PayPal: A Marketing

Strategy for the Future

Marketing for High Tech Entrepreneurs

UC Berkeley Fall 2008

Chris Anderson, Vera Dadok, Aby Galsky,

Samuel Lin, Camilo Mendez, Bonnie Zhu
12/8/2008

0
Table of Contents 
Executive Summary ........................................................................................................................ 1 

Introduction ..................................................................................................................................... 2 

Background ..................................................................................................................................... 2 

PayPal and eBay ......................................................................................................................... 2 

Value Propositions .......................................................................................................................... 3 

Buyers ......................................................................................................................................... 3 

Sellers.......................................................................................................................................... 3 

Operations ....................................................................................................................................... 4 

Product and Services ................................................................................................................... 4 

Revenue Sources ......................................................................................................................... 4 

Performance ................................................................................................................................ 5 

Current growth strategy .................................................................................................................. 5 

Growth in Established Markets................................................................................................... 5 

Expanding to Emerging Markets ................................................................................................ 6 

Failure in China and Lessons Learned ........................................................................................ 6 

New Product Development ......................................................................................................... 7 

Critique of growth strategy ............................................................................................................. 7 

New opportunities / strategies for growth....................................................................................... 8 

Non-Retail Payments Opportunities ........................................................................................... 8 

Incentives for New Contracting Payment Solutions ................................................................... 9 

Incentives for New Attorney Payment Solutions.................................................................... 9 

Incentives for new rental payment solutions .......................................................................... 9 

1
 Recommendations for new payment solutions ..................................................................... 10 

A new revenue model ........................................................................................................... 10 

Targeted marketing ............................................................................................................... 11 

Remittances ............................................................................................................................... 11 

Matches Core Competencies and Goals ............................................................................... 11 

Factors that Facilitate Entry into Market .............................................................................. 12 

Market Size ........................................................................................................................... 12 

Recommendation to PayPal Regarding Remittance ............................................................. 13 

Mobile Payment in Emerging Markets ..................................................................................... 14 

Conclusions ................................................................................................................................... 17 

Appendix ....................................................................................................................................... 19 

Non-retail Payment Calculations .............................................................................................. 19 

Contractor payments US market ........................................................................................... 19 

Attorney payments US market .............................................................................................. 19 

Tax preparation payments US market................................................................................... 20 

PayPal’s Potential Revenue Sensitivity to Market Conditions in the Remittance Market ....... 20 

Exhibits ......................................................................................................................................... 22 

2
Executive Summary 
As a dominant player in online payment business, PayPal, a subsidiary of eBay, processes
8.3% of $600B global e-commerce market. PayPal has presence in 190 markets and accepts 19
currencies with 44% of its revenue from outside of US.

In addition to its simple, quick and secure online payment services, PayPal has begun
developing additional payment services via mobile phones, browser add-ons and more. Through new
partnerships and its tie with eBay, PayPal’s revenue has been growing steadily at over 30% for the
past three years. PayPal often relies on brand recognition and word of mouth advertising to promote
its new products. While this has worked very well for traditional products, it has made it difficult for
several of its newest offerings to gain traction.

In the future as PayPal saturates its established markets and encounters competition in
emerging markets, PayPal will face difficulties if additional expansion is not pursued. We have
identified three new opportunities for PayPal: non-retail payments in US and remittance and mobile
payments in emerging markets.

Non-retail payments including rent, attorney fees, and contractor payments are an untapped
market where millions of transactions take place. Due to the unique payment structure in these
segments, PayPal can offer a very compelling value proposition in this payment space. For example,
PayPal can set up a system tailored for renters that uses a larger flat fee and requires funding by
debiting bank or PayPal accounts (for highest PayPal profit margins). Similarly, PayPal could
address lawyers and contractors by developing payment solutions that enable incremental payments
and up front advancements in a single invoice, thereby matching the needs of these industries
payment methods.

Remittances services are currently expensive and PayPal is in a unique position to leverage
their existing online fund transfer infrastructure to offer a lower cost to customers. The Dominican
Republic, Jamaica and Guyana have been identified as penetrable markets due to their large volume
of both remittance fees and banking populations. In order to break cultural and consumer behavioral
barriers, PayPal will need to conduct extensive marketing research and test acceptance levels in
addition to building partnership with local institutions.

Mobile payment platforms are leapfrogging traditional payment methods in emerging

markets with a high proportion of unbanked population. India has been identified as a compelling
mobile payment market due to the regulatory environment and high acceptance potential. The
mobile payments industry has a substantial first mover advantage; we believe PayPal should move
quickly to align mobile operators and banks in this region. In addition, PayPal should conduct
extensive market research to be sure they understand the culture and buying behavior in India.

