eBay 2006 Annual Report Download - page 26

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.
A number of U.S. states have enacted legislation regulating money transmitters. To date, PayPal has obtained
licenses in 36 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. In July 2005,
PayPal entered into a settlement agreement and agreed to pay $225,000 to the California Department of Financial
Institutions in connection with alleged violations of the California Financial Code relating to the use of a receipt
form for international payments that had not been pre-approved by the Department, and incomplete reporting to the
Department. If PayPal were found to be in violation of other money services laws or regulations, PayPal 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
additional licenses or regulatory approvals that could impose a substantial cost on PayPal.
We believe that the licensing or approval requirements of the U.S. Office 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 above. However, 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 or could be subject to fines and penalties. 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.
Although there have been no definitive 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 specified error resolution procedures and
absorb losses above $50 from transactions not authorized by the consumer. In addition, PayPal is subject to the
financial privacy provisions of the Gramm-Leach-Bliley Act, state financial privacy laws, and related regulations.
As a result, some customer financial 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 1.7 million transactions per day during the year ended December 31, 2006, and any violations could
expose PayPal to significant liability. Any negative change in the public’s perception of PayPal’s compliance with
privacy laws and policies could also negatively impact PayPal’s business.
PayPal’s status under banking or financial services laws or other laws in markets outside the U.S. is
unclear.
PayPal currently allows its customers with credit cards to send payments from 103 markets, and to receive
payments in 49 of those markets. In 35 of these 49 markets, customers can withdraw funds to local bank accounts,
and in eight of these markets customers can withdraw funds by receiving a bank draft in the mail. PayPal offers
customers the ability to send or receive payments denominated in 17 currencies. 25 of the 103 markets whose
residents can use the PayPal service are members of the European Union, and PayPal provides localized versions of
its service to customers in the EU through PayPal (Europe) Ltd., a wholly-owned subsidiary of PayPal that is
licensed in the United Kingdom to operate as an Electronic Money Institution. PayPal (Europe) implements its
localized services in EU countries through an expedited “passport” notification process through the United
Kingdom regulator to regulators in other EU member states, pursuant to EU Directives. PayPal (Europe) has
22