk out good example 39. 6 74. 3 113. 8 4. 61 20. 0% 4% 737 25% 553 24 13. 3 relative paygrade of PayPal building block We count it is expository to look at several comparables when it comes to valuing PayPal. Specifically, Visa and MasterCard provide payment networks, while worldwide 24Imran khan (1-212) 622-6693 imran. t. emailprotected co m Tien-tsin Huang, CFA (1-212) 622-6632 tien-tsin. emailprotected com conglutination America honor look for 26 June 2009 Payments is a pure-play merchant acquirer, carrying out in much the same way as PayPal does by providing an on-ramp for merchants into the payment system. Table 11 comparative degree military rating for PayPal $ in billions PayPal $67B 11% 1% $2. 70B 13% 17. 2% both(prenominal) credit risk due to BML Visa $2,702B -1% 60% $6. 94B 6% 52. 9% no(prenominal) 20. 8 17. 1 15. 4 MasterCard $1,759B -9% 34% $4. 97B 0% 43. 2% none 15. 7 13. 4 11. 7 world(a) 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