All opportunities we’ve identified leverage PayPal’s existing infrastructure, core

competencies, and current value offerings. Due to PayPal’s history of new product offerings not
gaining traction as a result of ineffective promotion, we believe PayPal should devote more resources
into advertising the sophistication and novelty of these new services. These recommendations will
help PayPal to achieve its goal of being the global standard for online payment solutions.

1
Introduction  
PayPal Inc., a subsidiary of eBay Inc., is in the business of online payment solutions, acting as a
secure middleman for transactions in ecommerce between online merchants or sellers and
customers or buyers. It is an international company, supporting transactions in 19 currencies and
with 44% of revenue from outside of the US 1 . In addition to basic online payment services it has
begun developing additional payment services via mobile phones, browser add-ons, and more.

PayPal is aiming to become the “online payment network of choice around the world” 2 . PayPal
currently has an 8.3% share of global ecommerce and plans to gain an increasing share of global
ecommerce payments in the next decade by increasing the frequency of use of current services,
developing new offerings, and expanding existing services to new markets.

Background 
The merger of two companies, Confinity and X.com, created PayPal in 2000. PayPal grew
rapidly, prompting eBay to acquire PayPal for $1.5B in 2002, when more than 50% of the eBay
users preferred PayPal as a payment method 3 .

PayPal and eBay 

PayPal has achieved a significant amount of its success due to its relationship with eBay. eBay
provides PayPal with a large, protected market that plays a key role in building PayPal’s huge
user base. eBay also increases the power of PayPal’s brand, offers a free avenue for advertising
PayPal, and access to eBay’s adjacent Marketplaces 4 . However PayPal has expanded beyond
eBay and provides services for many other online merchants, pulling in 49% of their Total
Payment Volume (TPV) from non-eBay sources in Q2 2007 5 . Growth for PayPal depends on

1
www.paypal-media.com/documentdisplay.cfm?DocumentID=2260
2
eBay Annual Report, 2007
3
http://news.cnet.com/2100-1017-941964.html
4
eBay Annual Report, 2007
5
https://www.paypal-media.com/documentdisplay.cfm?DocumentID=2260
2
increased growth in ecommerce outside of eBay, but eBay’s exclusive use of PayPal continues to
provide an important barrier against PayPal competitors.

Today PayPal has over 63M active accounts, accepts 19 currencies in 190 markets, processes
over $64B per year and has revenues of over $600M per quarter. PayPal’s TPV was
approximately 9% of global e-commerce in 2007 6 .

Value Propositions 
Buyers 

For buyers who want to make payments online, the PayPal platform is a financial gateway that
allows simple, private, and secure payments on a large number of websites. Unlike paying
directly with credit cards online, paying with PayPal does not require sharing sensitive
information such as credit card numbers on merchants’ websites and simplifies payment
information entry to only an email address and password.

Sellers 

For vendors who want to sell products online and collect payments electronically, the PayPal
platform is a payment processing solution that allows them to accept secure online payments
from customers in over 190 markets and in 19 currencies. Unlike online solutions provided by
traditional merchant accounts, PayPal’s product can be set up quickly and easily and has a low
cost transaction fee structure 7 .

6
https://www.paypal-media.com/documentdisplay.cfm?DocumentID=2260
7
eBay Annual Report, 2007
3
Operations 
Product and Services 

PayPal’s principal product is their online global payments platform. The company offers an
online payment platform for eBay and off-eBay accounts and merchants. Many companies carry
PayPal as a payment option, including Barnes & Noble, Toys R’ Us, Southwest Airlines, Delta
Air Lines, Blockbuster, among others.

PayPal offers other services to facilitate payments and money transfers. For example, PayPal
Mobile is a way to check your PayPal balance, send request money and buy products online by
using a mobile phone. PayPal Plug-In is another product that allows the user to use PayPal on the
Internet anywhere that MasterCard is accepted.

PayPal also has other financial products such as the PayPal ATM/Debit Card, PayPal Plus Credit
Card, PayPal Pay Later, PayPal Money Market Fund, among others.

Revenue Sources 

The overwhelming majority of PayPal’s revenue is from transaction fees paid by online
merchants. Typically, transaction fees are a $0.30 flat rate on top of 1.9 to 2.9 percent of the
payment amount.

