Payment Options and Online Services - Peer-to-peer Payment

PEER-TO-PEER PAYMENT

Other than credit card transactions, the most popular online payment option is the peer-to-peer (P2P) option by which individuals can send one another payment via a third party. PayPal is the leader in this category, boasting the largest Internet-based payment network in the world with roughly 8 million customers. Founded in November of 1999, PayPal began to attract attention from the millions of users buying and selling merchandise on auction site eBay. By March of 2000, when PayPal merged with online banker X.com, the firm was signing up nearly 15,000 newclients a day.

To sign up for online payment services, PayPal customers are required to key their name, daytime phone number, home address, and email address into an online form. Users can opt to charge purchases to a credit card, or they can provide PayPal with the account information necessary to allow PayPal to withdraw funds from a bank account. Once their account is activated, PayPal members can send funds to any other PayPal account holder via an automated email message with the subject line, "You've Got Cash!" Compared to the 2.9 percent monthly fee typically charged by credit card firms, along with an additional charge of 30 cents per transaction, PayPal simply charges 1.9 percent of each transaction completed for e-businesses bringing in more than $100 per month.

In June of 2000 PayPal diversified into payments between businesses and consumers (B2C). The firm also began allowing clients to conduct transactions via cell phones. P2P customers exceeded 3 million in August. When PayPal began focusing on business-to-business (B2B) payments, the value of transactions conducted via the firm multiplied, prompting the launch of fraud protection services, similar to that offered by credit card companies. As part of its new Cybersource Fraud Scan, the firm also established a member information guide, to allow buyers to verify that sellers had been reviewed by the firm.

By the year's end PayPal had secured 4 million P2P customers and conducted nearly 50 percent of the transactions competed on eBay, more than conducted by eBay's own payment service, Billpoint Inc. International expansion efforts included allowing Internet users outside the U.S. open PayPal accounts. By March of 2001, PayPal offered e-mail based payment services in 26 countries. To help shoppers more easily find merchants that supported PayPal transactions, the firm compiled a listing of 5,600 "PayPal Shops," which it posted on its Web site. Hoping to entice more customers to abandon their credit cards in favor of P2P online services, PayPal began paying interest on funds deposited into a PayPal account.

Although PayPal was the first firm to gain critical mass in the online payment arena, a P2P payment competitor emerged in March of 2001. Banking and insurance behemoth Citigroup joined forces with Microsoft Corp. to offer its c2it online payment service on Microsoft's MSN.com Internet gateway. With a daily visitor rate of roughly 7 million, MSN.com hoped it would quickly attract a large base of c2it clients.

In 2001, Gartner Group predicted that debit cards, such as those offered by InternetCash, would be the payment method used by roughly 30 percent of all online purchases by 2003. With roughly 10 million individuals online without credit cards, the potential for alternative online payment methods certainly seems promising.