Organizational Changes at PayPal - Essay Example

s Organizational Changes at PayPal Company Profile/Background PayPal is a company that provides online payment solutionsand has more than one hundred and fifty million active accounts globally. The company is based in America, and it processes payments for auction sites, online vendors and other users for which it charges a fee. PayPal is available in more than one hundred and eighty markets across the world. This company was started in 1998 by Peter Thiel and Max Levchin, and it was then referred to as Confinity and its main business was Palm pilot cryptography (Bhargava: 2). In the year 2000, Confinity merged with another company called X.com which provided financial services. The merger led to the creation of PayPal, a name adopted in 2001. By mid 2000, nearly 2000 eBay listings started to use PayPal payments, and by October that year, PayPal was used by customers to pay for more than a quarter of the eBay transactions(Bhargava: 3). PayPal had grown tremendously, processing over one hundred thousand transactions daily, with a total of the worth of more than $6 million per day. PayPal’s strong growth continued to show the following year despite competition from other companies. For example, in 2000, Western Union introduced MoneyZap offering similar services. In the same year, CitiBank came up with c2it, which presented a significant threat to PayPal. Unfortunately, c2it was charging higher fees compared to PayPal, and it eventually failed to attract enough customers. PayPal was bought by eBay in 2002 for 1.5 billion dollars (Bhargava: 4). At the time of the sale, around 60% of PayPal’s transactions were conducted from eBay auctions while the rest were from online merchants. EBay thus became the motor that drove the success of PayPal. However, in September 2014, it was agreed that eBay was going to make PayPal into a separate company. This was finalized in July of 2015, and now PayPal is a separate company traded publicly (PayPal.com, 2015). The need for change The rapid growth enjoyed by this company has been as a result of changing its strategy to suit the needs of the customers and at the same time ensure maximum safety for online transactions. Being a leader in online payments, PayPal was finding it challenging to address all the needs of the millions of customers they served. There were a number of challenges the company was facing that drove it to change its business model. These challenges were as a result of the growing customer numbers, stiff competition, regulatory issues and safety concerns. First, PayPal operates in a highly sensitive and competitive market segment. The threat from other companies offering more or less similar services has been a major concern for the company. Since its inception, PayPal has had to deal with the threat of competitors. For example, two years after its establishment, PayPal faced competition from Citibank, who introduced the c2it service. Citibank partnered with Microsoft and AOL, and the c2it presented a significant threat to the growth of PayPal (Referenceforbusiness.com, 2015). In another example, Google introduced the Google’s Checkout system, which allowed customers to retrieve their financial information and give it to merchants whenever it needed. With such a system, PayPal was facing the risk of being thrown out of the online payment market. An even bigger threat came from mobile service providers. For example, companies like Verizon and ATT were facilitating P2P payments, services that allow customers to send and receive money using their mobile phones. This was eliminating the need for services offered by PayPal and other similar companies. Due to the increasing competition, PayPal had to come up with solutions that enabled it to attract and retain more customers. Secondly, since its inception, the company has been faced with the challenge of ensuring the safety of customer information and funds. The company deals with volumes of sensitive data on a daily basis, and this makes its operations highly sensitive. Individuals continue to target the company, and these include merchants that fail to deliver goods that have purchased or from outsiders who keep sending fraudulent emails with the aim of stealing from customers. PayPal has had to try a number of measures to guarantee customers that their information is safe so as to enhance the customers’ confidence in their services (Prashanth: 7). The company has faced a number of security challenges in the past. For example, PayPal was criticized by several customers for failing to institute an efficient security detection system. It was claimed that the surveillance system it used at the time, “Igor”, froze accounts of innocent account holders on suspicion of having received unauthorized payments. It was even argued that when the fraud was detected, accounts of customers were closed without consulting them. In another example, PayPal also faced security challenges from its internal personnel. Employees were accused of involving in fraudulent activities in which customers were losing money and having their information leaked (Prashanth: 8). The company acknowledged that the information and data it handled was prone to the security breaches occurring internally. Due to these reasons, the company needed to come up with measures that would guard customers from both external and internal fraudsters. Being a sensitive line of business, security has remained to be a core aspect of the company’s business model. Thirdly, PayPal was increasingly finding it difficult to deal with the increasing volumes of customer data and transactions. It was becoming challenging to satisfy the demands of the consumers. These consumers were drawn from various countries across the world, and this meant that satisfying them was becoming a mammoth task. PayPal realized that it was necessary to have a mechanism in place that helps manage the clients from the varied backgrounds and geographical regions (Prashanth: 10). More importantly, PayPal realized that it was operating in different countries with different legal requirements relating to this line of business. Customers from various countries had to receive the same high standard of service offered in other parts of the world. There was the need to have good relationships with local financial institutions in the various regions it operated. In addition to customer satisfaction, PayPal needed to continue expanding its operations so as to facilitate international growth. Change programs In order to address the challenges it was facing, PayPal had to initiate a number of changes in its business model. The above challenges were addressed by changing the business model in three major phases. In the first phase, PayPal sought to address the problem of competition from similar companies. In the beginning, PayPal relied on the payments made to eBay website. At first, this was very attractive to small businesses or individuals. However, the company realized that it needed to attract more clients to open accounts. The growth that was being experienced at the time was sluggish. PayPal engaged in a marketing campaign aimed at accelerating its growth. In fact, it deposited $10 in every new user’s account. This aggressive marketing campaign was done between 1999 and 2000, and it saw an increase in the number of account holders (Crystalpayments.biz, 2011). As a result of this campaign, PayPal was enjoying more