PayPal: A Case Study of Financial Technology

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Financial technology is changing how the financial industry is operating, and this is due to the disruptive technology that the firms in the industry offer. Every organization that enters the industry has its purposes, of which the main one is to use the multifaceted technology and innovations at its disposal to serve as many clients as possible. Because the customers are always concerned about the security of their information, an organization that gives security of the client the top priority gains a competitive advantage. Such concerns come because of fraud and cybercrime that are prevalent in the industry. PayPal has managed to remain the top position because it has overcome security challenges.

Keywords: PayPal, technology, cybercrime, fraud, security.

Introduction

One cannot deny the fact that financial technology industry is thriving globally and has received millions of dollars in investment in the past few years (Schulman 2015, p. 5). A great number of consumers worldwide are using financial technology services. People in the financial technology industry develop new tools to meet the challenges posed by customers in the industry. Financial technology companies utilize innovation such as the widely available payment applications with more different multifaceted software such as Big Data and artificial intelligence (Schulman 2015, p. 6).

The developments in the financial technology have compelled financial institutions to rethink their strategy to the industry, and this rethinking has been useful because access to financial services spread even more. Financial technology cannot only make the products and services accessible but can also make them cheaper by reducing the cost incurred in doing business for the financial organizations. The objective is to assess the financial technology by taking PayPal as a case study and evaluating its progress and challenges the company faces in the financial market.

A) PayPal Independent from EBay

While divorces may sometimes cause more problems than marriages, spin-offs are always far more complicated when compared to mergers. Several issues tend to be decided in a corporate marriage after closing the deal (Nguyen 2016, p. 52). The important thing that needs to be settled is how the IT systems will be separated, how the derivation of the assets will take place and which staff will be on whose payroll. Therefore, separation processes tend to be complicated as they keeps people busy and cost much money (Nguyen 2016, p. 54).

The change in technology and markets is rapid, and this has made some mergers incompatible hence becoming independent of each other, and the stakeholders tend to be passionate about spin-offs (Shrier and Pentland 2016, p. 89). The association with EBay practically limited PayPal's ability to expand since PayPal made rival e-commerce sites that were less willing to collaborate with it as a result of its association with EBay, which was competing with other e-commerce firms (Shrier and Pentland 2016, p. 94).

Spinning off to become independent and to have its shares and the ability to give out its bonds has given PayPal an opportunity to be aggressive in pursuing acquisitions and competing for talent. The different leadership is slowly neutralizing the threats, culture, and approach and the company is picking up from where it left off before the merging process. Therefore, PayPal is better off independent of EBay (Nicoletti 2017, p. 78).

B) Failures and Success of PayPal

The main success of PayPal in the last three years since its split from EBay has a concentration on marketing security of its clients' funds and information (Schulman 2015, p. 8). Security frauds have been on the rise in the e-commerce industry, and PayPal has been outstanding in communicating this fact and coming up with back-end solutions to keep its partners and the consumers safe. Security has been an element of the growth strategy of the organization, and this has earned the company the loyalty of its customers, just as it was pointed out by the CEO in the company's vision. The company is becoming a lifestyle brand among its consumers (Milne 2017, p. 34). Besides this, the organization has always made an effort to show that it is an ethical company. It established its moral standing by withdrawing as a payment option for gambling sites and virtual customers around the world. The company showed that it would not compromise its brand integrity. The company has continued to expand and continues to be innovative and standing by the value of integrity and strong compliance hence demonstrating its success in three years after being independent (Schulman 2015, p. 9).

However, there are possible challenges that might translate to the failure of PayPal the in the long run in line with the vision of the organization (Schulman 2015, p. 12). The competition is the primary challenge for new financial technology companies that are emerging regularly and entering the market fully prepared to overcome their competitors. Examples of such companies include Amazon and Square. In 2013, the total amount that was transacted by PayPal was over $170 billion, but over 25 billion dollars came from the mobile platforms (Schulman 2015, p. 17). Amazon, on the other hand, launched a card-swiping gadget and other peripherals, which assist the merchants in establishing their point of sale systems. The system can undercut the fees of both the PayPal and Square. Such challenges have contributed to the slow implementation of the vision of PayPal (Schulman 2015, p. 21).

C) Greatest Risks of PayPal CEO

One of the main challenges that the current CEO of PayPal is going to face in the next five years is the management of the operational risks that come from the third party service providers (Lee 2015, p. 218). Oversight frameworks for vital third party service providers such as data services and cloud computing need to be improved, and that must be done where PayPal depends specifically on a given third party service provider in conjunction with other rival financial technology companies. If an attack from the cybersecurity angle on a financial technology company is successful, then it can have a devastating effect on the company since the entire business premise is built on the concept of transacting quickly. If the attack leads to loss of money, then it will be a fraud that will ruin the reputation of the organization. However, if a bank is hit, then it can deal with the fallout however bad it may look. The management of the company is faced with the task of investing in cybersecurity to avoid such possibilities (Lee 2015, p. 221).

