PayPal is considered the world’s largest debit electronic payment system. But is PayPal a fintech company? This article provides a clear and concise overview of the history of creation and operations of this service to help you better understand its significance and principles.
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Is PayPal a fintech?
The activities of the electronic payment system PayPal fall within the sector of financial technology, or fintech. Therefore, it can and should be considered a fintech.
PayPal provides customers with services for sending and receiving money online without the need for bank accounts or credit cards. The main innovative financial technology used by the company is peer-to-peer (P2P) banking. This is what sets PayPal apart from many other popular online payment operators.
The founders of PayPal created special software for encrypting financial transfers between individuals using electronic devices.
To describe this technology in simple terms, the payment system has a database of customer accounts created by the customers themselves during registration. All electronic money transfers are made directly between them without the involvement of any bank as an intermediary. Thanks to this, transfers are made quickly with just one click on the site or in the app.
It should be noted that PayPal was among the first to offer one-click payments in the mass market.
All of the above describes financial technology, making PayPal a fintech company. Moreover, the international FinTech magazine ranked PayPal first in its list of the top 100 fintech companies of 2022.
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History of PayPal
Elon Musk was one of the co-founders of PayPal, along with other dollar billionaires from the founding team, such as Peter Thiel, Max Levchin, and others.
The story of PayPal’s creation began in 1998 when a team of technologists from Silicon Valley founded the company Confinity, which developed software specializing in cryptography. One of the team members was the famous billionaire of Ukrainian origin, Max Levchin.
By the end of 1999, the young technologists from Confinity released their main product under the PayPal brand. In the same year, Elon Musk founded the online bank X.com in California. The two American fintech companies competed with each other. However, in the middle of 2000, they merged. Until June 2001, the new venture used the old Musk’s company name – X.com. After the merger of PayPal and X.com, Elon Musk was fired as CEO due to management’s behind-the-scenes maneuvers. Eventually, the company was renamed PayPal and became one of the most successful payment systems in the world.
The initial rapid growth of the electronic payment system occurred thanks to servicing electronic auctions on eBay. In 2002, PayPal made an IPO on the NASDAQ stock exchange. Public trading in shares helped the company significantly increase its capitalization. By the end of 2002, PayPal shares had increased in price by 55%. At that time, this indicator was called phenomenal growth in the fintech sector.
eBay Corporation decided to reduce its expenses on payment system services and acquired PayPal in October 2002, paying USD 1.5 billion for the deal. Elon Musk, as a witness, received USD 176 million, while Max Levchin received only USD 34 million. As it is known, Musk spent his money on founding the space company SpaceX and investing in the electric car manufacturer Tesla Motors. Levchin eventually created another fintech company called Affirm. After its public listings, the Ukrainian programmer became a dollar billionaire.
In 2015, PayPal spun off from eBay. The fintech project had already tripled its former parent company in terms of market capitalization, which today amounts to USD 86 billion. But this is not the limit. At the beginning of 2022, PayPal’s value was estimated at USD 210 billion.
Nowadays, the total number of PayPal users worldwide exceeds 392 million people. The company’s payment services for purchases are used by many online stores and auctions, including eBay and Amazon.
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How does PayPal process payments?
To create a PayPal account, new users need to register by providing their email address and password. Afterward, the client is prompted to link their bank account or credit card to their account, which enables them to create and process payments using PayPal balance.
PayPal’s peer-to-peer banking technology allows for money transfers within the PayPal system by simply specifying the recipient’s email address. This is where fintech’s advantages lie. Once the recipient receives the notification, they can follow the instructions to receive the money and withdraw it to their bank account. The PayPal system enables such operations to be carried out quickly and conveniently, with a minimal fee.
As a security measure, PayPal offers two-factor authentication and password encryption. The payment system does not store clients’ full credit card numbers and bank account information on its servers, thus ensuring the protection of banking information.
On partnering e-commerce platforms, PayPal fintech clients are also protected by such technologies:
- SSL encryption
- firewall protection
- stringent website security protocols.
PayPal earns revenue from fees charged to clients for conducting transactions. However, if funds are transferred between clients within the system using PayPal balances, this service is provided free of charge. In other cases, the fee is at least 2%, which is still lower than that of international payment systems Visa and MasterCard.
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