The purpose of this report is to introduce the economic concepts and models that have shaped the development and growth of online payment systems, in this case, Pay Pal. The report achieves this by describing the relevant economic models and analysis of PayPal in context of digital and online trends. This report refers to PayPal and its relation to the ‘network’ and ‘attention’ economies and discusses some of the issues PayPal faces today and for the future. Hence, this report presents only a broad context of online payment systems and does not present in depth analysis of economic values or trends. Assumptions are made based on both the success of PayPal and the issues it faces.


During the early 2000’s, the development of Web 2.0 provided innovations that had begun a revolution online in user interactivity. The internet was evolving into a dynamic platform which offered a new level of interaction and contact between users. For savvy start-ups, this interactivity provided web developers opportunities to build applications which allowed user generated content and spawned the growth of online marketplaces. With this growth, the need for safe and secure online transactions for consumers became an essential driver for business success. Innovations in secure online payment systems had evolved that became the intermediaries between web users and their financial institutions. For users, online payment systems provided the opportunities for financial transactions without having to expose individuals bank account details. For business, these systems offered the ease of receiving online payments without having to deal directly with traditional financial institutions like banks. One of these systems, PayPal, provides these services and has grown into one of the Internet’s most successful online payment systems.

PayPal's Growth

At the forefront of the digital economy lie the various laws and trends that both govern its progression and dictate which companies succeed and which do not. In our analysis of a business such as PayPal, it is impossible to ignore not only how these trends have affected it, but also how PayPal itself has in turn shaped them.

Although there are many trends that affect Internet commerce, with much that can be said of each of them, we will be refraining from covering some of the less impactful trends. Instead, the focus of our analysis will be restricted to two principal and relatively recent developments of the online business scene; namely, the so-called network and attention economies. We are particularly interested in examining several of the components of these two major developments and, more specifically, how PayPal itself relates to them.

In order to begin, a definition of what is meant by the idea of network and attention economies will be provided. As mentioned previously, all of these terms all refer to major developments that have been surfacing within the digital economy, though that is where their similarities end for the most part. In this section, we will be supplying a brief description of each of these developments, as well as an outline of the relevant terminology that may be associated with them.

The network economy refers to the consequences that result from the integration of the industrial-age economy over the Internet. This has, in particular, created a drastic shift in how the value of commercial products is generated (Kelly, 1997). A defining characteristic of the network economy is that the value of a particular product is proportional to its abundance. This is in stark contrast to traditional economics, where the inverse was true; an item’s value was largely reliant upon its scarcity. Kelly’s “Law of Displacement” (1997), as well as the notion of “network effects” from which this development derives its name, both encompass this shift.

The attention economy stems from the idea that attention is one of the most important resources in an information society such as the Internet. Attention is a relatively scarce commodity; Goldhaber argues that this, in addition to the power it can grant those who are capable of garnering and manipulating it, makes it highly desirable in the digital economy (1997). In a market where creativity is the greatest “limiting reagent” and existing ideas can easily be copied, it makes sense that attention becomes a highly valuable asset.

218 million active customer accounts

It is important to note that other methods of transferring funds between individuals or businesses over the Internet certainly existed prior to PayPal. Despite this, however, it can be argued that the eventual widespread acceptance and adoption of these online payment systems can be owed almost single-handedly to the success of PayPal. The electronic payment giant has since become a dominating force within the digital economy; the security, flexibility and simplicity it offers through with its services have made it an appealing choice for businesses and consumers alike (Avaliani, 2004). Boasting 218 million active customer accounts, over 17 million merchant accounts and a total payment volume (TPV) of $114 billion by the end of September 2017 (PayPal Holdings, Inc., 2017), it has become somewhat of a de facto standard for conducting online commerce.

With PayPal’s popularity growing at such a rapid pace, the reasons for choosing it over other alternatives are only becoming more and more prominent. As more users and businesses opt to support its services, the benefits involved in others also deciding to do so increases; this can be attributed to Kelly’s “Law of Plenitude” (1997): the more people who use PayPal, the more viable it becomes as an independent payment platform. This is a prime example of the network effects that exist within the Internet economy.

Even before its association with eBay, PayPal still had a reputation among its users as one of the safest online payment services (Avaliani, 2004). This can be attributed primarily to the myriad of security features it offers, for both buyers and sellers (MarketLine, 2013). However, once PayPal’s user base exploded after becoming a subsidiary of eBay, its reputation no longer solely relied upon careful analysis by its users. A notable observation in commerce is that people are often very willing to place their trust in leading organizations, and the case of PayPal does not appear to be an exception to this. This leads to some particularly interesting implications, where growth leads to trust, which in turn leads to even more growth, and so on. PayPal has thus generated a name for itself, eventuating in many new users trusting it implicitly.