PayPal’s profit varies depending on the base source a customer chooses to fund the payment.
When transactions are processed with a credit card, the majority of the transaction fee received
by PayPal goes straight to the credit card company. However, when customers use money
directly from PayPal accounts or bank accounts 8 , the transaction fee is nominally profit.
Approximately 60% of transactions are processed with credit cards.

8
eBay Annual Report, 2007
4
Performance 

PayPal’s revenue is almost directly related to the dollar amount of payments or TPV. PayPal’s
revenue has been growing steadily at over 30% for the past three years to $1.8 billion in 2007
(see Exhibit 1). In addition, the percentage of off eBay revenue has improved from 35% to 42%
in the past two years, indicating that PayPal is successfully improving revenue from merchant
services and other off eBay offerings. PayPal also has a substantial international offering: over
44% of its revenues are from non-US sources 9 .

Current growth strategy 
PayPal’s growth strategies can be divided into three categories—strategies within established
markets, expansion to new geographies, and development of new services.

Growth in Established Markets 

In established markets, such as the U.S. and Australia, PayPal enjoys excellent brand recognition
and a large user-account base. In these markets, PayPal’s goal is to increase customer usage. To
achieve this, PayPal is partnering with large corporations and exploring strategies to increase
PayPal’s share of eBay transactions. Last year, PayPal partnered with Barnes and Noble, Toys R’
Us, and several other large retailers in the US.

Little advertising effort is put into attracting small online merchants 10 , but PayPal’s brand and
simple solutions for integrating one-click payments and shopping carts on these websites
continues to draw new businesses.

PayPal’s general strategy is to keep operating costs low by spending very few resources on
advertising. Instead PayPal relies on word-of-mouth, eBay, and merchant customers 11 (with the
PayPal button on websites) to maintain and increase awareness of PayPal’s primary product. By

9
eBay Source
10
Interview with Jeff Lowman, PayPal Strategy Group conducted by the group, Nov.2008
11
Add more stuff: web developers, online news, tech blogs, etc.
5
targeting big merchant customers like Barnes and Noble, PayPal further increases visibility,
market penetration, and user accounts.

Expanding to Emerging Markets 

Expanding to new geographical territories is one of PayPal’s core focuses 12 . Its transactional
revenue growth rate within US dropped from 36% in FY2006 to 22% in FY2007 while that of
international maintained 46%. Yet despite significant effort, not all of PayPal’s endeavors to
enter foreign markets have been successful.

Failure in China and Lessons Learned 

In attempts to capture some of the 220 million potential online shoppers in the China’s
ecommerce market, PayPal rolled out PayPal.cn in 2005. However, by mid-2007, PayPal’s share
of China’s third payment market was only 1.6%. The setback was largely attributed to nuances
and challenges of online payments in China market. These include ambiguous governmental
regulations, consumers’ continued preference for cash payments, low credit card usage, and
online payment restrictions for debit card users. In the end, PayPal’s failure in China boiled
down to their inability to understand the local market and culture 13 .

The experience in China harshly reminded PayPal that a successful rollout requires two things:
the technical infrastructure and an understanding of users’ buying behavior in that local market.
If and when PayPal expands into Asia, South America, and southern Africa, the lessons from
China will likely prompt extensive market research so that a platform tailored to the unique
needs of the market can be implemented.

12
Interview with Jeff Lowman
13
Taobao has a layout that is similar to a Chinese department store with separate sections for women’s and men’s
department. In contrast to Taobao, eBay Eachnet provided no phone support and discouraged buyer-seller contact
that could lead to haggling.
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New Product Development 

PayPal is currently acquiring and developing several new products and services. Some of their
recent offerings have been PayPal Mobile in 2006 14 , PayPal Plug-In (November 2007) 15 Bill Me
Later 16 , and they even have plans to add a credit product to their offerings. This December
PayPal is beta testing PayPal Student Account, a service that is similar to an online allowance 17 .
Finally, an iPhone application has recently been produced 18 and continues to be under
development 19 .

Although many of their new products sound promising, their track record for promoting many of
their previous products has been poor.

Critique of growth strategy 
PayPal relies too heavily on brand recognition and word of mouth advertising to market and sell
its new product offerings. PayPal’s association with eBay and strong brand recognition were
effective marketing tools for their well-known online payment platform, however this company
image and branding does not extend to new services that are significantly different from PayPal’s
typical offerings.

The president of PayPal recently admitted that the mobile platform has not succeeded in the US 20
even as mobile financial transactions are attracting new competitors and expanding as a market
in the US and abroad 21 . While new products and services are continually being bought and
developed, it seems that these products are developed and then left unused by the majority of
PayPal users. PayPal needs to put more effort into marketing and promoting their new products
or stop wasting resources developing them.

