eBay 2005 Annual Report Download - page 26

Download and view the complete annual report

Please find page 26 of the 2005 eBay annual report below. You can navigate through the pages in the report by either clicking on the pages listed below, or by using the keyword search tool below to find specific information within the annual report.

Page out of 123

  • 1
  • 2
  • 3
  • 4
  • 5
  • 6
  • 7
  • 8
  • 9
  • 10
  • 11
  • 12
  • 13
  • 14
  • 15
  • 16
  • 17
  • 18
  • 19
  • 20
  • 21
  • 22
  • 23
  • 24
  • 25
  • 26
  • 27
  • 28
  • 29
  • 30
  • 31
  • 32
  • 33
  • 34
  • 35
  • 36
  • 37
  • 38
  • 39
  • 40
  • 41
  • 42
  • 43
  • 44
  • 45
  • 46
  • 47
  • 48
  • 49
  • 50
  • 51
  • 52
  • 53
  • 54
  • 55
  • 56
  • 57
  • 58
  • 59
  • 60
  • 61
  • 62
  • 63
  • 64
  • 65
  • 66
  • 67
  • 68
  • 69
  • 70
  • 71
  • 72
  • 73
  • 74
  • 75
  • 76
  • 77
  • 78
  • 79
  • 80
  • 81
  • 82
  • 83
  • 84
  • 85
  • 86
  • 87
  • 88
  • 89
  • 90
  • 91
  • 92
  • 93
  • 94
  • 95
  • 96
  • 97
  • 98
  • 99
  • 100
  • 101
  • 102
  • 103
  • 104
  • 105
  • 106
  • 107
  • 108
  • 109
  • 110
  • 111
  • 112
  • 113
  • 114
  • 115
  • 116
  • 117
  • 118
  • 119
  • 120
  • 121
  • 122
  • 123

otherwise harm our business. In addition, affected users will likely complain to regulatory agencies that could
take action against us, including imposing fines or seeking injunctions.
Negative publicity and user sentiment generated as a result of fraudulent or deceptive conduct by users of
our eBay and PayPal services could damage our reputation, reduce our ability to attract new users or retain our
current users, and diminish the value of our brand names.
Changes to credit card association fees, rules, or practices could harm PayPal's business.
Because PayPal is not a bank, it cannot belong to or directly access credit card associations, such as Visa
and MasterCard. As a result, PayPal must rely on banks or payment processors to process transactions, and
must pay a fee for this service. From time to time, credit card associations may increase the interchange fees
that they charge for each transaction using one of their cards. MasterCard and Visa each implemented
increases in their interchange fees for credit cards in April 2005. PayPal's credit card processors have the right
to pass any increases in interchange fees on to PayPal as well as increase their own fees for processing. These
increased fees increase PayPal's operating costs and reduce its profit margins. PayPal is also required by its
processors to comply with credit card association operating rules, and PayPal has agreed to reimburse its
processors for any fines they are assessed by credit card associations as a result of any rule violations by
PayPal. The credit card associations and their member banks set and interpret the credit card rules. Some of
those member banks compete with PayPal. Visa, MasterCard, American Express, or Discover could adopt
new operating rules or re-interpret existing rules that PayPal or its processors might find difficult or even
impossible to follow. As a result, PayPal could lose its ability to give customers the option of using credit cards
to fund their payments. If PayPal were unable to accept credit cards, its business would be seriously damaged.
In addition, the velocity of trade on eBay could decrease and our business would further suffer.
PayPal is required to comply with credit card associations' special operating rules for Internet payment
services. PayPal and its credit card processors have implemented specific business processes for merchant
customers in order to comply with these rules, but any failure to comply could result in fines, the amount of
which would be within Visa's and MasterCard's discretion. PayPal also could be subject to fines from
MasterCard and Visa if it fails to detect that merchants are engaging in activities that are illegal or activities
that are considered ""high risk,'' primarily the sale of certain types of digital content. For ""high risk''
merchants, PayPal must either prevent such merchants from using PayPal or register such merchants with
MasterCard and Visa and conduct additional monitoring with respect to such merchants. PayPal has incurred
fines from its credit card processor relating to PayPal's failure to detect the use of its service by ""high risk''
merchants. The amount of these fines has not been material, but any additional fines in the future would likely
be for larger amounts, could become material, and could result in a termination of PayPal's ability to accept
credit cards or changes in PayPal's process for registering new customers, which would seriously damage
PayPal's business.
Changes in PayPal's funding mix could adversely affect PayPal's results.
PayPal pays significant transaction fees when senders fund payment transactions using credit cards,
nominal fees when customers fund payment transactions by electronic transfer of funds from bank accounts,
and no fees when customers fund payment transactions from an existing PayPal account balance. Senders
funded 53% of PayPal's payment volume using credit cards during both 2004 and 2005, and PayPal's financial
success will remain highly sensitive to changes in the rate at which its senders fund payments using credit
cards. Senders may prefer funding using credit cards rather than bank account transfers for a number of
reasons, including the ability to dispute and reverse charges if merchandise is not delivered or is not as
described, the ability to earn frequent flier miles or other incentives offered by credit cards, the ability to defer
payment, or a reluctance to provide bank account information to PayPal. PayPal has received inquiries
regarding its disclosure practices with regard to funding mechanisms from the attorneys general of a number
of states, and in March 2005, a complaint seeking class action status was filed alleging, among other things,
that PayPal's disclosure regarding the effects of users' choice of funding mechanism is deceptive. While we
believe PayPal's disclosure is legal and accurate, any required change to our disclosure practices could result in
increased use of credit card funding, damaging PayPal's business.
22