E-Payment Systems
 - PayPal
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updated 2010 Nov 10
http://www.youtube.com/watch?v=n7uAG7ZE_QM October 2010, student Neda in BCS555 at Seneca made an informative video about how PayPal works and some of the issues

PayPal What the
customer does
What the
vendor does
Third party
Security Pros and Cons
a system which allows subscribers to affect payment by transferring to the vendor, amounts from a bank account, or a debit from a credit card. 

EBay acquired PayPal in Oct 2002

Types in email address, chequing account number, or credit card info, and they become a Visa merchant. Vendors are not really stores, but rather individuals selling/auctioning items. In the case where goods are to be sent from the vendor, items are sent once PayPal confirms payment made to them. No involvement. Your account is automatically insured for up to $100,000 at no cost to user. Insurance is provided through Travelers Property Casualty Insurance. In the beginning only available to US customers, since EBay took over, it is more popular. Used to take approximately 2 weeks to receive payment if using chequing account.
The screen capture to the left shows that although PayPal has become more popular through the exposure it has received at EBay, it is suffering from some negative publicity as a result of a scam in March 2003.

"Recipients are asked to provide their PayPal account information, credit card number, and bank account number using a form in the body of the e-mail message. A button is provided to "log in" to PayPal's site and update the information.  The message is designed to look like it was generated by PayPal, using graphics from the PayPal Web site as well as fonts and colors similar to legitimate PayPal correspondence."

Paul Roberts explains the story of a person who almost got caught
""It was formatted really nicely. It had the right colors for the PayPal site and there weren't any obvious grammar mistakes," said Karawynn Long, a writer  and Web designer in Seattle who received one of the apparent scam e-mail  messages. Long was almost fooled by the message into entering her  account information.   "The subject of the e-mail was odd. But it was early in the morning.  Pre-coffee," Long said.  Searching for the Source Suspicious of being asked for her confidential account information, however,  Long used her e-mail program to view the message's HTML source code.  Her search revealed that information submitted using the form would go to a host server with a domain name ending in.ru, the domain suffix for Russia, according to Long.   "When I viewed the source I could see [the scam], but how many people view the source on their e-mail?" Long said. 

. The moral of the story is, be careful always when people ask for confidential information - even if it seems to be a company you already deal with.

Thanks to Riaz G. in GNED 136, March 2003, for pointing this story out



The screen capture to the left shows a Reuters story carried by Yahoo April 1st, 2003 about PayPal being in trouble with U.S. government regulations
PayPal is owned by eBay. "Silicon Valley-based eBay said it received a letter on Friday [March 28th, 2003]  in which the U.S. Attorney for the  Eastern District of Missouri accused PayPal of violating a provision of the USA Patriot Act. The provision prohibits the transmission of funds that are known to have been derived from a criminal offense, or are intended to be used to promote or support unlawful activity.   The prosecutor also said the company could be  forced to forfeit the money it received in  connection with the alleged illegal activity and that it could also be criminally liable."

"Congress passed the Patriot Act one month after the Sept. 11, 2001 attacks on New York City and the Pentagon. The  legislation broadened law enforcement powers, especially to combat money  laundering that is believed to help finance terror attacks."

. The moral of the story is, always monitor the "Political / Legal / Regulatory Environment" because the applications of certains laws, restrictions and regulations can have an effect on your business and your business with third parties.



. One of the things that always helps students understand how something works is to provide some real-live examples. PayPal has many applications but you may be interested to know it is used in one way by people that buy and sell expensive Swiss watches. There is a well known chat room on the web called Timezone www.timezone.com.

In the forums for Omega and Rolex you can see people posting messages about watches they'd like to buy and sell and use PayPal as the method for exchanging the money.

Professor Richardson has, when time permits, been a visitor to the chat rooms, as an Omega and Rolex owner . I asked some of my acquaintances if they would provide some comments for my students as to how they felt about PayPal and what they liked and didn't like, their comments, posted in April 2003, are listed below.


"I use Paypal for almost all my internet transactions of watches. Buying and Selling. I prefer to be paid by paypal as the money is there instantly and I can ship the product. When buying the money is transferred to the seller and he can ship to me. Never had one single problem.. Tell your students though, the rule of thumb regardless of method used for transferring money is "know the buyer",..."Know the Seller". Many deals have gone bad (even though money was transferred) because the product was not represented properly."
Jerry, USA

"Ignoring all the ways you can lose your money by accepting paypal (buyer chargebacks etc.), bottom line is that paypal is a very expensive, but  convenient way to exchange money. Fees are about 3%. For low $$ transactions, say <$100 I might live with a $3 fee to get the cash, avoid "check's in the mail" BS etc or know the seller got my money.

