PayPal Sees Torrid Growth With Money-Sending Service By JATHON SAPSFORD Staff Reporter of THE WALL STREET JOURNAL If your acquaintances are even slightly tech-savvy, it may not be long before somebody beams money into your e-mail in-box. Don't delete it. The money's good. It's all part of a new online payment system called PayPal.com (www.paypal.com), and it's growing by 9,000 new users a day just three months after its official launch. The system responds to many of the needs that led to the creation of virtual currencies with names like "beenz" and "Bippy dollars." But PayPal uses real dollars. And now, instead of just techno-nerds, the service is attracting mainstream users. Driving PayPal's torrid growth is a simple joining of two proven technologies: e-mail and the credit-card network. Registered users can send a payment to anybody with an e-mail address just by writing a dollar amount into an online form. When the e-mail is sent, the payment is charged to the sender's credit card or bank account. Registration takes five minutes. If the person on the other end isn't a registered PayPal user, that's OK. The receiver just fills out the form attached to the e-payment to tap the money, which is already waiting in a PayPal.com account in the receiver's name. Completing the form also registers the receiver as a user. "This is what people in technology call a viral product," says Peter Thiel, the chief executive of PayPal.com. "It's easier than catching a cold. And it is spreading as fast as a virus." Taking the money out of the system isn't as quick. PayPal will cut a check and send it to you through the regular mail, credit it to your credit card or transfer it into your bank account -- all of which can take up to a week. But the big fans of the system keep the money in their accounts to use again. That last option is the key to how PayPal hopes to thrive. The PayPal account doesn't provide interest, so PayPal can invest any money left there until the user wants to spend it. If PayPal keeps growing at its current rate, the company hopes it will soon manage enough customer money to both make a profit and absorb all the fees involved in credit-card transactions. For now, the PayPal service is free, and Mr. Thiel says the company has no intention of ever charging its customers. Among PayPal's most common uses is the cybersettling of accounts between family and friends. Andrew Brenner, for example, a 31-year-old tech-industry employee, recently threw a big barbecue party with friends. Afterward, he e-mailed $83 to pay his buddy for his share of the burgers and beer. A few weeks later, another friend was short the cash for his share of a fish dinner at a Palo Alto, Calif., restaurant. Mr. Brenner knew that his buddy did have a hand-held computer with e-mail capacity. So right there in the restaurant, over the remains of prawns and swordfish, Mr. Brenner asked his friend to send him an e-mail for $20. As the friend sent the e-payment over the red-checkered tablecloth, Mr. Brenner paid the bill knowing his friend's share would be in his account at PayPal. "PayPal is replacing currency," says Mr. Brenner flatly. "This is becoming the payment service of the Internet." Some heavy hitters in venture capital agree. Wall Street's Goldman Sachs Group Inc., together with a fund tied to the West Coast Web incubator idealab!, recently invested $23 million in PayPal.com during its second round of venture financing. Its first round came from Nokia Corp., the Finnish mobile phone giant, and Deutsche Bank AG of Germany. Before that, the company was working with seed money from individuals and a hedge fund run by the current chief executive, Mr. Thiel. Mr. Thiel, a blond 32-year-old who says "awesome" a lot, graduated from Stanford Law School in 1992 and soon joined the Wall Street law firm of Sullivan & Cromwell. A year later he joined CS First Boston, where he traded currencies for a few years. By 1996 he had moved back out to his native California to start up his own hedge fund. In 1998, he met PayPal's chief technology officer, Max Levchin, who wanted to launch a venture that provided encryption technology. Mr. Thiel's hedge fund bought into the idea, and Mr. Thiel joined the new venture himself as CEO. Launched in December 1998 under the name Confiniti, the company focused on providing financial institutions with the technology to make online and mobile transactions secure. But the start-up soon saw the huge demand for secure payment systems on the Web. When the new company hit on combining the credit-card network with e-mail and launched the PayPal service, more investors started to take note. Now, Confiniti is in the process of changing its corporate name to PayPal, and Mr. Thiel is giving a lot of the company's money away. That's because PayPal provides a virtual $10 coupon to any user who signs up a friend -- and gives the friend a $10 coupon as well. In other words, it costs PayPal $20 for each new user, or $2 million for 100,000. Mr. Thiel says the approach is much more effective -- and a lot cheaper -- than buying a 30-second ad during the Super Bowl. Other companies have also deployed or are working on online payment, including eBay Inc. and CheckFree Holdings Inc. Since PayPal's launch, 190,000 users have signed up, and 9,000 or more new users are signing up each day. Some investors value Web-based financial-services companies at $1,000 to $10,000 a customer. Using the middle of that range, PayPal's franchise would now be valued at around $500 million. The product is a particular boon for online auction denizens because it cuts out the risks of being paid by check through the mail. Lisette McConnell, a 33-year-old graphic designer, sells custom-designed neckties on eBay. She has trusted buyers before, sending goods before checks cleared, only to find out the check wasn't any good. Other merchants spend thousands of dollars and per-transaction fees to be able to accept credit cards. But PayPal makes all that unnecessary. "It's like air money," Ms. McConnell says. There are limitations on bigger transactions, in order to combat fraud and hackers. Cathy Rowekamp, 48 years old, of Winnsboro, S.C., sells antiques online. Once shipping charges are thrown in, her prices are in the thousands of dollars. Buyers of her chests, dressers and rockers must get a form from PayPal through the mail confirming their street address to conduct transactions larger than $200. That's supposed to take only a matter of days, but the turbo-charged growth at the company has caused delays, all of which Ms. Rowekamp is finding frustrating. "I want it to work so bad," she says. One user, Jim Bruene, had his payments frozen when he tried to get around the limit. The publisher of a financial newsletter called Online Banking Report, he sent a freelance reporter several e-payments that totaled more than $200. But the PayPal fraud alarms kicked off, and Mr. Bruene's money was tied up for weeks. "If you're a consumer and a couple thousand dollars disappeared for two weeks, you probably wouldn't want to use" the service again, Mr. Bruene says. "Sometimes I worry that we're too obsessed with security," concedes Mr. Thiel. Other online payment systems have received bad press over lax security. But long before last week's hacking attacks, PayPal sought to keep its system secure by hiring a board of advisers staffed with heavyweights in encryption technology. One is Stanford University Prof. Martin Hellman, one of the brains behind the most commonly used form of encryption on the Internet. Another is Stanford Prof. Dan Boneh, who leads a team of researchers who specialize in code breaking. To fire off payments for anything more than $200, a consumer must wait for PayPal to send through the mail an address confirmation, which has a coded approval number. Only after keying in that number can consumers make larger payments online. "Fraud protection is a trade-off," says Mr. Thiel. "If you make it totally airtight, it becomes less user-friendly." __________________________________________________ Do You Yahoo!? Talk to your friends online with Yahoo! Messenger. http://im.yahoo.com
