eBay 2004 Annual Report Download - page 50

jurisdictions, buyers may also have the right to withdraw from a sale made by a professional seller within a
speciÑed time period.
While eBay can suspend the accounts of users who fail to fulÑll their payment or delivery obligations to
other users, eBay does not have the ability to require users to make payment or deliver goods, or otherwise
make users whole other than through our limited buyer protection programs. Other than through these
programs, eBay does not compensate users who believe they have been defrauded by other users. eBay also
periodically receives complaints from buyers as to the quality of the goods purchased. We expect to continue
to receive communications from users requesting reimbursement or threatening or commencing legal action
against us if no reimbursement is made. Our liability for these sort of claims is only beginning to be clariÑed
and may be higher in some non-U.S. jurisdictions than it is in the U.S. Litigation involving liability for third-
party actions could be costly for us, divert management attention, result in increased costs of doing business,
lead to adverse judgments, or otherwise harm our business. In addition, aÅected users will likely complain to
regulatory agencies that could take action against us, including imposing Ñnes or seeking injunctions.
Negative publicity and user sentiment generated as a result of fraudulent or deceptive conduct by users of
our eBay and PayPal services could damage our reputation, reduce our ability to attract new users or retain our
current users, and diminish the value of our brand names.
Changes to credit card association fees, rules, or practices or its users' credit card usage rates could
negatively aÅect PayPal's business.
Because PayPal is not a bank, it cannot belong to or directly access credit card associations, such as Visa
and MasterCard. As a result, PayPal must rely on banks or payment processors to process transactions, and
must pay a fee for this service. From time to time, credit card associations may increase the interchange fees
that they charge for each transaction using one of their cards. MasterCard has announced an increase in the
standard interchange fee for credit cards in online commerce transactions eÅective April 2005. PayPal's credit
card processors have the right to pass any increases in interchange fees on to PayPal as well as increase their
own fees for processing. Such increased fees increase PayPal's operating costs and reduce its proÑt margins.
PayPal is also required by its processors to comply with credit card association operating rules, and PayPal has
agreed to reimburse its processors for any Ñnes they are assessed by credit card associations as a result of
processing payments for PayPal. The credit card associations and their member banks set and interpret the
credit card rules. Some of those member banks compete with PayPal. Visa, MasterCard, American Express,
or Discover could adopt new operating rules or re-interpret existing rules that PayPal or its processors might
Ñnd diÇcult or even impossible to follow. As a result, PayPal could lose its ability to give customers the option
of using credit cards to fund their payments. If PayPal were unable to accept credit cards, its business would
be seriously damaged. In addition, the velocity of trade on eBay could decrease and our business would further
suÅer.
In 2002, both Visa and MasterCard adopted new operating rules for Internet payment services like
PayPal. In order to comply with the associations' new rules, PayPal and its credit card processors have
implemented changes to existing business processes for merchant customers. Any problems with this
implementation could result in Ñnes, the amount of which would be within Visa's and MasterCard's discretion.
PayPal also could be subject to Ñnes from MasterCard and Visa if it fails to register and conduct additional
monitoring with respect to the activities of merchants that are considered ""high risk,'' primarily certain
merchants that sell digital content. PayPal has incurred Ñnes from its credit card processor in 2003 and 2004
relating to PayPal's failure to detect the use of its service by certain ""high risk'' merchants using the PayPal
service. The amount of these Ñnes has not been material, but any additional Ñnes in the future would likely be
for larger amounts, could become material, and could result in a termination of PayPal's ability to accept
credit cards, which would seriously damage PayPal's business.
PayPal pays signiÑcant transaction fees when senders fund payment transactions using credit cards,
nominal fees when customers fund payment transactions by electronic transfer of funds from bank accounts,
and no fees when customers fund payment transactions from an existing PayPal account balance. Senders
funded 53% of PayPal's payment volume during 2004 using credit cards, and PayPal's Ñnancial success will
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