Wednesday, February 27, 2008

How deep are their pockets?

Any funds PayPal holds for dispersal are automatically deposited in a corporate bank account, which earns interest, according to Paypal representative Amanda Pires. The money is kept there until it's ready for distribution. PayPal, which processes payments for eBay auctions as well as e-commerce transactions from elsewhere on the Internet, counts interest payments on those funds as one of its revenue streams.

That's a perfectly legal practice, as PayPal is classified as a deposit broker, according to Federal Deposit Insurance Corporation (FDIC) spokesman David Barr.

"Deposit brokers make money being deposit brokers," Barr said. "That's the reason they're in business. As long as fees are disclosed, that's fine from our standpoint."

But the revenue generated from this practice is miniscule given PayPal's total revenue picture, said Thomas Weisel Partners managing director Christa Quarles.

Citigroup (C, Fortune 500) Director of Internet Research Mark Mahaney arrived at similar estimates by examining PayPal's public quotes of average "stored value." Mahaney approximates the interest earned on the float at "single-digit millions per quarter, and at most $10 million a quarter."
"I understand sellers are angry about [the 21-day policy], but the fee changes are really what's going to drive broader revenues at eBay," Quarles said.

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