than 65 per cent of all online payments market. PayPal managed to ward successfully off any competition from upcoming companies by charging fees lower than what was charged by other companies. Also, PayPal decided to enhance its presence on sites such as adult sites and online gambling websites. This move saw the company record an increase in the number of active accounts to more than 9 million by the end of 2001, with more than half a million of these accounts outside of the United states. This was impressive because the company had initially intended to expand its presence in the United States among the eBay users. During this initial phase, PayPal was establishing itself on the international market, and this led to investors such as eBank from Japan and Bankinter from Spain invest in the company (Crystalpayments.biz, 2011). The second phase of the change of business model focused on enhancing security and improving the overall customer experience. This phase was carried out between 2000 and 2002. This involved undertaking a number of steps to guard both the local and international clients. In order to enhance security, PayPal employed systems that would efficiently handle the data volumes without compromising on speed and efficiency. For example, the company started using firewalls to protect their servers from unauthorized access (Prashanth: 12). These servers were not connected to the internet directly, which ensured that users’ data was fully guarded. PayPal also came up with an antifraud team that worked closely with law enforcers to curb cyber crimes (Prashanth: 13). The company also came up with internal measures to address fraud. For example, users’ bank accounts were to be verified by a system known as the Random Deposit Technique. Tougher penalties were introduced for those employees found engaging in fraudulent activities. As a result of these security measures, PayPal was able to gain the trust of the users. This phase of business model development also involved partnering with various international bodies with the aim of enhancing customer service and promoting regulatory compliance. For example, PayPal partnered with OmniPay in 2003 (OmniPay: 2). This collaboration helped PayPal to process international transactions effectively. OmniPay is extensively known for its knowledge of various geographical regions around the world, and this proved an important asset for PayPal in serving its international clients. The final phase of the PayPal business model change started in late 2002 and continued to today. Mainly, PayPal embarked on a model that would enhance its growth and returns without necessarily relying on eBay (Ecommerce-digest.com, 2014). There were several strategies taken by the company to enhance its growth beyond eBay and enhance competitiveness. First, PayPal lowered its transactions fees from about 2.2% to 1.9% for merchants who traded in volumes of $100000 and above. Secondly, the company put measures in place to encourage its users to recruit non-eBay merchants. This was achieved by increasing the referral bonus to $1000 (Ecommerce-digest.com, 2014). This led to a high number of non-eBay merchants registering with the company. Thirdly, PayPal has attempted to grow beyond eBay by developing merchant relationships with other companies such as Amazon and Yahoo. For example, Yahoo uses PayPal is the recommended payment system. In another example, PayPal signed up with Apple’s iTunes and Napster as merchants. The result of this has been increased numbers of merchants that are now driving the growth of PayPal. In order to ward off the competition brought about by mobile service providers, PayPal launched PayPal Mobile in 2006 with an aim of facilitating online payments. Through this mobile system, users can pay for goods by sending the PayPal payments to merchants via text messages. PayPal also persuaded various credit card providers such as Retail Decisions USA and CyberSource to include PayPal payment system (Crystalpayments.biz, 2011). This is also involved hiring a news sales team whose main job was to convince the larger merchants such as Yahoo and Amazon. As a result of this strategy to split-off from eBay, PayPal has been able to realize tremendous growth independently. During this phase, the company has also continued to enhance its global presence. Localized websites in countries such as China, Italy, Australia and Spain have been recently added by PayPal. This has allowed the company to successfully operate in more than 190 countries worldwide. This growth has been the main driver behind eBay and PayPal separating into two different traded companies. It is now estimated that PayPal processes one in every six dollars that are spent online (PayPal.com, 2015). The company is now localizing in twenty-six currencies and has developed relationships with more than 14000 institutions around the world. Analysis The change in business model adopted by PayPal has had significant impacts on the manner in which it conducts its business. The growth of PayPal and its eventual separation from eBay is a clear indication of how effective the change has been. Unlike before, PayPal no longer has to rely on eBay alone for transactions, but it instead has partnered with major companies like Yahoo to generate transactions. The competitors PayPal had at the time have slowly been going out of the market, and although there are competing companies at the moment, PayPal continues to post incredible growth. The current security policies and procedures provided by PayPal are of the highest standards, and unlike before, customer complaints relating to security are at a minimum. There is an efficient investigative team that helps in resolving disputes relating to transactions. The company now uses the best encryption technology available and has generally invested in the state of the art security technologies available today. Before changing the business model, PayPal had difficulties in serving its customers from the diverse backgrounds. However, the company currently has more than 8000 PayPal team members that offer support to their customers in more than twenty languages. This illustrates how the company has been able to take care of its growing client base. Although the company is leading in this industry, the threat from competitors cannot be ignored. Internet payment services such as Skrill, Amazon payment services, Pioneer, and Payza are a major threat to the future growth of this company. In addition, Internet fraud continues to be a big challenge because it keeps changing. Fraudsters are continuously looking for new ways to steal through the internet. Despite the challenges, the future of this company is bright. It is likely that PayPal will continue to grow in the coming years, and expand into all regions of the world. Works Cited Bhargava, Sanjay. ‘PayPal.’, pp. 1-16. 2011. Web. . 27 Aug.2015 Crystalpayments.biz,. Paypal. N.p., 2011. Web. 28 Aug. 2015. Ecommerce-digest.com, PayPal Case Study Analysis. N.p., 2014. Web. 28 Aug. 2015. OmniPay., ‘PayPal: Redefining the global economy.’ pp. 1-2. Web. 28 Aug.2015. PayPal, PayPal Stories. N.p., 2015. Web. 28 Aug. 2015. Prashanth, Konakanchi, ‘PayPal.Com’s Business Model.’ ICFAI Center for Management Research (ICMR), 2004. Pp. 1-19. Referenceforbusiness.com, PayPal Inc. - Company Profile, Information, Business Description, History, Background Information On PayPal Inc.. N.p., 2015. Web. 28 Aug. 2015. Read More