More on PayPal

Earlier this week I wrote about the limitations of PayPal. Interesting to read the following among PayPal’s SEC filings:

In late 2000, MasterCard indicated it would terminate PayPal’s ability to accept MasterCard cards for payment if we did not change some of our practices and procedures immediately. We and our credit card processor had a series of meetings with MasterCard to discuss how to bring our practices and procedures into compliance. As a result of those meetings, we made changes to our system that we believe resolved MasterCard’s concerns, but MasterCard has not communicated to us that its concerns have been fully resolved. In 2001, Visa informed our credit card processor that some of our practices violated its operating rules, and we made certain changes to our practices in response. In a letter dated January 25, 2002, Visa informed our credit card processor that three issues remain unresolved and, as a result, fined our processor $30,000. Our processor charged us for the full amount of the fine imposed on them. Specifically, Visa objected to our charging and immediately rebating international membership fees, and to our charging fees to international customers for payments that are funded using credit cards, but not for payments that are funded from balances in the PayPal system. Visa also objected to our practice of obtaining a card holder’s single up-front authorization, rather than authorization on a transaction by transaction basis, to charge that card holder’s Visa account if the card holder requests an ACH transfer and that transfer fails. We are continuing our efforts to resolve Visa’s concerns. Although Visa has not threatened to suspend, terminate or otherwise limit or restrict our ability to accept Visa cards, we have proposed to change our current practices to resolve these three outstanding issues. These changes include not rebating international membership fees, charging fees to recipients of cross-border payments rather than to international senders, and seeking authorization on a transaction by transaction basis to charge a card holder’s Visa account if a related ACH transfer fails. As is the case with any merchant that Visa believes is violating its operating rules, however, Visa could terminate our ability to accept Visa cards for payment or levy additional fines against us if we do not resolve Visa’s concerns.

That seems to suggest that their entire business model is quite vulnerable to the whims of Visa and MasterCard, something confirmed later on in the same filing:

Changes to card association rules and practices, or excessive charge-backs, could result in a termination of our ability to accept credit cards. If we are unable to accept credit cards, our competitive position would be damaged seriously.

More foreboding (but pleasantly honest at least) is this statement:

We have limited experience in managing and accounting accurately for large amounts of customer funds. Our failure to manage these funds properly would harm our business.

And then there’s the corker:

We have a limited operating history, are not currently profitable and may not become profitable. If we never become profitable, our stock price would decline.

That’s a very nice summary of the last 5 years, isn’t it?