posted on February 12, 2002 05:43:03 AM
PayPal Warns About Service Problems
SAN FRANCISCO (AP) -- PayPal Inc. warned Monday that its popular online payment service is about to be shut down in Louisiana by that state's banking regulators, casting another cloud over the company's widely anticipated initial public offering of stock.
The imminent shutdown of PayPal's service in Louisiana was disclosed in Securities and Exchange Commission documents. They detail the risks the Palo Alto-based company faces as it tries to overcome the stock market's distaste for unprofitable Internet companies.
PayPal had hoped to sell 5.4 million shares at $12 to $14 apiece last week, but a patent infringement lawsuit filed by CertCo Inc. threatened to short circuit the company's online payment service. That prompted investment bankers to delay the IPO until this week.
In a counterclaim filed Monday in Delaware, PayPal sought to invalidate CertCo's patent claim and alleged the New York-based company waited until the last minute to file its complaint to disrupt PayPal's IPO.
The delay forced PayPal to disclose several new developments, including word that Louisiana regulators sent a Feb. 7 letter ordering the service to stop brokering payments between online buyers and sellers until the company receives a money transmission license.
Monday's bad news might pressure PayPal to lower its IPO price or pull the offering, said Kyle Huske, an analyst with IPO.com.
"Obviously, you don't want these kinds of negatives to come out in a panicky market like this," Huske said. "It's tough to say what will happen now. It's all going to depend on the fortitude of the investors that they had already lined up for the IPO."
With the latest revisions to its outlook, PayPal now hopes to set the IPO Thursday, paving the way for the company's shares to begin trading Friday on the Nasdaq Stock Exchange.
At the current target price, PayPal's IPO would raise more than $60 million. As of Sept. 30, the company had $138.6 million in the bank and its losses have been steadily diminishing over the past year.
In its SEC filing Monday, PayPal said it will comply with the Louisiana order forcing it to suspend business in that state when management receives the notice. The company also said it may appeal the Louisiana order in an administrative hearing.
PayPal's Louisiana customers accounted for 0.9 percent of the service's payment volume during the first nine months of last year, according to the SEC documents. The company makes its money by collecting a commission based on the dollar amount of most transactions completed on its e-mail service.
Although Louisiana represents a small portion of PayPal's overall business, the company's regulatory problems in that state might not be isolated, management conceded in Monday's filing.
Besides Louisiana, New York also has notified PayPal the company is running an unlicensed banking business. The New York regulators still haven't ordered PayPal to stop doing business there, which accounted for 6.4 percent of the payment volume handled by the company during the first nine months of last year.
PayPal said regulators in nine other states and the District of Columbia have indicated the company needs a license to run its online payment service. Those states are: Arizona, California, Colorado, Idaho, Massachusetts, Maryland, Texas, Virginia and Vermont.
The company said it has already filed, or plans to file, applications in those states and the District of Columbia. Based on management's analysis, the company also has decided to seek money transfer licenses in Connecticut, Minnesota and North Carolina.
PayPal already is licensed in Oregon and West Virginia.
If state regulators determine PayPal has been running an illegal banking business, the company could face substantial fines dating back to when the service began with 24 users in October 1999. The service had ballooned to 12.8 million accountholders as of Dec. 31.
posted on February 12, 2002 06:15:31 AM
Hmm..maybe I'll start using C2it more often. Question..would it be a majot faux pas to add to my listings that I prefer C2it over Paypal due to Paypal's problems with regulations in several states?
MEOW
posted on February 12, 2002 08:11:49 AM
I doubt that Paypal "is going down the tubes".
They seem to be in the process of getting licensed in a number of states in addition to the ones it has already completed.
You could say they are not to bright for getting into an IPO without covering some important bases, but in my experience this is typical of many large companies.
They give potentially troubling complications like whether they are a bank or not their "benign neglect" until they become real issues.
Not my idea of good managment, but sort of how our own government has approached things like Social Security, Medicare, Campaign Reform, Energy, Air Safety and Bioterrorism.
posted on February 12, 2002 08:23:17 AM
Would I buy stock in a company whose profitability depends on it continuing to be an unlicensed and unregulated entity?
posted on February 12, 2002 08:48:13 AM
it might actually make them accountable and they will not be able to simply freeze up peoples accounts when they feel like it
posted on February 12, 2002 09:06:52 AM
PayPal has been on the decline for quite some time. I certainly wouldn't invest in a company that can't earn a profit.
posted on February 12, 2002 09:40:22 AM
With Paypal in the inner circle with investment companies like Smith Barney, their future outlook is actually much brighter than one might think. The upcoming IPO will bring them into the big leagues, with capital and support from some of the world's largest investment banking institutions.
