PayPal's Risks and Potential Rewards

Computerworld - In PayPal Inc.'s 156-page filing for its initial public offering (IPO) in February, the company listed numerous potential risks for liability, as well as potential opportunities.
The risks included the following:
• Potential use of payment system for illegal purposes, such as fraud, money laundering and offshore gambling.
• Disputes between buyers and sellers.
• Unauthorized use of credit cards.
• Negative publicity stemming from customer complaints.
• Chargeback fees assessed to PayPal when a buyer reverses charges.
• Potentially being found in violation of federal and state banking and money-transfer laws.
• Potentially being found in violation of international laws. (PayPal operates in 36 countries.)
• PayPal's limited experience in managing and accounting large amounts of customer funds.
But analysts said the company offers benefits so important to the online community that it breezed through its successful IPO in February and has become the de facto electronic-payment processor for the bulk of peer-to-peer trading.
Those benefits included the following:
• Profit potential (2% to 3% of 3.5 billion in transactions for 2001).
• Fills a real market need.
• Less expensive for members than traditional credit card merchant accounts.
• Rapid adoption and growing membership.
• Set standards for antifraud and internal system security. (In addition to an antifraud system, PayPal provides a database that rates the quality of senders and recipients of funds.)
• Best available choice for members, according to analysts.