Regulation is another risk that the CEO of PayPal will have to deal with in the next five years (Leong and Sung 2018, p. 75). The financial technology companies find it difficult to handle newer regulations that are constantly being put in place by the authorities. Because the financial technologies are constantly innovating, there is a high probability that regulations put in place by the government can dampen their innovation. Therefore, the manager of the company must opt for proper legal advice as time goes on to avoid being sandwiched between the authorities and effects of cybersecurity threats. (Leong and Sung 2018, p. 77).

D) The Difference in the Risks from the Case Study

From the discussion of risks in C, it is apparent that they are not different from those that are presented in the case study (Dietz et al. 2016, p. 57). Security risk that is highlighted in both the case study and the above discussion is the part of the total risk. According to the case study, the fact that PayPal was going to leave EBay and become independent indicated that they were to undergo a security risk as a result of operating autonomously. The growing number of operations and the intricacy of products significantly augmented the number of points of susceptibility to cyber-attacks. This sentiment has been echoed in the discussion of risks by the CEO, which points out that the possibility of cyber-attack on a financial technology firm can be devastating, especially if the firm has not invested in cybersecurity. The issue of security also manifests itself if there are regulations to deter innovation, which then fails to plug the security loopholes (Dietz et al. 2016, p. 59).

Another similar threat in the case study that is comparable to the one discussed in risks discussed by the PayPal CEO is a threat of the new entrants. Concerning the case study, PayPal operates in a setting that is complicated and complex (Farboodi and Veldkamp 2017, p. 63). The setting has competing entrants among the new entrants, and they have substantial resources. Such competitors include the MasterCard, Visa, Apple, and Google among others. PayPal had varied results when they competed or collaborated with these industry players. As a result of the presence of many players in the industry, some rules are devised regularly to control the possibility of exploitation of the consumer. This point justifies the continuous establishment of new regulations, which has such an effect on innovation in the financial technology industry as mentioned in the risks of the PayPal CEO (Farboodi and Veldkamp 2017, p. 68).

E) Responding to the Launch of Apple Pay

Moreover, the PayPal should adopt the applied lens concept. The concepts comprise three working domains, which are macro, meso, and micro (Macvaugh & Schiavone 2010, p. 221). The findings from the study by Macvaugh and Schiavone (2010) found that understanding technology acceptance greatly differs depending on which lens is applied. It was stated that the domains theory indicated that macro means the domain of the market, meso to indicate the domain of the community of users and the micro to mean the domain of the single user (Macvaugh & Schiavone 2010, p. 221). Individuals who take up the applied concept theory exchanged information than the ones who do not (Macvaugh & Schiavone 2010, p. 221).

Additionally, PayPal should adopt the diffusion of innovation theory (DIT). The theory explains the process of acceptance of technology advancement and innovation adoption (Rogers, 2013, p. 297). The theory solidly depends on understanding factors why individuals adopt the technology (Al-Jabri & Sohail, 2012, p. 190). Through the innovation theory, PayPal will drastically increase market access as opposed to Apple pay

Formerly the main rival of PayPal was Billpoint, which was a joint venture between Wells Fargo and EBay. EBay was the most important partner of PayPal, yet it owned Billpoint, which was a competing business to PayPal (Cheng, Hsu and Lo 2017, p. 254). However, in the midst of all the challenges, PayPal triumphed because of using a superior networking intelligence. Network intelligence should be undertaken ethically just as PayPal did it several years ago. They should once again try to apply it to respond to the recent launch of Apple Pay and Android Pay, which are advancing in the financial technology business at an alarming rate (Cheng, Hsu and Lo, 2017, p. 256). The company should discuss with the two rivals on how they perceive the market after which they can come up with clues on what their rivals are up to and develop measures and approaches to counter competitors’ ideas.

Network intelligence is also instrumental in developing new technologies and innovation. When employees tap their personal and professional networks, they will tend to amass feedback from friends with a wide range of diversity, expertise, and experience. When adaptation, innovation, and execution are direly necessary, success will be closely connected to how the team or members of the staff interact with the outsiders. Successful teams will transverse borders to forge solid network connections both internal and external to the organization in a bid to respond to competition from Apple Pay (Cheng, Hsu and Lo, 2017, p. 258).

