eBay 2007 Annual Report Download - page 34

that merchants are engaging in activities that are illegal or 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 credit card networks 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 or use buyer credit issued by
GE Money Bank. Senders fund a significant portion of PayPal’s payment volume using credit cards, 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 directly with their credit card provider if merchandise is not
delivered or is not as described, the ability to earn frequent flier miles or other incentives offered by credit card
issuers, the ability to defer payment, or a reluctance to provide bank account information to PayPal. In addition,
some of PayPal’s newer offerings, including the ability to make a limited number of payments without opening an
account, have a higher rate of credit card funding than PayPal’s basic product offering. In September 2006, PayPal
entered into a settlement agreement with the attorneys general of a number of states under which it agreed to pay
$1.7 million to the attorneys general, shorten and streamline its user agreement, and communicate more information
regarding protection programs to users. Also in September 2006, PayPal announced that it had reached a
preliminary settlement agreement under which it agreed to pay approximately $3.5 million into a settlement
fund for the benefit of a class represented by plaintiffs in a suit that alleged, among other things, that PayPal’s
disclosure regarding the effects of users’ choice of funding mechanism was deceptive. This settlement was rejected
by the court. Although PayPal did not admit any liability for any of the allegations in the two cases, changes to our
disclosure practices could result in increased use of credit card funding, which would harm PayPal’s business.
PayPal’s failure to manage customer funds properly would harm its business.
PayPal’s ability to manage and account accurately for customer funds requires a high level of internal controls.
In some of the markets that PayPal serves and currencies that PayPal offers, PayPal has a limited operating history
and limited management experience in managing these internal controls. As PayPal’s business continues to grow, it
must strengthen its internal controls accordingly. PayPal’s success requires significant public confidence in its
ability to handle large and growing transaction volumes and amounts of customer funds. Any failure to maintain
necessary controls or to manage accurately customer funds could diminish customer use of PayPal’s product
severely.
System failures could harm our business.
We have experienced system failures from time to time, and any interruption in the availability of our websites
will reduce our current revenues and profits, could harm our future revenues and profits, and could subject us to
regulatory scrutiny. Our eBay.com website has been interrupted for periods of up to 22 hours, and our PayPal
website has suffered intermittent unavailability for periods as long as five days. In August 2007, Skype experienced
an interruption during which the majority of Skype’s users were unable to use its products for approximately two
days. Any unscheduled interruption in our services results in an immediate, and possibly substantial, loss of
revenues. Frequent or persistent interruptions in our services could cause current or potential users to believe that
our systems are unreliable, leading them to switch to our competitors or to avoid our sites, and could permanently
harm our reputation and brands. Reliability is particularly critical for PayPal, especially as it seeks to expand its
Merchant Services business. Because PayPal is a regulated financial entity, frequent or persistent site interruptions
could lead to fines, penalties, or mandatory changes to PayPal’s business practices, and ultimately could cause
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