14
http://www.techcrunch.com/2006/03/22/paypal-mobile-launches-and-its-awesome/
15
http://www.reuters.com/article/technologyNews/idUSN1840572920071119
16
http://premium.hoovers.com/subscribe/co/overview.xhtml?ID=ffffjrytrrxyjcrhxy
17
http://bits.blogs.nytimes.com/2008/12/01/paypal-brings-the-weekly-allowance-into-the-21st-century/
18
http://www.finextra.com/fullpr.asp?id=22340
19
Interview with Jeff Lowman
20
http://www.americanbanker.com/article.html?id=20080324AZ23ATWO
21
http://www.multicellphone.com/obopay-mastercard-partnership-for-mobile-payment-service/
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New opportunities / strategies for growth 
Three areas have been identified as large markets that will integrate well into PayPal’s existing
infrastructure, core competence, and value offering. These areas include:

Non-retail payments As PayPal expands to more financial services, specific solutions and fee
rates should be considered to draw in new types of transactions such as rent, professional service
fees (i.e., contractors, lawyers), and more.

Remittances As PayPal is globally available, they have the opportunity to simplify remittances
for users.

Mobile payments in emerging markets PayPal can use its mobile payment technology to
become established in new geographies where mobile phone penetration is high and non-cash
financial solutions are needed.

Non­Retail Payments Opportunities 

The identified non-retail opportunity for PayPal is the creation of payment platforms tailored for
rental payments, independent contracting payments, professional services paymentscharity
payments, etcetera. The total payment volume for contractor and attorney payments is $300B
and $240B respectively (see Exhibit 2) 22 .

Independent contractors and lawyers share a similar and unique payment structure that is based
off of an advancement of initial start up funds and incremental payments throughout the client-
customer relationship. Due to the uniqueness of this payment structure, we believe PayPal can
offer a very compelling value proposition in the contractor and lawyer payment space. Similarly,
tenants typically pay rent on a monthly basis after an initial larger security deposit.

22
See Appendix-Non-retail Payment Calculation for details of market sizing.
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Incentives for New Contracting Payment Solutions 23 

Today, contracting payments are predominantly made by check, however, there are many
incentives to switch to instant electronic payments: eliminate the need to place liens on property
while waiting for checks to clear, eliminate weekly bank runs to finance operations, eliminate
carrying large sums of cash for materials purchases, enabling electronic payment of employees
and subcontractors, and increasing accountability and documentation of contractor operations.

Incentives for New Attorney Payment Solutions 

Today, we estimate that over 40% of lawyer payments and money transfers are via check. For
smaller firms and independent lawyers that only accept check, waiting for checks to clear - or
even worse, dealing with bounced checks - hampers business. In addition, the nature of the
attorney-client interaction lends itself to a payment structure where clients are forced to make
small payments throughout the interaction, creating many opportunities for checks to bounce.
Obviously credit card payment solutions would mitigate most of this hassle, however many small
firms have not adopted this payment method due to infrequency of use. A professional payment
/ billing solution (that accepts credit card), would alleviating hassles with checks and in addition
would likely increase the perceived level of sophistication and image that the client has for the
attorney.

Incentives for new rental payment solutions 

Rent is most frequently paid by check, cash, or money order, although some landlords now offer
credit card payments in person each month or automatic debiting of the tenant’s bank account 24 .
Most of these methods either involve the tenant mailing the payment to the landlord or walking
to the rental office, both inconvenient for the tenant. The automatic debiting requires the tenant
to give out sensitive bank account information to the landlord or other party conducting the

23
We define independent contractor payments as fees paid whenever someone comes to a residence or business to
make repairs (i.e., plumbing, electrical) or modifications (i.e., remodeling, painting).
24
Stewart, Marcia. “Every Tenant’s Legal Guide.” Nolo, 2007.
9
transactions. For tenants with Internet access or home or work, paying the rent via the Internet in
a secure and optionally automatic way would simplify life.

In March 2008, 82% of households had Internet access 25 . Of the 116 million households in the
US in 2007, 69% households were owned and 31% rented (see Exhibit 3) 26 . Therefore,
approximately 35 million households pay rent.

