PayPal is in the centre of two battles: One for control of every transaction on the Planet, the other for control of its own destiny
The clogged roads of San Jose teem with Priuses, which merely serve as earnest slalom gates for David Marcus to blow through in his black Porsche Panamera Turbo on a January afternoon. The 40-year-old president of PayPal has been in a rush since taking the top job 21 months ago. He’s overseen a sweeping overhaul of the payment company’s technology. He’s rolled out a passel of new products to let his 143 million users pay with their phones. And he’s seen his parent company, eBay, become a public target—Carl Icahn has quietly amassed a 2 percent stake, ahead of a just-promised proxy fight—as the division he runs increasingly appears more valuable than the core business that purchased it.
Eager to show off some of the magic, we’re racing to Birk’s, a bustling Silicon Valley chophouse that accepts PayPal from diners. Marcus fires up the PayPal iPhone app, which locates him in the restaurant and allows him to scan a bar code before the meal and watch the cheque update on his phone in real time. The idea is to bring the speed and simplicity of internet shopping into the physical store. “I like to think of it as The Matrix,” grins Marcus, a slight accent revealing his French and Swiss upbringing.
But there’s a glitch in this matrix. The restaurant is not running the latest program. There’s no bar code to scan before the meal and none on the cheque. Instead, Marcus must type in a seven-digit code attached to the bottom of the cheque. When the cheque arrives the code is missing. “The challenge,” Marcus says, trying hard to mask his frustration, “is not only scaling the technology but having people understand it on the merchant side.” Ten minutes later, the waiter returns, code in hand. Marcus enters a tip, pays the bill via iPhone and sighs: “When it actually works, you don’t have to wait.”
Marcus and PayPal have neither the luxury of glitches nor of waiting. Money is going mobile, and the race is on to control the flow of bits and cash across a billion smartphones and at millions of online and physical locations. Research firm Gartner estimates that mobile payments will top $720 billion a year by 2017, up from $235 billion last year. The upside remains enormous: Humans made $15 trillion worth of retail transactions in 2013. Whoever ends up with controlling interests in this new digital ecosystem will reap billions in transaction fees, collect massive amounts of consumer data and control the type of targeted advertising that makes marketers drool. Giants such as Apple, Amazon, Google, Visa and MasterCard all want to be your mobile digital wallet, as do several well-financed startups, including Square, founded by Twitter billionaire Jack Dorsey.
Right in the middle of it all: PayPal, the precocious child of the last dotcom boom, which is now inflicting as much disruption on its parent company as it hopes to on global banking. It moved $180 billion in 26 currencies across 193 countries last year, and its revenue grew 20 percent to $6.6 billion—41 percent of eBay’s total revenue and 36 percent of its profits. It’s no longer fair to call eBay an online auction company. PayPal, purchased in 2002 for what everyone thought was an outrageous price of $1.5 billion, is now worth at least half of eBay’s $70 billion market capitalisation.
“If you just went out and took it public you’d get a huge premium because of growth,” says Icahn, who is demanding a sale or spinoff. Elon Musk, the billionaire polymath behind Tesla and SpaceX who made his first fortune co-founding PayPal, is even more direct: “It doesn’t make sense that a global payment system is a subsidiary of an auction website. It’s as if Target owned Visa or something.” PayPal, he adds, “will get cut to pieces by Amazon Payments, or by others like Apple and by startups if it continues to be part of eBay.” Such sentiments add another layer to this gold rush. The winner of the brewing mobile-payment showdown will first be predicated on who wins the battle to control PayPal.
That eBay, one of the most innovative startups of all time, now finds itself positioned as a lumbering giant has some historical basis. PayPal has a legitimate claim, based on future successes, to the most entrepreneurial founding team ever. Musk (Tesla, SpaceX) was originally joined by Peter Thiel (Facebook, Palantir) and Max Levchin (Yelp, Slide), with an initial mission similar to what Bitcoin is trying to do 15 years later: Create an electronic currency independent from governments and central banks. Soon to join: Reid Hoffman (LinkedIn), David Sacks (Yammer), Jeremy Stoppelman (Yelp) and Chad Hurley and Steve Chen (YouTube). It’s almost impossible to find a major startup in Silicon Valley untouched by the PayPal “mafia”.
(This story appears in the 21 March, 2014 issue of Forbes India. To visit our Archives, click here.)