PayPal at a crossroads?

After three years of rapid growth, the PayPal online payments service is at a crossroads.

PayPal, which now tops 13 million customers, reached operating profitability at the end of 2001. Last month, the company followed with a successful initial public offering, one of the first Internet-related IPOs in recent memory.

But PayPal's notoriety has also drawn increasing scrutiny. A lawsuit by online security company CertCo charging patent infringement forced PayPal to delay its IPO. Since then, plaintiffs' lawyers have filed two class-action suits against the Palo Alto, Calif.-based company on behalf of disgruntled customers. Separately, state banking regulators from California, New York, Idaho and Louisiana have raised questions about whether PayPal is operating an unauthorized bank or money-transmitting service.

Is it a bank? PayPal says no, though regulators have not yet weighed in with a final determination. With the company's post-IPO quiet period now ended, PayPal Chief Executive Peter Thiel spoke with CNET News.com about this and other challenges facing the fast-moving upstart.

Q: What are your near-term goals for PayPal?
A: Well, our goal, in some ways, is just to have the company continue doing as well as we have been doing, to not have anything go wrong. To keep doing what we're doing well.

How are you going to deal with the regulatory issues surrounding PayPal?
There are obviously regulatory issues that people have raised about our business--about whether we should be regulated like a bank. I think we are big enough that we've gotten the attention of a lot of people. We've got to provide an assurance to customers that we are not some sort of high-risk bank that loses lots of money.

Is PayPal going to be regulated as a bank?
Our view is that we are not a bank. We did a release about an advisory opinion issued by the FDIC (Federal Deposit Insurance Corporation); the idea is that as long as we continue doing what we are doing today, we won't be subject to federal banking laws. There are a number of states like New York, Louisiana and California where people have raised questions about the business. The regulators' job is to make sure customers' money is safe, that people can be comfortable leaving funds in the PayPal network. We are fundamentally a sound business. We are not going to blow up and lose customers' money. There's not a single state where we have been shut down or had to discontinue our service. We're fully operational in Louisiana and the most serious questions were raised there.

"We are fundamentally a sound business. We are not going to blow up and lose customers' money."

The regulatory issues aren't the only challenges you face. You were recently sued by a group of customers over the freezing of their funds.
We think the lawsuit is fundamentally without merit. When you have 13 million people using a service, there are always going to be people who are not happy with what you are doing. But the vast majority of our customers are very happy with our service. If they weren't, we would stop growing. I think we are a very high-profile company and there's going to be significant scrutiny on a lot of levels. We've been under scrutiny for a long time.

The class-action suit that was filed against PayPal focuses, in part, on a customer-service issue. Is the suit going to force PayPal to take a closer look at customer service?
We take complaints from our customers very seriously. Complaints from plaintiffs' lawyers, we take with a grain of salt. We are working very hard to make our service very easy to use. It's an ongoing challenge. I think we are doing a very good job for a company that has as many users as we do.

The chief complaint in the lawsuit concerns PayPal freezing funds. PayPal often does this when it has a suspicion of fraud, but many of these customers say their accounts are being frozen illegitimately.
One of the perspectives to keep in mind is that we are a payment network. There are two different sides to each payment. Our responsibility is to make sure that the money is good for the person receiving it. If we did not freeze some of the money, innocent buyers would not get their money back. It's onerous for people when get they get their accounts frozen. But it's important for us to do that to protect innocent customers.

When these things get escalated, we do look at them carefully. Now with many of the individuals that are involved in this particular lawsuit, there are some very legitimate questions about what they were doing and how the money was used.

"We take complaints from our customers very seriously. Complaints from plaintiffs' lawyers, we take with a grain of salt."

What do you think of eBay's recent move to buy back Wells Fargo's stake in Billpoint, which is one of your competitors?
It's not always that easy to tell what that means. I don't have a crystal ball to see what their precise plans are. eBay's a great company...But the fact is that 70 percent of eBay's sellers are using PayPal. They've expressed a strong desire to continue using PayPal. eBay--at least in its public statements--has said that it will continue to allow them to use PayPal.

How does eBay's move affect the competitive environment?
I don't know if it makes a big difference one way or another. My understanding is that Wells Fargo will continue dealing with a number of parts of the Billpoint process. I wouldn't make too much of that change in the equity ownership.

PayPal grew rapidly, largely by providing a service to eBay customers. How are you moving beyond online auctions?
We're steadily diversifying from auctions. People are selling goods off our site. Our international product continues to scale. It's available in 36 countries outside the United States. Seventeen percent of our payment volume at the end of last year was international. That's where one of the two parties in the payment is outside the United States. I think we will continue with our core focus on small businesses and gradually expand our suite of small-business services.

How do you see PayPal evolving?
I see us as remaining a payments company that enables people to send and receive money. I see us adding a lot more incremental functionality to make the system better. There are a lot of little things that add up like that in big way. With our international product, I see us basically making it a one-stop payment gateway throughout the world.

What types of things are you doing on the international front?
We're working on building a multi-currency product and a multi-language version of our product. We intend for the company to remain based in the United States. I don't think we need to open branch offices in all these different countries.

There will be a set of questions on a regulatory basis: Are we a bank? Should we be regulated as a bank? It's important for us to get in front of regulators internationally and we're working on doing that.