Recommendations for new payment solutions 

Because contractors and lawyers share a similar payment structure, several payment solution
characteristics will be compelling to both customers. For example, both lawyers and contractors
would value a payment architecture with an invoice that could grow throughout the interaction
and be paid off intermittently as various fees are addressed. For the lawyer, this may be retainer
fees, billing for services, filing fees, et-cetera; for the contractor this may be advancing payments
for materials purchases, start-up costs, or weekly payments. Additionally, lawyers and
contractors might both value a platform that can store detailed records of accomplishments at
each payment step so the customer can view them in an online invoice and for record keeping.
Partnerships with shopping cart providers should ease PayPal’s burden of developing these
solutions.

A new revenue model 

These offerings would be different enough from their current products that they may require a
new revenue model tailored to suit the needs of the new customers. For example, when dealing
with large payments of over $500 per month 27 as in a typical rent or lawyer payment (see Exhibit
4 for rental costs breakdown by amount), PayPal’s current fee structure of taking a percentage of
the transaction may not be feasible. However, PayPal could set up a system that uses a larger flat
fee and required funding by debiting bank or PayPal accounts (for highest PayPal profit

25
http://www.webpronews.com/topnews/2008/05/14/18-of-us-households-have-no-internet-access
26
http://www.census.gov/population/socdemo/hh-fam/cps2007/tabH1-all.xls
27
http://factfinder.census.gov/servlet/DTTable
10
margins). This would be easy to implement with PayPal’s current infrastructure, and the added
convenience for both parties would be well worth a few dollars to customers.

Targeted marketing 

For contractors, marketing would probably be most effective in Home Depot catalogs and other
places where contractors are likely to look. Likewise, for lawyers or renters, the service could be
marketed in lawyer magazines, traditional lawyer channels and home owner magazines,
respectively. Following the early adopter phase, reference-based vertical marketing should be
used for each identified market segment. For example, in the contractor industry, the payment
solution will work for electricians, contractors, plumbers, architects, builders, etc.

Remittances 

PayPal should enter the remittance services market from the U.S. to Latin America and
Caribbean countries (LAC). Remittances from the U.S. to LAC were approximately $50 Billion
in 2007 28 and experienced a positive growth rate of 6% from 2006 to 2007 29 (see Exhibit 5).
Also, PayPal can use remittances to enter new global markets without additional product
development.

Matches Core Competencies and Goals 

Providing remittance service to LAC opens the door for PayPal to provide other services (such as
e-commerce) to LAC. This is a straightforward way to be a first-mover in these markets.

Additionally, PayPal already has extensive knowledge and technical skills needed to deal with
currency exchanges and money transfers across different countries. With these abilities, handling
remittance to LAC should pose no trouble for PayPal.

28
International Fund for Agricultural Development (IFAD) and the World Bank
29
Paulina Ibarra. US Slowdown Affects Remittances in LAC. The World Bank: April 8, 2008.
11
Factors that Facilitate Entry into Market 
30
The remittance market is highly fragmented. There are no mature markets in LAC . Besides
Mexico, the major MTOs (such as Western Union, MoneyGram, Vigo, and etc.) have less than
20% of the market. Remittances play an increasingly large role in the economies of LAC,
contributing to economic growth. Remittances receivers help increase banking, reduce poverty
31
and social inequality . Due to these benefits, many governments promote the sending of
remittance through banks.

Market Size 

PayPal’s potential market size in remittances from the U.S. to LAC is approximately $2.4 billion
after filtering out the red herring information (Exhibit 6) 32 . Estimating that PayPal will gain a
15% market share and charge a 3% fee (lower than the lowest average fee on remittances at 3.9%
in El Salvador 33 ) 34 , the revenue to PayPal would be $10.6M, (1% of PayPal’s profits now).

Additionally, the market for remittance to LAC is growing in three fronts: amount, channel, and
banks. Remittance market, even after being affected by the U.S. economic downturn, still shows
positive growth of 6% between 2006 and 2007. Second, the switch form informal channel to
formal is increasing in many of the LAC countries. Countries such as Mexico and the Dominican
35
Republic have remittance through formal channels at a rate of 85% and above . Lastly, there is a
rise in the number of remittances performed through banks, which corresponds to increasing

30
Manuel Orozco. The Remittance Marketplace: Prices, Policy and Financial Institutions. Georgetown University:
June 2004.
31
Conference Report: Research on Remittances to Latin America and the Caribbean. Inter-American Dialogue:
March 14, 2007
32
Of the $50 billion in remittance, approximately 43% is actually performed through formal channels32. Within this
43%, the average number of transactions remitted through banks is about 11%
33
USD 2.4B in remittance, the average cost of remittance ranges from as low as 3.9% in El Salvador to about
11.66% in Barbados (with an average of 8.25%, see Exhibit 9)
34
Manuel Orozco. The Local Economy and Local Governments’ Responses to Remittances in Latin America ad the
Caribbean. Inter-America Dialogue: June 2008.
35
Lenora Suki. Competition and Remittances in Latin America: Lower Prices and More Efficient Markets.
Columbia University: February 2007.
12
number of receivers who own bank accounts. As shown in exhibit 9, in countries such as
Dominican Republic, Guyana, and Haiti, more than 60% of recipients of remittances have bank
accounts.