Sure, Paypal has many waters to navigate, but it should be expected, as they created a new business model, the likes of which banking regulators haven't yet created laws to oversee. This doesn't make Paypal a fraudulent or illigitimate business. There's just a need for some work to be done to define their business and to insure that it meets the criteria of ongoing written regulation at the appropriate levels of local, state, federal and International laws. It's actually time for these agencies to catch up with the times with their regulation. Paypal's business model will be at the forefront of these new laws and may actually end up being a benefactor because they are the first in line.
Paypal has redefined the way online users move money and despite their start-up costs and losses to date, their business model is sound and viable. With 12 million + users and a need for their services in the marketplace, there's some tremendous potential for this company.
The above commentary is not an effort to pump up this company. It's to provide a counter-perspective to the many negatives that have been written on the board about Paypal and to highlight some of the assets that this business actually possesses. Millions of users rely on Paypal each day and the numbers are ever increasing. Isn't it reasonable to think that there's a chance that the company can turn their business model into a profitable venture? I personally don't thing that it's an unreasonable possibility, but I tend to view things in the macro perspective, instead of from inside the box.
A long time ago, I took a chance on a small online auction company named eBay. They had this small idea that an online auction platform may work. I made a large sum of money by taking a chance with their idea. Ever heard of them?
Lifes about taking calculated risks. If you don't ever step up to the plate, you'll never have a chance to get on base.
I'm looking forward to the pessimistic rebuttals that will follow this optomistic note.
posted on February 12, 2002 10:15:28 AM
Glad you made money on ebay stock, but buying stocks is very different than banking. When I buy stocks, I accept the risk that my investment might disappear, and on several issues, that did happen for me. Oh well, I knew the risks.
However, paypal is different. They operate like a bank (They handle money coming in and out of an account, I even have a debit card) - There are a few problems here. One is that they are not FDIC insured. If they decide to close up shop tomorrow, your money will basically be gone. The second is that they seem to arbitrarily lock up accounts. I have a merchant account in addition to paypal, and I once had a problem with a $2000 transaction (luckily it worked out just fine) and during this time, my bank account, and my merchant account were not locked up. I had access to my money minus the large transaction that was in question.
After reading their lack of licensing in various states and threats to shut down, as well as their patent problems, and posts here, I've decided to keep using paypal, but to scale back my activity considerably. I've already removed my credit cards from my account, and I am in the process of switching my bank info from my business checking account to a free checking account I tend not to keep much money in. Finally, I've decided that once my balance goes over $100, I will sweep the money into my bank account. This will reduce my liability should they go under. I hope they don't, I find them very useful, but I won't risk my money just in case. I already lost a small amount of money with a company called Flooz, which was an online gift certificate company...
posted on February 12, 2002 10:37:19 AM
Computerboy: You can call it pessimism if you'd like, but you'll be WRONG.
Many of us are simply put off by the manner in which Paypal has treated its sellers since they started making ever changing revisions to its service agreement.
Your comparision to ebay is actually a REALLY good one. ebaY has done the same thing. As they've gotten larger and larger, the "little guy" doesn't seem to matter anymore. Customer service has suffered and many of us have been told by both paypal and ebay - "do it our way or leave".
Do I want to see paypal fold up? NOPE, I don't. Do I want to see them get a little bit of their own "medicine". YEP, I do.
I'm just waiting for the fee increase. When that happens, the "domination" will be over, and competition will enter paypal's market. Once that happens, fees will decrease to "reasonable" necessary business fees just like my merchant account - 1.7% and 20 cents per transaction. I'll keep using paypal as I always have. I'll keep using C2it, Paydirect, Bidpay, ecount, and Paying fast too. I want myself and my customers to have REASONABLE choices.
Paypal's fraud problem is something they created with their business model. They need to change their business model to reflect that and to decrease their fraud the same way the rest of the BANKS do it. Their expenses are their problem. If they can't be competitive they shouldn't survive. I don't see anyone buying my items if I can't get them "price competitive" why should paypal be any different?
