It's hard to know what to call services like PayPal (www.paypal.com), since they invented a new financial services category. They're not banks since their business model is not making money on loans. They process payments for a fee, but they work with the existing credit card processing systems and bank electronic transfer systems. Some call them an "online money transfer company."
These are some of the key elements in PayPal's model:
the ability to e-mail payments
the ability to accept credit cards and electronic checks
a network of buyers and sellers with sufficient critical mass
a safe system in which to conduct commerce
a viral component that continually adds members to the network
The genius of this new model is expressed in the term "e-payment network." What PayPal and similar companies have achieved is to build a network of buyers and sellers who pay and accept payment via a new transfer system. Yes, many just use PayPal to accept credit cards. But each person who desires to pay by credit card through the PayPal system must join PayPal in order to do so. Likewise, if someone e-mails you money via PayPal, you have to join PayPal in order to receive the money. The result is an ever-growing network of members, that is, driven by a "viral" element. Pretty slick!
In the early days of the commercial Internet, there was a lot of talk about "electronic wallets." The concept was good, but three things were required: (1) a critical mass of buyers and sellers equipped to pay and receive payments this way, (2) an agreed upon standard so sellers didn't need
multiple wallets, and (3) a compelling reason to use this system. In the US, at least, wallet systems failed because most people used credit cards as their preferred vehicle for online commerce and didn't really need another system.
But with the advent of eBay auctions, millions of regular people suddenly became small-volume merchants. It was too expensive for them to set up a merchant credit card account, so they accepted only checks and money orders. Enter PayPal with a no cost way for these small auction merchants to accept credit cards (that is, a compelling reason), and PayPal took off rapidly, its network of auction buyers and sellers growing geometrically.
PayPal was the first e-payments network in the US to achieve critical mass. Now PayPal merchants accept payments via credit card-funded PayPal transfers, check-funded PayPal transfers, and cash PayPal transfers from money left in PayPal accounts from previous sales. It's an approach that has been widely copied.
The inherent difficulty with e-payment networks is their vulnerability to fraud, which can financially destroy the network owner, and cause great distrust between sellers and buyers. PayPal weathered the fraud storms that sank similar companies. More recently, eBay Payments BillPoint (www.billpoint.com) has joined the fray, bringing with it lots of experience on preventing fraud and creating a trusted community. In Europe, several similar but smaller networks have developed.
In Russia, a different problem created e-payment networks -- a small percentage of the population that possessed credit cards and the need for a trusted system by which to conduct e-commerce. PayCash (www.paycash.ru) is different from PayPal in that money must be transferred into a PayCash account in order to make purchases with it, much like a "wallet" system. PayPal doesn't require any balance in a buyer's account to make a credit card- or bank-funded purchase. PayCash has a US-affiliate, Cyphermint.com, that allows US residents to sell to PayCash network members in Russia, Latvia, and the Ukraine -- though the number of network members in the US is far below critical mass for much commerce to go the opposite direction.
A couple of other e-payment systems have developed in the US that are NOT true networks of members. Western Union BidPay (www.bidpay.com) can be used only for auction payments. It is an electronic method for buyers to send money to sellers in the US and Canada who receive Western Union money orders by US mail -- first class, priority, or express mail. CitiBank c2it.com (pronounced "see TO it," www.c2it.com) allows US residents to transfer money relatively inexpensively via e-mail in the US and by check or bank transfer to recipients in 100 countries worldwide.
If you're a merchant, you need to consider taking payments via one or more of these e-payment networks. They could well open up new markets for you, both in your own country and abroad.
