PayPal in 2019 had its most successful year in terms of financial performance. It saw the company generate $17.8 billion in revenues only, which resulted in an operating income of $2.7 billion and a net income of $2.4 billion.
The company also saw it’s market capitalization rise over $300 billion recently. One of the reasons behind PayPal’s success is its robust and effective business model.
What is PayPal business model?
PayPal’s business model describes many factors that play a critical role in revenue generation for the company. These factors include the target markets, products and services, and anticipated expenses of the company.
In short, its business model gives an idea of how the company generates its revenues and profits.
PayPal’s target market includes the online payments market for users around the world. When PayPal first started, there was no or very little competition in the market, which allowed PayPal to capture a significant portion of the market.
When eBay began promoting PayPal as its primary mode of acceptable payments, the company boosted even further in the market.
Today, PayPal is available around the world and has captured most of its target markets. However, there are still some countries where PayPal isn’t available, such as emerging or developing countries, such as Sri Lanka or Pakistan.
For some of these countries, PayPal has a plan to introduce its services in the future. However, for some others, PayPal does not want to expand there for various reasons.
How does PayPal make money?
The most important thing that PayPal’s business model gives insights into is how the company makes money. It does so by defining its products and services, its sources of revenues, and its anticipated expenses.
PayPal has the advantage of being an experienced company when it comes to revenue generation, as shown by its historical financial performances.
For PayPal, revenues come from different sources. These include the following.
Transaction-based fees
The primary source of money that PayPal makes is its transaction-based fees. Users on the platform can send funds to and receive funds from various sources.
Similarly, PayPal offers users the ability to benefit from offline transactions through its virtual terminal.
Furthermore, the company also allows its users to order a debit card that they can use to make transactions through their PayPal balance. For each of these services provided by the company, it charges users a fee.
The fee charged by the company has two parts, a percentage-based charge and a fixed amount. The standard rate per transaction through PayPal is 2.9% of the transaction value and $0.30 fixed amount.
However, the percentage and fixed fee differ depending on multiple factors. These include the type of account, user location, type of transaction, the money involved, etc.
These can take the transaction-based fee up to 5.4% and $0.30 fixed amount.
PayPal, unlike its competitors, does not charge its users for transactions within the platform but family and friends only. Users can add others to their friends and family list to avoid the standard charges.
Similarly, the platform does not require users to pay any subscription-based fees, setup fees or cancellation fee.
Currency conversion
PayPal also charges its users for currency conversion. It typically happens when users from different countries send each other money through the platform.
It also includes other charges, for example, international payment fees when using international payments. The fees that the platform depends on factors such as the countries and currencies involved.
Business accounts
Of the two types of accounts, business accounts are the principal source of income for PayPal. It is because business accounts not only have high volumes of transactions, which can result in higher transaction-based revenues but also may pay charges for pro accounts.
‘Pro’ business accounts provide several benefits to businesses at a $30 subscription fee. In addition, considering PayPal has a significant business userbase, the amounts can add up to substantial revenues for the company.
Payflow Payment Gateway
Payflow is a payment gateway offered by PayPal through which businesses can link their websites to their processing network and merchant account. It allows those businesses to connect their merchant account to their website and provide their audience with online checkout features.
There are two plans, when it comes to Payflow, that users can benefit from or choose. The basic version is free, while the pro version costs $25 per month.
Interest earned
PayPal works similarly to banks. When users deposit money in their account, the money stays with the company until withdrawn. The company uses this as an opportunity to invest the money and earn interest in it.
Users don’t get a percentage of the interest income as it solely relates to PayPal. However, interest income can generate the company a respectable amount of earnings.
Conclusion
PayPal demonstrated its best financial performance to date in 2019. The reason behind the unprecedented financial performance lies in PayPal’s business model, which shows how the company makes money.
For PayPal, some of its highest sources of income include transaction-based fees, currency conversion fees, subscriptions from business accounts, Payflow payment gateway, and interest earned from investing users’ balances.