Competition is a GOOD thing. Domination is a BAD thing. I'll be really glad when both ebay and paypal lose their "monopolies".
posted on February 12, 2002 12:21:46 PM
Thanks for the posts. They all have merit and I agree with you all on the need for changes to be made, especially on the customer service front. Yes, fees will need to be put in line and improvments will need to be made and policies changed, but I think this can all be done - and legally.
There can be long debate on what Paypal is or what it is not. It may be a bank, it may be an exchange, it may be a processing company, it may be alot of things, but right now, it's just PAYPAL and its the dominant market leader. I Recall a similar thing happening to eBay a few year's back when many were saying eBay was more than just a preported "VENUE" - remember? Folks were licking their chops at an opportunity to sue eBay for their auctions gone bad and many were speculating that this undefined line that ebay was straddling was going to be their downfall. WRONG! eBay prevailed and today is still able to maintain its ambiguous Venue status. It's my opinion that Paypal will be able to do the same. Both ships are soon to be navigated by Wall Street and the Big Boys know how to play the game better than anyone. Especially since they make the rules. I don't know about everyone else, but I have a pretty strong feeling the Smith Barney and the other underwriters know what they are doing on this one...
Think about this for a moment.... Does anyone have an idea of what the capture rate of a new banking customer is? It's a BIG number and Paypal has 12 million+ of them. A major asset, regardless of what side of the fence you stand on with Paypal. You can bet that many financial service companies would love to have access to this list and the possiblity of a Paypal buyout/merger or strategic alliance by/with a larger financial institution is not at all unrealistic. This option will always be available to Paypal, as their strong penetration and market dominance is genuine and desireable.
I'm in on the IPO and will be rolling the dice on the outcome. If it works out I'll be rewarded for my optomistic speculation. If I'm wrong, shame on me, but at least I'll know that I went with my hunch and gave it a try.
posted on February 12, 2002 12:44:53 PM
Has all the earmarks of something you'd find under a rock and beat with a stick. Even if it were to shed its skin, it would still slither around.
Legitimate businesses try and work within the laws from the beginning, not when they've been around for years and go "duh! sorry 'bout that, what do we have to do to be in compliance." This ain't pocket money from an eBay Seller's garage biz, this is a multimillion dollar international business.
posted on February 12, 2002 01:18:15 PM
computerboy,
I don't think mballai's reaction is necessarily out of bitterness. His comments actually make a lot of sense based on the facts. Let's think about the pros and cons about investing in paypal. These are all facts that have been documented.
Pros:
1) Large user group of over 12 million customers
2) 136 million dollars in the bank
Cons:
1) They have lied to their customer base on several occassions
2) They provide little/no customer service
3) They have not received appropriate money transfer liscenses
4) They may face severe fines for transfering funds without licenses
5) They do not have FDIC insurance on their transactions
6) Their use of software may be a violation of another company's patent
The sad fact of the matter is... the pros are easily outweighed by the cons. How quickly do you think that 136 million dollars will disappear IF paypal starts loosing patent law suits and is levied with fines from various states (not to mention international implications!) Once the money is gone... how quickly do you think the 12 million users will disappear? Add on to this the fact that Paypal's foundation was built on poor customer service & communication... and you've got a disaster waiting to happen. A building is only as strong as its foundation, and the same goes for businesses. I for one will not be buying any Paypal stock. In todays market where you can buy countless "time-tested" stocks at dirt-cheap prices... why would you want to risk your money in a company with many problems to overcome. It doesn't make too much sense to me. But... to each his own!
posted on February 12, 2002 01:34:05 PM
It's a matter of your comfort with risk and the potential you see in your investment. I happen to believe that Paypal will be able to make it work.
My shares are being purchased from Paypal in their directed share program pre IPO and believe that there will be strong initial interest. If this occurs, the stock will immedialy go up in value. I'll then have the option to sell off some of the stock to cover my costs and can then play with the some of the profit.