By examining all of these effects in the context of an Internet business like PayPal, we can see how they might correlate with the concept of an attention economy. We can also see exactly why attention is such a sought-after resource: with both the popularity and trust among a business’s customers being bound, in some degree, to the amount of attention it receives, the role that being able to effectively create attention plays in achieving success cannot be ignored.

PayPal Market Comparison

Since it was founded, PayPal has moved from startup, to disruptor, to market leader in the online payment industry. PayPal’s early dominance in the industry can be attributed in part due to it being the first person to person payment company to offer its services so widely. Competitors in the space, such as eBay owned Billpoint, couldn’t compete as by the time their services were launched PayPal had already built a strong network of users (CNET, 2002). So successful was PayPal against Billpoint, that eBay bought PayPal and shut Billpoint down in 2002 (CNN, 2002).

Another major factor in PayPal’s market leading position is that it allowed ordinary people to safely and securely make payments directly to each other without having to set up relationships with the banks, or credit card acquirers such as VISA and MasterCard. When Kevin Kelly said that ‘The technology we first invented to crunch spreadsheets has been hijacked to connect our isolated selves instead’ (1997) he was describing what PayPal, a company that did not at that time exist, was going to do to the online payments industry. PayPal disrupted the online payment industry, which in the early days on the World Wide Web, was dominated by the banking industry through the use of credit cards. It did this by providing people an easy method of paying each other online without providing access to each other’s banking or credit card details. PayPal made it much easier for a merchant to set up an account than the banks previously did (Goodrich, 2013).

Despite its early success many thought that the banks would eventually regain their dominance in the industry. Naseem Tuffahha, CEO and co-founder of Checkspace, an early competitor in the person to person payment industry, was quoted as saying in 2001 that ‘In the long term, we think banks are going to win’ against PayPal (Bach, 2001 p.1). In 2016, it was estimate that America’s big three banks, JP Morgan Chase & Co., Bank of America Group., and Wells Fargo & Co. only narrowly held more market share than PayPal in the person to person payment industry combined, however PayPal holds twice as much market share as any of the banks individually (Panno, 2016 p.2). This shows that PayPal has become the dominant player in the online person to person payment space. PayPal has now become the incumbent in this industry that the previous market leaders now conspire to overthrow.

PayPal has become the dominant player in the online person to person payment space

It has not all been smooth sailing regarding the titan of the online money transfer world. PayPal has had its fair share of criticisms levied upon it from complaints about an ineffective and often heavy-handed fraud detection system, processing refunds that can take anywhere from one to day to several weeks to process to the apparent stranglehold that PayPal has on the industry (Paypal on Trustpilot, 2018). Clearly PayPal as a company is a controversial one but with such a large market share and such a huge number of websites and online shopping portals utilizing PayPal it would seem the titan of the online payment sphere is simply too large to fall. This puts the company at the very head of the attention economy in that it is almost everywhere. Most online stores have options to pay with PayPal and often use a PayPal designed button (Yellow and attention grabbing) to make a person consider using it as an option. The other genius thing about integrating PayPal into an online store is the fact that you don’t even need an account to use PayPal, simply enter your credit card details and you benefit from security that PayPal offers.

Perhaps it is due to a sense of consumer apathy or the simple fact that the average user of PayPal (Those who simply use it for payments and have never had a problem with the service) do not have the inclination to go and search out the positives and negatives of PayPal as a service because it simply does not affect them in the way it affects a person who, for example, runs a full-time Ebay storefront. For them the issues of PayPal holding onto money, not processing refunds and the company’s notoriety for always siding with the customer in the case of a chargeback can be significantly damaging for an online business. This hinders these businesses in a very real way as is laid out by PayPal-Community forum user johndunne who complains that Ebay / Paypal are illegally holding onto the money that he has earned from items sold and that as soon he gets paid he will be discontinuing his use of the site indefinitely (“Paypal holding my money”, 2012). The thread that follows johndunne’s bitter statement is one that seems to indicate that much of the community is also extremely dissatisfied with PayPal.


PayPal’s success can be attributed to both the network and sharing economies. More users and businesses who opt to support PayPal’s services increases the benefits for others who choose to use its services. PayPal’s persistent reputation, as a safe and secure method for undertaking online transactions, shared between its users is a valuable resource for the company. While other methods of transferring funds between individuals or businesses over the Internet existed prior to PayPal, its large market share and domination of website and online shopping portal integration prove this giant online payment systems is currently too large to fail. PayPal is continuing to prove to us the understated value to the digital economy of the combination of both the network and sharing economies.

Written by:

Daniel Dunmore
Thomas Dunmore
Kyle Mannion
Jeffrey Ozog
Murray Summerville


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