Powered by PayPal from Silicon Valley’s Confinity

www.paypal.com

PayPal is the biggest online “wow” we’ve experienced since NextCard’s real-time credit card balance transfer in April 1998 (OBR 5/98).

PayPal’s just-launched Web service allows users to “email” money to anyone by simply typing their email address. And it’s free.

Note: shortly before press time, the format of this screen changed, see screenshot.

The Company: Yet another Silicon Valley start-up is eyeing the banking franchise. Launched just one year ago, Confinity (Palo Alto, CA) is a promising new payments company that bears watching closely, very closely. The company is handing out $10 referral fees and sign-up bonuses like candy. The fine print says that only the first 50,000 users earn $10 bonuses. (Users can earn up to $1,000 in referral fees by signing up a maximum of 100 new users). But we doubt the company’s investors will want them to stop at 50,000. The opportunity is huge, and it looks as though Confinity has at least a six-month head start on the competition.

The company won’t say how many employees they currently have, but there are at least 14 job openings listed on their Web site (Nov. 29).
Red Herring reported that the company had 14 employees in July when they received $5 million in funding from investors Nokia Ventures; Deutsche Bank Tech Ventures; Bill Melton, founder of Verifone and Cybercash; and Stanford professor Martin Hellman.

The Product: The company currently has three person-to-person (P2P) products in various stages:

1. Email payment service launched Nov. 15 that can be used to send money instantly to anyone with an email address.

2. Palm-to-Palm payment application currently in beta with full release scheduled for December. The estimated four to five million Palm users will be able to send money to other Palm users either through email as described above, or through Palm-to-Palm infrared communication using software that can be freely downloaded from the PayPal site. The software can also be sent to new users in 15 seconds using the infrared connection.

3. Cell-phone-based payments, a modified version of email payments, scheduled for release in
Q1 2000.

Much of the press coverage has focused on the Palm application, which is useful if you live in Silicon Valley or work in a high-tech Palm-toting company. But for the rest of the world, it’s the email payment program that has the huge potential.

Business Model: Originally, Confinity was looking at earning revenues from float, abandoned funds, and a 4.5% withdrawal fee (after first $500 each six months), among other things. But prior to its Nov. 15 launch, the company dropped the withdrawal fee and instituted a policy that will significantly limit the amount of abandoned funds. The PayPal system will automatically return money to the sender if not claimed within 180 days. Senders can also reverse transactions before the 180-day mark by requesting a reversal from customer service.

The company is planning a number of programs to boost usage beyond the one or two P2P payments the average user would make each month (our estimate). For example, a program targeting merchants is planned that would put the company into the ebilling market.

PayPal’s “Quick 1-Page Registration” really is.

How it Works:

Registration Process:

1. User goes to paypal.com.

2. Selects sign-up button on top right.

3. Completes mini-application including name, address, phone number, and email address

4. Chooses username, password, and secret question (for password resets).

5. Enters credit card info for authorization.

6. Checks email for confirmation message (timing will vary, we had to wait about 30 seconds).

7. Clicks on the link in the email, or manually inputs the 20-digit confirmation number.

8. After step seven, users are given a temporary charge limit of $100 against the pre-registered credit card.

9. An additional confirmation is sent to the user’s postal address. On subsequent logins, users are prompted for their snail-mailed confirmation number. After entering the 20-digit number, users’ credit card charge limit is raised to $5,000. The charge limit, which is currently the same for all users, is the maximum amount that can be charged to credit cards in a six-month period, with no single charge higher than $2,000.

The charge limit guards against fraud, but mostly it prevents users from quickly running through large volumes of credit card transactions for the float and/or miles. Nevertheless, it’s an appealing way of bagging an extra 10,000 miles every year.

We expect Confinity will eventually process card transactions as cash advances instead of purchases. That will effectively transfer the cost of the card transaction from Confinity to the user, which will give users a monetary incentive to fund their account via ACH instead of credit card deductions. The company won’t have to worry about the tedious and mildly confusing charge limit tracking either.

