eBay 2004 Annual Report Download - page 51

remain highly sensitive to changes in the rate at which its senders fund payments using credit cards. Senders
may prefer funding using credit cards rather than bank account transfers for a number of reasons, including
the ability to dispute and reverse charges if merchandise is not delivered or is not as described, the ability to
earn frequent Öier miles or other incentives oÅered by credit cards, the ability to defer payment, or a
reluctance to provide bank account information to PayPal.
If PayPal were found to be subject to or in violation of any U.S. laws or regulations governing banking,
money transmission, or electronic funds transfers, it could be subject to liability and forced to change its
business practices.
We believe that the licensing or approval requirements of the U.S. OÇce of the Comptroller of the
Currency, the Federal Reserve Board, and other federal or state agencies that regulate banks, bank holding
companies, or other types of providers of e-commerce services do not apply to PayPal, except for certain
money transmitter licenses mentioned below. However, PayPal has in the past received written communica-
tions from state regulatory authorities expressing the view that its service might constitute an unauthorized
banking business. PayPal has taken steps to address these states' concerns. However, we cannot guarantee that
the steps PayPal has taken to address these regulatory concerns will be eÅective in all states, and one or more
states may conclude that PayPal is engaged in an unauthorized banking business. If PayPal is found to be
engaged in an unauthorized banking business in one or more states, it might be subject to monetary penalties
and adverse publicity and might be required to cease doing business with residents of those states. Even if the
steps it has taken to resolve these states' concerns are deemed suÇcient by the state regulatory authorities,
PayPal could be subject to Ñnes and penalties for its prior activities. The need to comply with state laws
prohibiting unauthorized banking activities could also limit PayPal's ability to enhance its services in the
future. Any change to PayPal's business practices that makes the service less attractive to customers or
prohibits its use by residents of a particular jurisdiction could decrease the velocity of trade on eBay, which
would further harm our business.
A number of U.S. states have enacted legislation regulating money transmitters. To date, PayPal has
obtained licenses in 32 of these jurisdictions and interpretations in nine states that licensing is not required
under their existing statutes. As a licensed money transmitter, PayPal is subject to bonding requirements,
restrictions on its investment of customer funds, reporting requirements, and inspection by state regulatory
agencies. If PayPal's pending applications were denied, or if it were found to be subject to and in violation of
any money services laws or regulations, PayPal also could be subject to liability, forced to cease doing business
with residents of certain states, or forced to change its business practices. Any change to PayPal's business
practices that makes the service less attractive to customers or prohibits its use by residents of a particular
jurisdiction could decrease the velocity of trade on eBay, which would further harm our business. Even if
PayPal is not forced to change its business practices, it could be required to obtain licenses or regulatory
approvals that could impose a substantial cost on PayPal.
Although there have been no deÑnitive interpretations to date, PayPal has assumed that its service is
subject to the Electronic Fund Transfer Act and Regulation E of the Federal Reserve Board. As a result,
among other things, PayPal must provide advance disclosure of changes to its service, follow speciÑed error
resolution procedures and absorb losses above $50 from transactions not authorized by the consumer. In
addition, PayPal is subject to the Ñnancial privacy provisions of the Gramm-Leach-Bliley Act, state Ñnancial
privacy laws, and related regulations. As a result, some customer Ñnancial information that PayPal receives is
subject to limitations on reuse and disclosure. Existing and potential future privacy laws may limit PayPal's
ability to develop new products and services that make use of data gathered through its service. The provisions
of these laws and related regulations are complicated, and PayPal does not have extensive experience in
complying with them. Even technical violations of these laws can result in penalties of up to $1,000 for each
non-compliant transaction. PayPal processed an average of approximately 929,000 transactions per day during
2004, and any violations could expose PayPal to signiÑcant liability.
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