Another strategy that PayPal should use in responding to launch of the Apple Pay is to go for larger clients. Larger clients will lead to increased revenues and more business, which means that there are more resources to hire new employees and for marketing. Large customers can be stress-free to service than smaller corporations and can give the business more trustworthiness when meeting with each other’s possible projections. Building client trust is another avenue PayPal should adopt through adopting innovative crime prevention legal Acts. Willingness to adopt e-payment is much dependent on privacy-related matters like data protection (Kim et al., 2010, p.300.).

F) Plan for Company

a. Mitigating Fraud and Cybercrime for Individuals

It is advisable to increase network externalities. It has been stated that users’ adoption of e-payment services is largely dependent on the number of merchants offering the services (Macvaugh & Schiavone 2010, p. 221). Macvaugh and Schiavone indicated that the network externalities have a great effect on the diffusion of innovation (2010, p. 221).

Cost of the transaction of PayPal’s payment is another factor that surpasses other e-payments. It is important for PayPal to reduce transaction cost of e-payments to outperform Apple pay. High cost has an adverse effect on the adoption of e-payments (Wu & Wang, 2015, p.65). The cost also is affected by the level of trust in the services and the anticipated risk (Wu & Wang, 2015, p. 52).

A good number of individuals and small businesses fall victim to fraud at some point in their transactions, and each such fraud costs them a considerable amount. (Chishti and Barberis 2016, p. 67). Apart from hacking and phishing, the moment an individual accepts a payment that is fraudulent, they can be held financially accountable for the loss. Dealing with a fraudulent transaction entails the chargeback process and the possibility of a hit on the reputation of the organization. There should be steps put in place to minimize the risks and protect the customers and the company from the digital attacks (Chishti and Barberis 2016, p. 69).

There are many types of online frauds. However, they can be categorized into two buckets, which are account takeover and identity theft. Therefore, to help PayPal protect itself and the customers from online fraud and cyber-attacks, relevant organizations have established a set of practices and standards to safeguard the data of the consumer. Complying with the standards and practices is not optional for the online users, and the regulations must be strictly applied. The standards are called Payment Card Industry (PCI) standards, which were developed through the cooperation of three financial technology companies, namely, American Express, Visa and MasterCard. Achieving and maintaining PCI compliance is an on-going process that PayPal needs to undertake to ensure that they are adhering to the security practices highlighted by the PCI alongside other strategies to avoid loss of money and ruining the reputation of the company (Chishti and Barberis 2016, p. 71). The impact of negligence will taint the company's image, and impact the customers who might lose trust towards the company

The organization should employ both automatic and human monitoring to catch fraudsters (Harrison and Olliphant 2017, p. 23). The organization must ensure that the software they use is deploying fraud protection filters that will alert the organization if multiple orders arise from the same customer using different credit cards. The filters also help to identify fake emails, phone numbers and addresses, and other information that does not help. The software is only one of the lines of defense, but the organization must ensure the inclusion of the employees in the fraud prevention. Humans can often spot the oddities that the software missed. It means that the organization must train all the staff members to identify suspicious activity while they receive and handle orders (Harrison and Olliphant 2017, p. 25).

In case the organization comes across an order that seems suspicious, they can Google the address to confirm if it is real, and if by any chance the address comes back as that of a vacant lot, they will know that they have a possible scammer on their hands (Wilson 2017, p. 56). The organization can as well as delay the shipment of the transaction for two days to see what happens. If the customers are legitimate, they will go ahead to ask the organization concerning the holdup. The other option is to work with reliable third-party organizations. While the third-party organization may charge a certain fee, they tend to focus on their job, which is to offer their experience in securing their clients’ businesses. Such organizations have the expertise for taking care of sensitive data, and this place the sensitive information of the customers out of hands of fraudsters (Wilson 2017, p. 58).

The organization should also not keep on record the information that they do not require since such information could be sensitive information from the customer’s point of view and put both the organization and the customer at risk. By keeping the transactions between a client, and the bank, the payment firm can make it certain that there will be no fraudulent activity on the customer's account. This way, the company avoids a data breach that may arise from unintentional leakage of customer's information that can destroy a business (Wilson 2017, p. 62). The customers' trust towards the company is achieved by maintaining privacy, which is breached by data leak.

When the client completes a transaction using a device such as a mobile phone, then it is advisable to send an authentication code to the phone number they give during the transaction via a channel that is separate such as SMS (Treleaven 2015, p. 45). Through this, the company is certain that the customers are using a mobile device they claim to be using because mobile numbers are expensive to fake. The strategy can further be made robust by issuing a one-time password which expires in a few minutes, and this prevents the hackers from gathering old passwords to use (Treleaven 2015, p. 45). Endpoint authentication is another approach that is similar to phone number authentication. The process is used to know whether a given device has completed any transaction successfully with the organization in the past. The strategy can also be used to tell whether the device was used to try fraudulent transactions in the previous business dealings. Another approach is to check whether POS matches the previous transactions and if the amount spent, is in the range of the previous expenditures (Treleaven 2015, p. 45).

