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Palo Alto, California-based X.com served as one of the first online banking sites from its launch in December 1999 through October of 2001, when founder Elon Musk decided to shut down its operations. The firm merged with online payment services provider PayPal in March of 2000, and those operations are what remain of X.com. The largest Internet-based payment network in the world, PayPal offers its services to roughly 8 million customers, many of whom use the online payment provider to conduct person-to-person (P2P) transactions on auction site eBay.

X.com was created by the 28-year-old founder ofZip2 Corp., Elon Musk, in late 1999. Musk envisioned X.com as a full-scale banking and investment services site that offered everything from checking accounts to insurance services, mortgage lending, and bonds. He hired investment banker John Story as executive vice president and former Intuit Corp. CEO Bill Harris as president and CEO. Musk took on the role of chairman. The firm employed 15 staff members when the site-powered by Sanchez Computers Associates' e-PROFILE Internet bank solutionbecame operational. Roughly $25 million in venture capital had come from Musk and Harris, as well as from Sequoia Capital.

To attract new clients, X.com offered $20 to anyone who opened a free online checking account. Members who referred new customers to X.com were awarded $10 for each referral. Instant credit was also available to those who qualified. To make money, the firm planned to do what traditional lenders didrely on the interest rate spreads between what it earned on loans and what it paid on accounts. Within two months, X.com had secured 100,000 customers, compared to Etrade Telebank, the largest World Wide Web-based bank, with 130,000 customers. However, according to Forbes columnist Elizabeth Corcoran, cash incentives were not enough to ease consumer fears regarding virtual banking, particularly after X.com was forced to admit its initial site design hadallowed for fraud. "In January X.com conceded that it had designed its system in a way that made it too easy to siphon other people's money into an X.com account from traditional bank accounts. X.com detected about half a dozen questionable transfers and the money was returned." To prevent this from happening in the future, the firm required new clients to submit a canceled check if they planned to withdraw money from an account.

In March 2000, X.com merged with PayPal, which had been in operation since November of 1999, retaining the X.com name. At the time, PayPal was brining in nearly 15,000 new clients a day with its P2P payment services. To register, PayPal visitors were simply asked to input their name, daytime phone number, home address, and email address. PayPal members were then able to email funds to any other PayPal account holder via an automated email message titled, "You've Got Cash!" The funds could be charged to a credit card via an online form at the Pay-Pal site, or they could be withdrawn from a bank account, providing the user had supplied adequate verification of account ownership.

In June, X.com expanded PayPal services to allow for payments between businesses and consumers (B2C), including those made on cell phones. Clients who deposited funds into an X.com account by electronic fund transfer, credit card transfer, or check, were able to pay bills either at the X.com Web site or by pushing the letter "x" on their cell phones and then entering the email address of the payee. Businesses that accepted payments made via PayPal were assessed no monthly fee, compared to the typical 2.9 percent fee charged by credit card firms. Instead, Pay-Pal levied a 1.9 percent charge for each transaction completed, compared to the industry standard of 30 cents per credit card transaction.

Management differences prompted Harris to leave just six months after joining the new firm. The following month, X.com began offering online payment services on the Evite.com event planning Web site. As a result, Evite users in the U.S. could make a payment at the same time they responded to an online invitation. X.com 's P2P customers grew to exceed 3 million in August. It was then that the firm began focusing on business-to-business (B2B) payments, wanting to penetrate that market as well as it had the P2P market. As a result, X.com forged a deal with BuyLink Corp., a San Francisco-based online marketplace that served roughly 8,300 retailers and 3,000 manufacturers. Using the PayPal service, BuyLink users were able to make instant payments to one another. The firm faced more negative publicity when 125 PayPal users who bought computer hard drives at an online auction failed to receive what they had purchased. This, along with the fact that the value of transactions conducted over PayPal were increasing, prompted X.com to begin offering fraud protection, similar to the protection offered by credit card companies. As part of its new Cybersource Fraud Scan, the firm also put in place a member information guide, which allowed buyers to verify that sellers had been reviewed by X.com.

In October, Musk "launched a major redirection of the company's strategy," wrote American Banker columnist Megan J. Ptacek. "Rather than offer a wide range of banking and related services, the Palo Alto, Calif., company will become solely a global payment system." By then PayPal was serving 4 million P2P customers and handled roughly 50 percent of the transactions conducted on auction powerhouse eBay. As a result of Musk's decision, X.com reversed its plans to buy First Western National Bank, a purchase that had been planned as a means to gain Federal Deposit Insurance for its virtual accounts. To increase its foothold in the B2C and B2B markets, X.com began working on forging alliances with insurance firms, banks, and other financial institutions. Via a five-year agreement with Intuit Inc., X.com gained exclusive rights to provide online payment services to the three million small business customers using Intuit technology. Eventually, X.com officially changed its name to PayPal.

International expansion efforts, which included allowing Internet users outside the U.S. to open Pay-Pal accounts, began late in 2000. For example, PayPal and financial services powerhouse ING Group began working to extend email payment services throughout Europe. By March of 2001, the firm had expanded its reach to 26 countries. That month, PayPal put together a listing of 5,600 "PayPal Shops," which allowed shoppers to easily locate merchants that accepted Pay-Pal payments. In June, PayPal and Providian Corp. began offering a credit card that rewarded PayPal members with various perks. Efforts to increase B2B and B2C operations continued into 2001.


Carlsen, Clifford. "PayPal Lands $90M in Funding." The-Deal.com, March 6, 2001. Available from www.TheDeal.com.

Corcoran, Elizabeth. "Something Better Than Free." Forbes, February 21, 2000.

Perry, Joellen. "Settling Debts Online: A New Tool for E-mailers." U.S. News & World Report, April 17, 2000.

Ptacek, Megan J. "X.com Scraps Bank Strategy to Focus on PayPal System." American Banker, October 11, 2000.

Rosen, Cheryl. "New Services Let Users Pay Bills Via Cell Phone-Analysts Say Instant Payments Through Mobile Devices are the Wave of the Future." InformationWeek, June 19, 2000.

Toonkel, Jessica. "Electronic Commerce: X.com Moving In to B-to-B Online Payments." American Banker, August 9, 2000.

SEE ALSO: Banking, Online; Musk, Elon; PayPal; Peer-to-Peer Technology