The above scenerio is different than just buying the stock in the broad market.
posted on February 12, 2002 01:44:17 PM
Computerboy,
Granted... that method of purchasing stocks does make a lot more sense, and I truly do wish you the best of luck with it. However... what happens if you purchase these stocks pre IPO and then the IPO collapses and never goes through? (Let's face it... there is enough controversy around this deal for the financial backers to back away from it). Just a thought. Good luck with your investing and be careful!
posted on February 12, 2002 01:51:11 PM
That scenerio cannot occur. If the IPO doesn't happen, than I have no obligation to purchase the stock from the company. I am being offered the stock in the same manner that the Paypal employees and executives are being offered. If the IPO happens, I get shares. If it doesn't, I don't.
posted on February 12, 2002 02:09:02 PM
What I'd like to know is why the states are taking or considering action all of a sudden. I mean, Paypal's been transferring funds between states without the transferral licenses for years - did the states just suddenly notice, or does it have to do with the timing of their IPO? I guess I'm just surprised that at least one state didn't take them to task a couple years ago and set the precedent then.
Of course it doesn't come as a surprise that the states would be interested in squashing Paypal - it's a major facilitator of online transactions, the majority of which don't require collection of sales tax since they're across state lines. Not that eliminating Paypal would halt interstate commerce, but I really don't think the states will be happy until they get some sort of sales tax collected on every online transaction. Most states already have a "use" tax, but those are pretty much unenforceable and unenforced.
posted on February 12, 2002 05:25:16 PM
computerboy, who are you? Are you dating the CEO's daughter? You must know someone working at Paypal -- and eBay for that matter. Most of your posts are pro-Paypal/eBay.
posted on February 12, 2002 05:30:36 PM
I never really had a problem with PayPal per se. I do find it problematic that a company operates with its customers by moving the carrot further away and makes it harder to do business.
As a buyer, if I want to use a credit card, PayPal wants to stick a screen in front of my face to tell me that I shouldn't and try to persuade me not to do it. If I use my bank balance, they want to pat me on the head and tell me how wonderful that is. I know PayPal's agenda, but that's their problem--not mine. If they continue to treat me like a child, I won't use their service.
As a small seller, it's easier to use Billpoint. I don't want to insult my credit card customers with the above drivel and I certainly don't want to be charged for trying to demeaningly persuade people to conduct business this way.
posted on February 12, 2002 07:51:23 PMbut right now, it's just PAYPAL and its the dominant market leader.
Paypal's success, if you could call it that, is that it cornered a new market catering to eBay sellers. Paypal accomplished this by giving $10 to anyone who signed up. Fact is, Paypal still hasn't shown a profit.
Paypal accomplished its feat using venture capital. Paypal started back when Silicon Valley mentality was that any startup was a probable gold mine. Those times have changed. I dare say it would be much harder today to find the kind of backing Paypal had.
So far, despite its popularity, Paypal can only claim it has lost less recently than in past years. It may eventually turn a profit. OTOH, it may go public, and then deflate like a balloon. It doesn't take a genius to figure that a very few will get rich(er) and the vast majority will get screwed.
posted on February 12, 2002 07:56:20 PM
i feel for any companies long term success specially when dealing with the public its all about customer service and paypal basically has none so i cannot see a long term stable future for a company who treats many of its loyal customers like criminals. Dell customer service rocks and look where it has got them! Gateways sucks and look at them!
posted on February 12, 2002 08:23:56 PM
revvassago:
I have no affiliation with Paypal, other than being a high volume user. I signed up very early with the company and have run high dollar amounts using their service as an online seller. Paypal reserved a small amount of stock for employees and "friends" of the company. Several high volume users were placed in this "friends" catagory and were offered the opportunity to acquire stock.
As far as the Paypal presidents daughter is concerned, no we are not dating. In fact,we've never met. I suppose it would be a good way to get stock, but I'm quite sure my wife wouldn't go along with the idea.
All of the comments on this board are correct. Paypal needs to find a way to make money, greatly improve customer service and insure that they comply with all regulations required of them. The above is indesputable. It boils down to whether each of us believes there's a way for it to turn the corner and I happen to think they can. I see Paypal as an innovative company in its infancy. It has a great deal to learn and has some very nice attributes and assets to help it on its journey.
Only time will tell what is in store for this company.
posted on February 13, 2002 08:15:52 AM
I would say that Paypal has a greater than 50% chance of ending up just like Napster.
Both companies thought they had found a new way to get around the law through the internet.
Neither company could make money.
Once the regulators get done with Paypal,the cost of doing business with them will be prohibitive.
There is no way the credit card companies and banks will set by and allow an unregulated competitor raid their business. The record companies wouldn't allow Napster to do it either.
If Paypal ever goes public, there is a chnce that a premium could be had by the company being bought by a bank or CC issuer.