We have analyzed the sensitivity of PayPal’s potential revenues to factors such as changing in
overall remittance market size, formal channels usage, bank usage, PayPal’s market penetration
and fees is shown in Appendix . It is surprising to see that PayPal’s potential revenue is most
sensitive to changes in number of remittance through banks. A 1% increase in bank usage will
result in a 9% increase in revenue or $6.7M for PayPal. This is very good for PayPal because
many governments of LAC countries are working together with the U.S. to educate, facilitate,
and improve remittance channels, especially banking channels. Programs such as the New
Alliance Task Force (NATF) have been created in the US to increase the amount of immigrants
36
with bank accounts and promote financial education among these communities. Moreover, to
solve the problem faced by the migrant workers related to inaccessible to formal channels due to
the lack of accepted identification documents, new identification cards have issued by the LAC
countries. All these programs work to both encourage the migrant workers to send money
through formal channels and increase their enrollment in bank accounts. These help expand the
part of remittance market that PayPal can enter.

Recommendation to PayPal Regarding Remittance 

In order for PayPal to successfully enter this market, we have two recommendations. First, enter
countries with high remittance fees and a high percentage of population with bank accounts
(mainly because PayPal will only consider markets where the financial institutions are already in
place 37 ). Table below is a list of countries that PayPal should consider based on these two
criteria.

36
United States Government Accountability Office. International Remittances: Information on Products, Costs, and
Consumer Disclosures. Report to the Committee on Banking, Housing, and Urban Affairs, U.S. Senate: November
2005.
37
Interview with Jeff Loman, a global strategist working at PayPal Nov 2008 
13
 Remittance Average Transfer Annual Volume Recipients with
Fees (%) (USD) (USD in M) Bank Account (%)
Dominican Republic 6.4 176.00 2,410 66
Jamaica 8.2 209.00 1,651 65
Guyana 10.14 179.00 270 62
Haiti 6.7 123.00 985 68.4

Moreover PayPal needs to develop relationships with banks and credit unions in the developing
countries through revenue sharing, technology transfer, and/or partnership. 86% of the
remittances that are distributed in LAC region are cash payment picked up at office, branch, or
other distribution points (see Exhibit 11). Only 4% is direct credit to an account. Therefore, in
order to succeed in these developing countries, PayPal would require the financial institution to
serve as a distribution channel.

Mobile Payment in Emerging Markets 

The slow adoption of PayPal Mobile in the US market does not imply that the mobile payments
business is not promising. According to a study made by Gartner there is still huge growth
expected – Mobile payment is a service at an early stage with an expected 32.9 million users
worldwide in 2008, growing to 103.9 million users in 2011 38 . In this same study, Gartner also
notes that:

"The service [mobile payments] is easier to justify in emerging markets, where many people are
unbanked or underbanked, and there are few payment options...In developed markets banks
should be aware of alternative services from nonbanking institutions, such as PayPal and
Obopay, that can compete on lower fees and faster transactions and that are more proactive on
the mobile front”

Therefore, we believe that PayPal should consider launching its mobile payment proposal in a
market that embraces this technology and that has a higher need for this service than the US.

38
Gartner, "Dataquest Insight: Mobile Payment, 2006-2011"
14
Asia/pacific accounts for 85% of the total mobile payment users in the world and will be the
highest growing region in the next years.

Every participant that wants to be a relevant player in mobile payments should be in Asia that is
why we recommend that PayPal focus in this market.

There are basically two different technologies to make mobile payments 39 , Near Field
Communications (NFC) and SMS. NFC is a technology based in RFID that requires implants in
the handset and the merchant’s POS to make the transaction and it is usually used for retail and
transportation payments. The technology is advanced but its business model is relatively
complex to implement because it requires the alignment of different players. An SMS-based
service is simpler to deploy because it does not require a special handset it only requires the
negotiation of usage of mobile operator’s network. SMS PayPal’s technology is SMS based
which is also the leading technology for P2P payments, buying entertainment content and some
mobile banking services. To determine which market to enter is important to consider the
technology they use and the need of a P2P service.