For larger $$ transactions I prefer money orders. It costs about $1 per $1000 to buy a USPS money order (usually regarded as safest for both buyer and  seller) and $14 to Express Mail it. $16 total for next day delivery, plus a drive to the USPO [United States Post Office]. So breakeven between Express Mailing a USPS MO and paypal  is about $500. For a $1500 watch's $45 paypal fee, you could send the MO and pay for FedEx shipping of the watch!  Now I have bought a $1400 watch with paypal (seller paid fees) and sold a $1000 watch with paypal (buyer paid fees). But I won't do it again.
Michael, USA

not all opinions are positive
"They started out a nice little company a few years ago. However everything has been downhill ever since. Fees are constantly on the rise. Customer service is crap. It is very seller-unfriendly. Here is why I dislike Paypal:

   1--Someone used my account without my persmission. I reported it to Paypal and what did they do? Nothing. They told me to report it to my credit card. So  I report it to my credit card and what does Paypal do? Suspend my account until they review it. So for over a month now I have not had access to my  account. I call them but they seem pretty clueless as to how long the review process will take. In the meantime, I have a balance of almost $1400 that I  can't touch. So how is that supposed to be user friendly?

   2--Paypal makes its money at the cost of the sellers (whom should be their #1 priority to begin with). Sellers hate to use it because they get charged about 3% commission but if they don't use it, they lose buyers. Some sellers accept it at "buyer's charge" but that only works on sale boards (such as TZ &  Watchnet). Try stating "Paypal accepted w/ fees" on eBay and they will close your auction right away (cause eBay now owns Paypal as well).

When I do sell watches, I do offer my buyers the option of using Paypal (even now I can use my friends account). However I will throw in some kind of  bonus if they send a check/money order (free shipping or extra strap ...)"
name withheld

"I don't use Paypal and have no intention of starting. The lack of using Paypal hasn't seemed to slow down my buying, selling and/or trading watches. In your quest for the truth of Paypal, you might direct your students to
   www.Paypalsucks.com. There they will find many interesting stories of how people have been victimized by that system in real life. I know that one noted  watchseller, a doctor by profession, won't use Paypal since he was scammed out of a watch.  If using Paypal is a requirement for me to purchase your watch, then I will respectfully decline. On the other hand if I must use Paypal to buy your watch,  then you will need to find another buyer. Checks, money orders, and wire transfers are quite sufficient for most hobbyists, or at least it seems so to me."

Alternatives to PayPal
" sold an item to a buyer in Japan at 10:00 pm edt. He immediately e-mailed me and asked if he could wire the funds to my bank account, since it was  daytime in Tokyo. Half an hour later the wire was done, and when the money hit my account the next afternoon, I shipped. Fast payment, fast shipment,  lower fees than Paypal would have charged (since my bank does not charge for receiving wires)."

pic supplied by Tara
Student Tara D. from MGD415 at UTM in March 2006 found some information about PayPal launching a new service allowing people to use their cell phones to pay through Paypal.

This is a development I have been particularly interested in because I have been saying since 2002 that cell phones will be used as payment devices.

Tara emailed to say

"M-commerce as you mentioned in class is the latest technological development and Paypal is making sure its jumping on the bandwagon early.  The service is to be launched in the United States, Canada and Britain in a couple of weeks [April 2006].  Hopefully this will help pushstart M-commerce in Canada as it has been slow in development in Canada.

This new feature allows users to transfer money and pay either through the use of SMS where they send a SMS and a PayPal computer calls back the customer for them to enter their PIN number, or the customer can simply call and then enter their PIN number.  Through this new service what Paypal is in essence doing is making cell phones into digital wallets.  A financial consulting analyst named Dan Schatt commented that this move is excellent because it will create interest that a mobile phone is for much more than talking.  However I think the industry has been proving that cell phones are diverse from the beginning by adding text messaging and then cameras, Internet access and so on.

The article talking about the launch of this new service can be found at:"
Paypal To Offer SMS Payment By Eric Auchard.
Independent News and Media Online. March 23, 2006. 

for Tara -  "represent"


pic supplied by Andrew:
(he says it was when he was in Cuba: reading week 2008 )
Student Andrew S. from MGD415 at UTM in March 2008 emailed to say that he found a book discussing PayPal

Andrew said
"Good evening Prof. Richardson, Just finished reading "The Paypal Wars" by Eric M. Jackson, one of Paypal's first employee's, and chronicles the rise of the world's current leading payment processor. "

Andrew explains
"Not only is it an excellent read for leisure purposes, but it extremely relevant as an invaluable blueprint for how a payment processor should conduct itself and continually evolve in an industry that's evolving at break-neck speed. Besides being the first company to ever offer a type of m-commerce system, as the website was seen only as an aid to those wishing to exchange cash by "beaming" payments via PDA's. Add this to the fact that it goes in-depth with the fraudulent e-commerce activity such as credit card fraud and altercations with the mafia. I would strongly suggest this to ANYONE who has even a remote interest in online payment systems, and feel this would be a great "recommended reading" in addition to the section about payment processors."

Prof. Richardson adds,
"Andrew, I appreciate your information, one of the reasons students may want this book is because several reviewers have commented that it gives a good discussion of the fact that PayPal's "business model" was a critical factor in the challenges it dealt with in the beginning and the later success of the company - and I'm always trying to get students to understand the importance of sorting out a good business model when launching and enterprise" witiger.com/ecommerce/businessmodels.htm