eBay 2007 Annual Report Download - page 28

be time consuming, result in costly litigation, require significant amounts of management time, and result in the
diversion of significant operational resources.
Failure to deal effectively with fraudulent transactions and customer disputes would increase our loss rate
and harm our business.
PayPal’s highly automated and liquid payment service makes PayPal an attractive target for fraud. In
configuring its service, PayPal continually strives to maintain the right balance of appropriate measures to promote
both convenience and security for customers. Identity thieves and those committing fraud using stolen credit card or
bank account numbers can potentially steal large amounts of money from businesses such as PayPal. We believe
that several of PayPal’s current and former competitors in the electronic payments business have gone out of
business or significantly restricted their businesses largely due to losses from this type of fraud. While PayPal uses
advanced anti-fraud technologies, we expect that technically knowledgeable criminals will continue to attempt to
circumvent PayPal’s anti-fraud systems. In addition, PayPal’s service could be subject to employee fraud or other
internal security breaches, and PayPal may be required to reimburse customers for any funds stolen as a result of
such breaches. Merchants could also request reimbursement, or stop using PayPal, if they are affected by buyer
fraud.
PayPal incurs substantial losses from merchant fraud, including claims from customers that merchants have
not performed or that their goods or services do not match the merchant’s description. PayPal also incurs losses from
claims that the customer did not authorize the purchase, from buyer fraud, from erroneous transmissions, and from
customers who have closed bank accounts or have insufficient funds in them to satisfy payments. In addition to the
direct costs of such losses, if they are related to credit card transactions and become excessive, they could result in
PayPal losing the right to accept credit cards for payment. If PayPal were unable to accept credit cards, the velocity
of trade on eBay could decrease, in which case our business would further suffer. PayPal was assessed substantial
fines for excess chargebacks in 2001, and excessive chargebacks may arise in the future. PayPal has taken measures
to detect and reduce the risk of fraud, but these measures need to be continually improved and may not be effective
against new forms of fraud or in connection with new product offerings. If these measures do not succeed, our
business will suffer.
PayPal offers a buyer protection program for transactions on eBay.com that refunds up to $2,000 to buyers who
used PayPal in transactions with selected sellers if the buyer did not receive the goods they purchased or if the goods
differed significantly from what was described by the seller and up to $200 in most other eBay transactions. PayPal
has expanded this program to many eBay international marketplaces, in most cases with lower reimbursement
amounts. If PayPal makes such a refund, it may seek to collect reimbursement from the seller, but may not be able to
receive any funds from the seller. The PayPal buyer protection program has increased PayPal’s loss rate and could
cause future fluctuations in PayPal’s loss rate. For the full years ended December 31, 2006 and December 31, 2007,
PayPal’s transaction loss (including both direct losses and buyer protection payouts) totaled $126.4 million and
$139.3 million, representing 0.35% and 0.29% of PayPal’s net Total Payment Volume, respectively.
eBay faces similar risks with respect to fraudulent activities on its websites. eBay periodically receives
complaints from users who may not have received the goods that they had purchased. In some cases individuals have
been arrested and convicted for fraudulent activities using our websites. eBay also receives complaints from sellers
who have not received payment for the goods that a buyer had contracted to purchase. Non-payment may occur
because of miscommunication, because a buyer has changed his or her mind and decided not to honor the contract to
purchase the item, or because the buyer bid on the item maliciously in order to harm either the seller or eBay. In
some European jurisdictions, buyers may also have the right to withdraw from a sale made by a professional seller
within a specified time period.
While eBay can suspend the accounts of users who fail to fulfill their payment or delivery obligations to other
users, eBay does not have the ability to require users to make payment or deliver goods, or otherwise make users
whole other than through our limited buyer protection programs. Other than through these programs, eBay does not
compensate users who believe they have been defrauded by other users, although users who pay through PayPal
may have reimbursement rights from their credit card company or bank, which in turn will seek reimbursement
from PayPal. eBay also periodically receives complaints from buyers as to the quality of the goods purchased. We
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