PayPal faces challenges in growth plan

Since December, Safran has used PayPal to handle cash transfers and process credit card payments for the sock monkey dolls and other primate-inspired items he sells at his Monkeygoods.com Internet store.

But because PayPal forces prospective customers to its own site to complete their purchases, some give up in apparent frustration--costing him sales, he said.

"What would be perfect for me is if the user never had to leave my site," said Safran, a Reseda, Calif.-based Web developer.

He also said he would like to see PayPal work better with his e-commerce software. Safran and other Internet merchants are raising issues like these as PayPal tries to diversify its user base beyond eBay's online auction community, which accounted for nearly 70 percent of the $2.8 billion in payments it processed in the second quarter.

eBay said this summer it is investing heavily to expand PayPal's reach, both off-EBay and internationally.

Matthew Bannick, an eBay executive who has run PayPal since it was acquired about a year ago, said the company is working to make the payment flow more seamless for buyers and online merchants. He hopes to deliver a solution in a matter of months.

Although eBay shares have more than doubled since last October on a split-adjusted basis, investors still have high expectations for the company, which plans to continue delivering explosive revenue and earnings growth via its online auctions and PayPal.

Personal trainers, resort hotels in Mexico and pop star Madonna's Maverick Records are among those testing or using PayPal, said company executives, who see huge opportunities to do business with smaller merchants outside eBay's orbit.

"We're seeing nice growth in that segment," Bannick said, even though the company has just begun active marketing to new users.

Jewelry designer Tara Hunter, who uses PayPal for her Revealjewelry.com site, said PayPal is still fighting an old nemesis: consumer fears about entering credit card or bank account information on the Web to pay for purchases.

"It's intimidating," she said. "For first-time (buyers), it can be a little much."

Still, Hunter said PayPal hits the mark on the pricing side, particularly for very small businesses like hers. "I really couldn't afford to do it any other way," she said.

On the other hand, Safran said the cost of using PayPal works out to be about the same, if not a bit more in some cases, than running credit cards on his site.

Nevertheless, he said PayPal allows him to offer the variety of payment options that customers want. "The more you're willing to accept, the more likely you are to make a sale," he said.

PayPal is the No. 1 service of its kind, but rivals include Citibank's c2it service and Wells Fargo's SecureSource. Other providers of credit and debit cards services as well as online transfers also could turn up the pressure, analysts said.

Aaron McPherson, a research manager at IDC's Financial Insights group, said PayPal should continue to lead, unless its competitors give Web merchants a less expensive way to process credit cards.

If that happens, McPherson said, "that's the end of PayPal."

But for now, PayPal says its biggest competition continues to come from checks and money orders.

Story Copyright  © 2003 Reuters Limited.  All rights reserved.