While dealing with security threats, deployment of biometrics cannot be underestimated. Engineers are working round the clock to come up with iris scanning technology since the irises are known to all have unique patterns just like a thumbprint. However, different from thumbprint, the pattern of the iris cannot be tampered without incurring significant damage to the owner of the iris.

Conclusion

It is apparent that the accelerating pace of transformation in technology is a creative and, at the same time, destructive force. Financial technology is driving a new business model and the difficult times for new entrants in the financial industry are slowly fading away. For instance, businesses need new technology for effective competition and to exceed their opponents with greater speed, security, and accuracy. Financial disruptors are now finding their way in, and they have been attacking some of the most treasured elements of the financial services value chain. The approach has been particularly damaging to the incumbents who for a long time have subsidized significant but less profitable service offerings. The rise of PayPal to global domination has not been an easy task. When it started, there were other financial technology giants such as MasterCard and Visa. PayPal immediately began to convert the users who found PayPal's payment system streamlined and PayPal offered lower prices as compared to MasterCard, Visa, and other conventional payments.

Initially, PayPal was unable to operate independently and was purchased by EBay, which was one of the biggest e-commerce companies in the world. When the organization was under EBay, there were many changes taking place in the industry as there have been new entrants in the market, which, to some extent, threatened the existence of PayPal. Such companies include Square, Apple Pay, and Android Pay, among others. The industry that was initially difficult to enter into is now competitive due to the new entrants who had sophisticated technology to win the customers in the industry. These threats compelled PayPal to come up with new competitive strategies such as network intelligence and advanced technology that helped it to remain at the top position in the financial technology industry. However, competition is not the only threat that the organization is facing. Financial technology industry faces fraud and cyber-crime, which if appropriate measures are not put in place, can disorient the operations of the company and lead to devastating losses.

To counter fraud and cybercrime, PayPal has invested in security and has devised security protocols that are mandatory for putting through transactions and dealings with the company. The security measures are strictly applied, and, in case suspicious activity is noticed, it can lead to suspension or complete termination of the PayPal account of the doubted client. Despite the intense competition in the financial industry, the future is promising for PayPal. The company should continue investing in security and using their impartial expansion strategy that incorporates even the low earners in the society. Dealing with a fraudulent transaction entails the chargeback process and the possibility of a hit on the reputation of the organization. The advantage is that there are steps put in place to minimize the risks and shield the customers and the company from digital attacks.

References

Cheng, Y.W., Hsu, S.Y. and Lo, C.P., 2017. Innovation and imitation: Competition between the US and China on third-party payment technology. Journal of Chinese Economic and Foreign Trade Studies, 10(3), pp. 252-258.

Chishti, S. and Barberis, J., 2016. The FinTech book: the financial technology handbook for investors, entrepreneurs, and visionaries. Hoboken NJ: John Wiley & Sons.

Dietz, M., Khanna, S., Olanrewaju, T. and Rajgopal, K. 2016. Cutting through the noise around financial technology. McKinsey & Company. http://www.mckinsey.com/industries/financial services/our-insights/cutting-through-the-noise-around-financial-technology.

Farboodi, M. and Veldkamp, L., 2017. The long-run growth of financial technology (No. w23457). New York: National Bureau of Economic Research.

Harrison, M. and Oliphant, H., 2017. Payment via financial service provider using the network-based device. International Journal of Innovation, Management, and Technology, 9(2), pp. 74-78.

Lee, C., 2015. A study on FinTech (financial technology) and e-business: state of the art. 인터넷전자상거래연구, 15(5), pp. 217-229.

MacVaugh, J. and Schiavone, F., 2010. Limits to the diffusion of innovation: A literature review and integrative model. European Journal of Innovation Management, 13(2), pp.197-221.

Milne, A., 2016. Competition policy and the financial technology revolution in banking. space.lboro.ac.uk

Nguyen, Q.K., 2016. Blockchain - a financial technology for future sustainable development. 2016 3rd International Conference on Green Technology and Sustainable Development (GTSD), Kaohsiung: IEEE.

Nicoletti, B., 2017. The future of FinTech: Integrating finance and technology in financial services. Berlin: Springer.

Schulman, D., (2015). Reshaping the Financial Services Landscape, Basingstoke: Palgrave Macmillan.

Shrier, D. and Pentland, A. (eds). 2016. Frontiers of Financial Technology: Expeditions in future commerce, from blockchain and digital banking to prediction markets and beyond. New York: Visionary Future.

Treleaven, P., 2015. Financial regulation of FinTech, Journal of Financial Perspectives, 3(3), pp. 114-121.

January 19, 2024
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