Elapsed time: 5 minutes, 18 seconds*

*Time in takes to completely the online portion of the registration process: Includes typing the URL, completing the application, scanning the agreement, and confirming the email message (with a 30-second wait for the email to arrive). It does not include confirming the snail mail address a week later, which took less than a minute.

Sending Money (called “beaming” by Confinity):

1. User logs in to PayPal site.

2. Selects Beam Money from menu.

3. Enters email address of recipient (who does not have to be a registered Confinity user until they want to withdraw the money) and dollar amount of the payment; presses enter.

4. Confirms transaction; presses enter. The transaction immediately appears in the Transaction Log for reference.

Elapsed time: 59 seconds*

*Time in takes to completely perform the transaction: Includes typing the URL, logging in, entering the information, including an optional 10-word memo. Assumes you know the recipient’s email address and have available funds sitting in your PayPal account. Otherwise the payment amount is charged to your credit card adding 15 to 30+ to the entire process.

Shortly before we went to press, Confinity added a number of improvements to the main “beaming” screen including an important (albeit short)
32-character memo field.

Receiving Money:

1. A few seconds after money is sent (previous page), the recipient receives an email saying “Joe Jones has beamed you money” (see email right).

2. User clicks on imbedded link to retrieve money.

3. New users must register using the process outlined on; existing users simply log in.

4. Selects Withdraw Funds.

5. Users can leave the money in their PayPal account, have it electronically transferred via ACH to any bank**, or have a paper check sent. Either way, there are no fees assessed to either party in the transaction.

Elapsed time = 32 seconds*

*Time in takes to completely perform the transaction: Includes typing URL, logging in, selecting a pre-registered bank account to deposit the funds, entering the amount to transfer, and pressing enter. New users must first go through the five-minute registration process (previous page).

**Each bank account must be registered by entering bank name, routing number, and account number; then confirming that info. emailed to the address-of-record. This process takes 1 to 2 minutes.

Transaction logs make it easy to see what you’ve just done, or look back to activity many months ago. Users can search on any date range using the optional fields at the top of the screen.
The memo line is also captured in the log.

Email to Recipient of Funds

Subject: Jim Bruene Beamed You Money with PayPal!

Date: 5 Nov 1999 20:28:48 -0000

From: jb@netbanker.com

To: mq@netbanker.com

Jim Bruene (jim@netbanker.com) has just Beamed you Money! You now have $11.05 waiting for you at PayPal.

Visit http://www.PayPal.com/links/uni to sign up for your PayPal account today! And remember to sign up with this email address mq@netbanker.com in order to claim your money.

PayPal is a free service that lets you Beam Money to anyone using your credit card. Today, you can Beam Money online to anyone with an email address. In the near future, you will be able to Beam Money with your Palm, Handspring, and Windows CE organizers, Internet-enabled cell phones and two-way pagers.

Welcome to PayPal!

If you wish to thank your friend, reply to mailto: jim@netbanker.com

Source: Confinity, 11/99

Adding Funds:

1. User selects Add Funds from the main menu.

2. Selects an account to debit from a drop-down list of previously entered bank accounts. Note: users also have the option to, (a) mail a paper check to fund their account, or (b) not funding it in advance, in which case any necessary funds are charged to the user’s credit card entered during the registration process.

3. Enters the amount to be added to the PayPal account; presses enter.

4. Confirms transaction; presses submit.

Elapsed time = 36 seconds*

*Time in takes to completely perform the transaction (the same process as withdrawing funds): includes typing URL, logging in, selecting Withdraw Funds, selecting an account to debit, typing an amount, and confirming the transaction.

Transferring Funds:

A practically undocumented, but potentially interesting product feature, is the Web-based interbank funds transfer engine built into the system. In a matter of seconds, users can register multiple bank accounts to move money in and out of their PayPal account. Currently, you cannot move money directly from one bank account to another. You must first transfer funds into your PayPal account, wait for them to arrive, then move the money out. It’s a bit convoluted and can take
3 to 5 days, but it still beats mailing a paper check.

1. After logging in to PayPal, user selects Add Funds and follows the procedure outlined above (selecting bank account, then entering the amount to be debited from that account).