There are 4 different segments of countries in the Asia/Pacific region 40 :

The leaders: Japan and Korea

The mobile tigers: Hong Kong, Singapore and Taiwan

The mid-market: Thailand and Malaysia

The giants: China, India, Philippines and Indonesia

Japan and Korea were early adopters of mobile technology and similarly of mobile payments.
These are mature markets where there are strong established players and where NFC is highly

39
http://takemetoyourleader.com.Present and Future of Mobile Payments, August 29, 2008, Rob Gonda

40
KPMG, Mobile Payments in Asia Pacific, 2007
15
implemented and dominated by a few operators. There is little room for PayPal in this market
because the incumbents are very strong, the market adopts cutting edge technologies and P2P
transactions don’t have much traction.

The mobile tigers are the most highly mobile penetrated countries in the world but have little
adoption of mobile payments, just NFC for transportation services and for some retail stores.
These are also mature markets that have demonstrated little interest in mobile payments and
where users are not looking for new payment methods besides the traditional ones.

The mid markets are starting to adopt NFC technology and are focusing more on bill payments
and mobile banking. There is a growing opportunity for Person-to-Person payments and content
distribution but these markets are small and there would not be much scale to put some effort in
developing the mobile payments business.

India and China have a large number of mobile subscribers and therefore a large potential for
mobile payments, Philippines and Indonesia have a large number of users of SMS. In this
segment is where the opportunity for PayPal resides, specifically in China and India.

Philippines is already doing a lot of use of SMS payments but it has rooted players in the
business and therefore is difficult for a new entrant to gain market share. Indonesia represents a
large opportunity because there is interest in moving further in mobile payments adoption but
this country is highly risky because it has the largest number of fraudulent electronic transactions
in the world.

Both China and India represent the most attractive markets. First, their size represents a huge
opportunity – China has around 600 million mobile users while India accounts for 315 million.
Second, there is a real need for person to person mobile services because both countries have low
banking adoption, most of the transactions are cash-based and there is huge commerce activity
between people in far away regions – China has 73 ATMs per million people, India has 25
16
compared with the US that has 1,353 – China has 457 Point of Sale Systems per million people,
India has 270 and the US has 8,647.

However, given the failure that PayPal already had in China with its online payments attempt,
the strong positioning of the local players and the difficult regulatory environment of the
country, we would recommend that PayPal enters the Indian market. India represents a larger
opportunity of people outside of the banking system with less payment options and it is a good
fit for PayPal because it can leverage its brand since it is already a player in the online payments
business.

Obopay, an American player in this arena already entered the Indian market this year, which we
also think is a good sign. But for this same reason and the fact that this business relies in building
a huge network of users in a timely manner, we believe that PayPal should move fast into
aligning Indian mobile operators and banks to have a sound start.

Conclusions 
PayPal is in an excellent position to develop compelling electronic payment solutions for several
large and growing markets. Non-retail payments: interactions where large amounts of money are
transferred in a unique billing/payment structure (for example, lawyers, contractors, rent) are
opportunities where PayPal has the ability to develop extremely attractive payment solutions and
leverage its trusted brand name to help with product launch and marketing. Emerging market
mobile payments: as emerging markets leapfrog traditional payment methods and embrace the
convergence of applications into the phone, there will be a huge opportunity to spread a mobile
payments solution around the world. PayPal can leverage its brand as a trusted player in the
online payments business to help align the mobile operators and banks that will be required for
these initiatives to be successful. Remittance: PayPal’s end goal is to have a presence in the Latin
America and Caribbean countries and to serve the e-commerce in these locations. Remittance,
not only can act as a bridge to this goal, but also it can be a significant source of revenue at the
present time. Building from PayPal’s existing electronic fund transfer infrastructure, PayPal can
lower the cost of remittance for end users.
17
In the past, PayPal’s non-traditional offerings have had difficulty gaining traction. To succeed in
the future, PayPal will have to re-think its practice of relying mostly on branding and word of
mouth advertising to launch and market its new offerings. In addition, as PayPal moves into
international markets, the company must be poised for market research due diligence; the
mistakes from the China expansion showed firsthand the value of understanding the culture and
buying behavior in the markets they wish to penetrate.

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Appendix 
Non­retail Payment Calculations 

Contractor payments US market 

I. Estimate of number of contractor market size (US):

There are currently 316k licensed contractors in CA 41 . The population of CA is estimated at

37M, therefore approximately 1 in 120 CA residents is a licensed contractor. Assuming 300M
people live the US 42 , we can use the above 1/120 ratio to approximate the number of independent
contractors in the US; the answer is 2.5M.

