PayPal is the result of a March 2000 merger between Confinity and X.com. Confinity was founded in December 1998 by Max Levchin, Peter Thiel, and Luke Nosek, initially as a Palm Pilot payments and cryptography company. Both Confinity and X.com launched their websites in late 1999. X.com was founded by Elon Musk
in March 1999, initially as an Internet financial services company.
Both companies were located on University Avenue in Palo Alto.
Confinity's website was initially focused on reconciling beamed
payments from Palm Pilots  with email payments as a feature and X.com's website initially included financial services with email payments as a feature.
At Confinity, many of the initial recruits were alumni of The Stanford Review, also founded by Peter Thiel, and most early engineers hailed from the University of Illinois at Urbana-Champaign,
recruited by Max Levchin. On the X.com side, Elon Musk recruited a wide
range of technical and business personnel, including many that were
critical to the combined company's success, such as Amy Klement, Sal
Giambanco, Roelof Botha, Sanjay Bhargava and Jeremy Stoppelman.
To block potentially fraudulent access by automated systems, PayPal devised a system (see CAPTCHA) of making the user enter numbers from a blurry picture, which they coined the Gausebeck-Levchin test. According to Eric M. Jackson, author of the book The PayPal Wars, PayPal invented this system now in common use. Although, there is evidence AltaVista used a CAPTCHA as early as 1997, before PayPal existed. The neutrality of The PayPal Wars,
which was self-published by Eric Jackson through his company World
Ahead Publishing, funded in part by Peter Thiel, is disputed.
eBay watched the rise in volume of online payments and realized its fit with online auctions. eBay purchased Billpoint
in May 1999, prior to the existence of Paypal. eBay made Billpoint the
official payment system of eBay, dubbing it "eBay Payments", but cut
the functionality of Billpoint by narrowing it to only payments made
for eBay auctions.
For this reason, PayPal was listed in several times as many auctions
as Billpoint. In February of 2000, there were approximately an average
of 200,000 daily auctions advertising the PayPal service while
Billpoint (in beta) had only 4,000 auctions. By April of 2000 there
were more than 1,000,000 auctions promoting the PayPal service.
was able to turn the corner and become the first dot-com to IPO after the September 11 attacks.
Acquisition by eBay
In October 2002, PayPal was acquired by eBay. PayPal had previously
been the payment method of choice by more than fifty percent of eBay
users, and the service competed with eBay’s subsidiary Billpoint.
eBay has since phased out its Billpoint service in favor of retaining
the PayPal brand. Most of PayPal’s major competitors have shut down or
have been sold; Citibank’s c2it service closed in late 2003, and Yahoo!'s PayDirect service closed in late 2004. Western Union announced the December 2005 shut down of their BidPay service but subsequently sold it in 2006 to CyberSource Corporation. Some competitors which offer some of PayPal’s services, such as Wirecard, Moneybookers, 2Checkout, CCNow and Kagi, remain in business.
PayPal’s total payment volume, the total value of transactions in Q4 2006, was US$11
billion, up 36% year over year. The company continues to focus on
international growth and growth of its Merchant Services division,
providing online payments for retailers off eBay.Bank status
In the United States, PayPal is licensed as a money transmitter on a state-by-state basis. Although PayPal is not a bank,
the company is still subject to and adheres to many of the rules and
regulations governing the financial industry including Regulation E
consumer protections and the USA PATRIOT Act. However, on May 15, 2007, PayPal announced that it would move its European operations froto Luxembourg, commencing July 2, 2007
as PayPal (Europe) S.à r.l. & Cie, S.C.A. This would be as a
Luxembourg entity regulated as a bank by the Commission de Surveillance
du Secteur Financier (CSSF), the Luxembourg equivalent of the FSA. PayPal Luxembourg will then provide the PayPal service throughout the European Union (EU).