2. User waits up to 48 hours for money to be transferred into their PayPal account.

3. User selects Withdraw Funds and follows the procedure outlined on the previous page (selecting bank account, then entering the amount to be transferred). Again, up to 48 hours later the amount will be credited to the receiving bank account.

Elapsed time: 3 to 5 days*

*Total time it takes to move money from bank account A into bank account B. The two transactions only take about 30 seconds each to perform, however users must wait up to 48 hours for each of the two separate ACH transactions to post.

Marketing Strategy: The company’s Nov. 16 press release <biz.yahoo.com/prnews/991116/ca_confini_1.html> contains a hodge-podge of potential marketing strategies, from everyday person-to-person payment needs such as settling a dinner bill, to specialized merchant applications such as ordering and paying for a coffee drink prior to arriving at the coffee shop.

But the company’s main emphasis right now is viral marketing, hoping that the process of friends beaming money to each other will spread like wildfire across the Net. And to fuel the fire, the company is throwing money to its early adopters in the form of $10 sign-up and referral bonuses. Users can earn up to $1,000 by bringing 100 new users into the system ($10 each). To qualify for the $10 you must beam a penny or more and the recipient must register with Confinity, confirm their credit card number by email and confirm their street address sent by snail mail. The recipient also gets $10 and can earn additional referral bonuses in the same manner.

The company plans to offer the service on a co-branded basis through partners such as banks and portals. No word on partners at this early stage.

We strongly encourage you to set up an account at PayPal to see how it works. You can register, poke around, and beam yourself a test transaction, in less than 15 minutes, and you only have to give up one credit card number. Here’s why it’s so good:

•  Instant gratification: Within six minutes of first learning about PayPal, you can be beaming money across the Net.
•  Easy to use: You can send money to anyone simply by knowing their email addresses (you don’t even need to know their name!).
•  Simple and intuitive user interface: Once registered, it takes only 30 seconds to send money, faster even than scribbling out a
  paper check.
•  Instantaneous posting of transactions.
•  Two-step user authentication: Snail mail confirmation is required for full access, but a
  simple email authentication gets users started.
•  Fast Web site.
•  Free (except lost float).

It’s not perfect, the weaknesses:

•  Lost float: In its current business model, Confinity holds the money. Consumers won’t like that. But we think most will understand the trade-off: lost float for free transfers.
•  Fraud concerns: The current email address and password scheme is not rigorous enough for financial transactions. Additional password protection should be placed in front of transfer functions, at least for high-dollar transactions. Email notifications to senders would also be a welcome security addition.
•  360⁰ tracking: Users need a way to track whether the funds transfer was received. The company says it will add that feature soon. They recently added referral tracking.
•  Credibility: We don’t think the company does enough to assure users that the system is secure and fail-safe. It does an adequate job explaining itself, but they could use more detail and especially more assurances from independent third parties (only investors Nokia and Deutsche Bank are listed as endorsements)
•  Learning curve: This is the $64 million dollar question for Confinity. Will people go through the hassle of signing up and learning the system
  to get the $25 you owe them for mom’s flowers? We think many will, if the other issues, especially credibility, are addressed (see below).

Summary: For a system 10 days out of beta, PayPal is spectacular. The company’s ability to plug holes and refine its business in Internet time bodes well for the future. We have been using the system for about three weeks and have already witnessed dozens of enhancements to the user interface and Web site.

Trust is the biggest obstacle to adoption. Will users turn over their bank account numbers to a new, unregulated, unlicensed company with “pal.com” in its name? We think for most consumers the answer is “no.” The company must partner with major financial services companies (e.g. a top-10 bank or card issuer; or Visa, MasterCard, or American Express) to gain significant adoption. The company should have little trouble finding big name backers. Chase’s $15 million profit in VerticalOne (OBR 9/99) should mollify any critics in the boardroom.

Contact:

Matt Bogumill, Business Development

165 University Avenue

Palo Alto, California 94301

Phone: (650) 566-3645; Fax: (650) 566-3646 matt@confinity.com

The Confinity Team

Source: Confinity, 11/99

Investors

Sources: Confinity, 11/99

The Buzz

Source: Confinity, Dow Jones, 11/99