II. Estimate of contractor payment market size (US):

• 2.5M licensed contractors
• $60k average contractor salary 43 (labor costs)
• Estimate that labor and material costs are equal (conservative)
• 2.5M*$60k*2 = $300B US market for contractor payments.

Attorney payments US market  
•
Approximately 1.1M active lawyers in US 44
• 2k billable hours per year (40x50)
• Estimate 60% occupancy
•
$300 per hour average bill rate 45
• 1.1M*2k*$300*0.6 = $400B US market for attorney payments
• Assume 60% of lawyers’ services are monetized by hourly billing
• $240B market for client to lawyer payments with check/credit card.

41
http://www.cslb.ca.gov/
42
http://quickfacts.census.gov/qfd/states/06000.html
43
http://www.simplyhired.com/a/salary/search/q-Independent+Contractors/l-Anaheim,+CA
44
http://www.abanet.org/
45
Laffey Matrix: http://en.wikipedia.org/wiki/Laffey_Matrix
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Tax preparation payments US market 
•
155M individual Federal returns filed in 2008 46
•
80% returns done professionally (125M) 47
•
$300 average filing fee 48
• 125M*$300 = $37B market
• 40% of TPV is channeled through ''check only" firms
• $15B market size for "check only" based tax preparers
• $22B market size for "check + credit card" based tax preparers

PayPal’s Potential Revenue Sensitivity to Market Conditions in the 
Remittance Market 

46
http://www.irs.gov/newsroom/article/0,,id=188359,00.html. 30M out of 155M are e-filed from the home with
software like "TurboTax".
47
http://www.irs.gov/newsroom/article/0,,id=188359,00.html. 30M out of 155M are e-filed from the home with
software like "TurboTax".
48
Bruce Moeller, CPA, J.D 394 Bell Marin Keys Blvd. Suite 1, Novato, CA 94949
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21
 Exhibits 
Exhibit 1. 2005 – 2008Q3 PayPal Performance

Exhibit 2. Market Size of non-retail payment in the US. (All assumptions used to generate
these data are listed in the Non-retail Payment Calculation in Appendix)

Exhibit 3. U.S. Households breakdown by Tenure for 2007.

US Households by Tenure 2007

1%

30%

Own/Buying
Rent
No Cash Rent

69%

22
Exhibit 4. U.S. households breakdown by Rental Costs per Month for 2005.

Households by Rental Costs Per

Month 2005

6% 7%

15%
18% Below $250
$250- $500
$500-$1000
$1000-$1500
$1,500 or more

54%

Exhibit 5: Remittance from the U.S. to Latin America and the Caribbean in (US$ Million) in
2007. The figure is taken from Inter-American Development Bank’s Multilateral Investment
Fund (IDB-MIF).

23
Exhibit 6: The growth and the nominal amount of remittance from the U.S. to LAC countries.
Picture taken from Remittances Ebb and Flow with the Immigration Tide by Federico S.
Mandelman, ECON South: Volume 10, Number 3, Third Quarter 2008.

Exhibit 7: Process steps for remittance through formal channel from U.S. to Latin countries.
Picture taken from The Remittance Marketplace: Prices, Policy and Financial Institutions by Dr.
Manuel Orozco at George Town University: June 7, 2004.

24
Exhibit 8: Survey of Latinos remitting to Latin America in July 2007. Table taken from
Toward the mainstream: current trends and dynamics of remittances to Latin America and the
Caribbean by Manuel Orozco. Inter-American Dialogue: February 2008.

Exhibit 9: Remittance transfers details broken down for each LAC countries. Data collected by
Central Banks of each country and World Bank Development Indicators (* 2005; ** 2003 data).
The Local Economy and Local Governments’ Responses to Remittances in Latin America and
the Caribbean. Inter-America Dialogue: June 2008.

25
Exhibit 10: Table showing remittance and other indicator. Table taken from Toward the
mainstream: current trends and dynamics of remittances to Latin America and the Caribbean by
Manuel Orozco. Inter-American Dialogue: February 2008.

Exhibit 11: Remittance distribution in LAC region. Picture taken from Competition and
Remittances in Latin America: Lower Prices and More Efficient Markets by Lenora Suki.
Columbia University: February 2007.

 
26
Exhibit 12: Mobile payment users share - worldwide estimated for 2008. Values take from
Gartner, "Dataquest Insight: Mobile Payment, 2006-2011"

World Mobile Payment Users Share ‐ 2008

1%
3% 11%

Asia/Pacific
U.S.
W. Europe
Others

85%

27