eBay 2003 Annual Report Download - page 49

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If PayPal were found to be subject to or in violation of any U.S. laws or regulations governing banking,
money transmission or electronic funds transfers, it could be subject to liability and forced to change its
business practices.
We believe that the licensing or approval requirements of the U.S. OÇce of the Comptroller of the
Currency, the Federal Reserve Board and other federal or state agencies that regulate banks, bank holding
companies, or other types of providers of electronic commerce services do not apply to PayPal, except for
certain money transmitter licenses mentioned below. However, one or more states may conclude that
PayPal is engaged in an unauthorized banking business. PayPal received written communications from
regulatory authorities in New York and Louisiana in early 2002 expressing the view that its service as it
formerly operated constituted an unauthorized banking business, and from authorities in California and
Idaho in 2001 that its service might constitute an unauthorized banking business. PayPal has taken steps
to address these states' concerns and received a conclusion in 2002 from the New York Banking
Department that its current business model does not constitute illegal banking. PayPal also has obtained
licenses to operate as a money transmitter in California, Louisiana, Idaho and many other states. However,
we cannot guarantee that the steps PayPal has taken to address state regulatory concerns will be eÅective
in all states. If PayPal is found to be engaged in an unauthorized banking business in one or more states, it
might be subject to monetary penalties and adverse publicity and might be required to cease doing
business with residents of those states. Even if the steps it has taken to resolve these states' concerns are
deemed suÇcient by the state regulatory authorities, PayPal could be subject to Ñnes and penalties for its
prior activities. The need to comply with state laws prohibiting unauthorized banking activities could also
limit PayPal's ability to enhance its services in the future. Any change to PayPal's business practices that
makes the service less attractive to customers or prohibits its use by residents of a particular jurisdiction
could decrease the velocity of trade on eBay, which would further harm our business.
A number of states have enacted legislation regulating money transmitters and PayPal has applied for
licenses under this legislation in 31 jurisdictions. To date, PayPal has obtained licenses in 24 of these
jurisdictions. As a licensed money transmitter, PayPal is subject to bonding requirements, restrictions on
its investment of customer funds, reporting requirements, and inspection by state regulatory agencies. If
PayPal's pending applications were denied, or if it were found to be subject to and in violation of any
money services laws or regulations, PayPal also could be subject to liability, forced to cease doing business
with residents of certain states, or forced to change its business practices. Any change to PayPal's business
practices that makes the service less attractive to customers or prohibits its use by residents of a particular
jurisdiction could decrease the velocity of trade on eBay, which would further harm our business. Even if
PayPal is not forced to change its business practices, it could be required to obtain licenses or regulatory
approvals that could impose a substantial cost on PayPal.
Although there have been no deÑnitive interpretations to date, PayPal has assumed that its service is
subject to the Electronic Fund Transfer Act and Regulation E of the Federal Reserve Board. As a result,
among other things, PayPal must provide advance disclosure of changes to its service, follow speciÑed error
resolution procedures and absorb losses above $50 from transactions not authorized by the consumer. In
addition, PayPal is subject to the Ñnancial privacy provisions of the Gramm-Leach-Bliley Act and related
regulations. As a result, some customer Ñnancial information that PayPal receives is subject to limitations
on reuse and disclosure. Existing and potential future privacy laws may limit PayPal's ability to develop
new products and services that make use of data gathered through its service. The provisions of these laws
and related regulations are complicated, and PayPal does not have extensive experience in complying with
them. Even technical violations of these laws can result in penalties of up to $1,000 for each non-
compliant transaction. During 2003, PayPal processed approximately 629,000 transactions per day, and any
violations could expose PayPal to signiÑcant liability.
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