2. 20-763 ELECTRONIC PAYMENT SYSTEMSFALL 2001COPYRIGHT © 2001 MICHAEL I. SHAMOS Electronic Payment Systems 20-763 Lecture 12 Peer-to-Peer Systems

3. 20-763 ELECTRONIC PAYMENT SYSTEMSFALL 2001COPYRIGHT © 2001 MICHAEL I. SHAMOS Peer-to-Peer (P2P) Concepts P2P –payments not involving a bank –payments “directly” between payor and payee –classic example: cash –transfers between digital wallets –purchasing online content –micropayments Distinguish between P2P payments and P2P technology –Napster, Gnutella Someday we may use P2P technology for P2P payments

4. 20-763 ELECTRONIC PAYMENT SYSTEMSFALL 2001COPYRIGHT © 2001 MICHAEL I. SHAMOS PayPal Structure x.com PayPal Private Bank X.COM’s BANK INTERACTS WITH BANKING SYSTEM THROUGH ACH USED FOR ACCOUNTING PURPOSES ONLY NO MOVEMENT OF REAL MONEY PRIVATELY HELD COMPANY ALSO OWNS A BANK User User’s Bank USER INTERACTS WITH PAYPAL THROUGH BROWSER BETWEEN TWO PAYPAL USERS, TRANSACTIONS ARE PURELY BOOK ENTRIES IF REAL MONEY MUST MOVE, PAYPAL SENDS INSTRUCTIONS TO ITS BANK USER MAINTAINS NORMAL RELATIONS WITH HIS BANK

5. 20-763 ELECTRONIC PAYMENT SYSTEMSFALL 2001COPYRIGHT © 2001 MICHAEL I. SHAMOS PayPal ACCOUNT HOLDER A ACCOUNT HOLDER A’S BANK ACCOUNT HOLDER X PAYPAL ACCOUNT A... ACCOUNT X ACCOUNT HOLDER X’S BANK ACH PROCESSOR ACCOUNT HOLDER A’S CREDIT CARD INTERNET EMAIL PAYPAL’S BANK 1. A PAYS X VIA PAYPAL (A HAS ENOUGH IN PAYPAL ACCOUNT) 6. PAYPAL NOTIFIES X OF PAYMENT. X CHOOSES PAYMENT METHOD 2. OR: PAYPAL CHARGES X’S CREDIT CARD 3. OR: PAYPAL INITIATES ACH DEBIT 4. FUNDS ARE DEPOSITED IN PAYPAL’S BANK 7. OR: PAYPAL INITIATES ACH CREDIT 5. PAYPAL CREDITS X’S PAYPAL ACCOUNT 8. OR: PAYPAL MAILS CHECK TO X

6. 20-763 ELECTRONIC PAYMENT SYSTEMSFALL 2001COPYRIGHT © 2001 MICHAEL I. SHAMOS PayPal Concepts Merchants pay low fees; individuals pay nothing Interest paid on deposits Mass (bulk) payments Business model: fees + float Relationship with eBay Mobile payments possible What would happen if PayPal could be used for everything?

7. 20-763 ELECTRONIC PAYMENT SYSTEMSFALL 2001COPYRIGHT © 2001 MICHAEL I. SHAMOS PayPal Fees SOURCE: PAYPALPAYPAL

8. 20-763 ELECTRONIC PAYMENT SYSTEMSFALL 2001COPYRIGHT © 2001 MICHAEL I. SHAMOS PayPal and Foreign Exchange x.com PayPal U.S. U.S. User U.S. User’s Bank PayPal U.K. U.K. PayPal Bank U.S. PayPal £ Acct U.K. User’s Bank U.K. User $ £ U.K. PayPal Bank U.K. PayPal $ Acct

9. 20-763 ELECTRONIC PAYMENT SYSTEMSFALL 2001COPYRIGHT © 2001 MICHAEL I. SHAMOS PayPal IPO (Ticker: PYPL) PayPal filed for $80.5M public offering Sept. 2001 Number of depositors: 10M, 90% market share No one else has more than 100,000 (less than 1%) Bank of America (largest in U.S.) has 3M regular depositors Search for “We accept PayPal” gave 18,500 hits Year 2000 revenue: $14.5M, lost $170M Never a profit; cumulative losses $213M Daily volume: 165,000 payments Annualized volume of payments handled: $3B Total number of Silicon Valley IPOs in 2001: 5

10. 20-763 ELECTRONIC PAYMENT SYSTEMSFALL 2001COPYRIGHT © 2001 MICHAEL I. SHAMOS Email Payments Market SOURCE: CELENT.COMCELENT.COM

11. 20-763 ELECTRONIC PAYMENT SYSTEMSFALL 2001COPYRIGHT © 2001 MICHAEL I. SHAMOS Email Payments Growth SOURCE: CERTAPAYCERTAPAY

12. 20-763 ELECTRONIC PAYMENT SYSTEMSFALL 2001COPYRIGHT © 2001 MICHAEL I. SHAMOS Q A &