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PayPal founder on Google's Wallet

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Max Levchin co-founded PayPal in 1998, and saw it through a public flotation and its acquisition by eBay for $1.5bn in 2002. He now heads his own incubator, MRL Ventures.

So Google has a finance company. What now?

I prefer to think of PayPal as a risk management business, but that's a separate point. Assuming what has been publicized is sufficiently close to reality, the important question is what's the transactional market Google is trying to address with Wallet.

I think attacking eBay-proper is just not very likely, at least today. It's going to be very hard for anyone, and possibly even for Google, to compete on PayPal's home-turf; but it's not unprecedented: PayPal competed there and won once before.

How did PayPal win? You were involved in a pretty high-profile lawsuit, entrapping some fraudsters.

Multiple factors, but a big one was fraud, yes. eBay was already a public company - losing millions of dollars per month - and learning how to manage fraud was an extremely scary proposition to them at the time. PayPal was a startup and had the cojones to learn how to beat fraud the hard way, so while eBay generally chose the safer strategy, for example, declining risky-looking transactions, PayPal had a more compelling offering, because we were willing to take on a lot more risk. PayPal is very well integrated with eBay at this point.

PayPal co-founder Max Levchin

So PayPal's growth was pretty symbiotic with eBay - even before they bought the company?

We were in a way, their growth engine - we were taking on their riskier users, which meant (among others) their new users, where there is the least amount of available information. And so more people could join and transact, and feel happy about eBay; and so in the end it was a great match - we matured into a very sophisticated risk manager, and they realized that we were better at it than they could ever be. At the time, roughly half of PayPal's business was on eBay too.

And now?

PayPal has been (before and after the ebay acquisition) diversifying, the one visible example is the iTunes deal with Apple. There is a whole unit with PayPal dedicated to getting into additional transactional markets outside eBay; so this off-eBay space can become the Google-payments vs PayPal battleground. Adding payments processing to Froogle would certainly be one thing Google could do in the course of that battle.

But Google says it isn't competing head-on with PayPal, or at least not the "stored" credit part. So what does that leave?

There are a few areas: eBay ecommerce, off-eBay ecommerce, gambling, adult, and (google-specific) adwords/adsense payments.

Without an auction site, it's going to be hard. The fundamental problem of diversifying from, or battling for off-eBay is that there are very few consolidated marketplaces of even comparable scale. Where do you go to find all non-eBay collectable sellers?

To a specialist auction site? There's a successful one for antiques...

Yeah, but there is an ocean of sites out there of every kind, some are even probably fakes. The value that eBay brings to the table is certain saftey of the experience, knowledge that most people selling stuff are really who they say they are, and so on.

Froogle has a number of similar characteristics, though at the moment, the transactions don't happen under Google's supervision or participation. So the only volume that makes sense here is the the combined volume of all these little and medium-sized sellers. though I have no idea what that is compared to eBay.

So Google pitches Froogle as an eBay but with 'reputable merchants'?

Well, at the moment it certainly isn't. No, maybe it is - I just bought something from it!

So back to Risk Management. Can you explain it in a nutshell?

The fundamental business model of PayPal is "seller pays for the right to acccept payments in a risk-free (or at least risk-reduced) transaction", and the fundamental game is can you charge the seller low enough rates to keep things interesting for her, while losing little enough money on the risk management part to keep things interesting for yourself!

Which is why the core PayPal "skill" is risk management.

And this is quite a different skillset. Is it one that's a core Google competency right now?

No, it's not, and Google needs to recruit. I think their key recruiting challenge will be risk management people. which is trickier than one might think. Risk management people come from old-school places like retail banks, and they favor conservative-first approaches, which almost always ends up being expressed as risk policies that favor old, established customers, and turn away transactions from new, riskier customers. Even people from sub-prime card issuers and lenders frequently have that attitude, which can be deadly for your growth.

The advantage that PayPal has, which may be difficult even for Google to stomach, though, is an enormous (at this point) amount of data: good transactions, bad transcations, and variables to describe those, and the only way you can get that data (which has to be specific to your particular type of transactions, etc) is by letting bad transactions go through your system and learning from that. And that hurts!

And you're skeptical that this has anything to do with Adsense?

My opinion (given a back of the napkin estimate) is that it's not the advertising transactions that are driving their entree here.


There's another avenue we didn't discuss in depth: and its the role of a Google or Yahoo! as a clearing house for rights holders. The really useful stuff is locked up in databases and collections and individual publisher's archives. Google has had a really bruising experience with Google Library, so far. Its preferred strategy of not charging a fee, but putting text ads around the material, doesn't fly. So the question is whether the database holders, like Lexis Nexis, will work with Google or Yahoo!, or prefer to work through other institutions, such as libraries and churches.

What do you think? Let us know. ®

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