From the November 2007 issue of Treasury & Risk magazine

Gold AHA Award Winner for Working Capital Management

Growing too fast is a problem anyone would want to have, but for $7-billion eBay Inc. and its subsidiary PayPal, it caused a big problem: a huge funding gap created by a growing demand for working capital. Treasury was called in to figure out what was happening, and how to fix the problem.

Treasurer Jennifer Ceran assembled a cross-functional team, under the direction of PayPal Treasurer Ed Banas, which looked into the issue. What Banas and his team discovered was that PayPal was immediately funding credit card transactions by customers using extremely rapid clearing systems. But PayPal's banks and card administrators were not doing the same for it, leaving the Web-based payment solution too often holding the bag. Thus, the more PayPal grew, the bigger this funding gap became.

The problem was exacerbated with PayPal's rapid expansion into Europe and Asia. European regulators were requiring the company to maintain higher surpluses against customer balances than were required in the U.S. and credit card processing in Europe was also slower than domestically.
By mid-2005, in Europe alone, the average working capital needs to fund the gap between receivables and payables had reached 24 million euros, which included an opportunity loss of interest income of over 700,000 euros a year. Treasury was covering this gap by actively managing inter-company settlement and foreign exchange swaps, but the problem was growing rapidly. By December of that year, it had more than doubled to 50 million euros.

Back in San Jose, Banas' team--made up of people from tax, accounting, risk management, payment operations, merchant services, financial services, PayPal Europe finance and FP&A--began work on quantifying the problem and figuring out potential solutions.

The team came up with nine fixes. The most significant among these were:
- Changing PayPal's regulatory status in Europe from money issuer to deposit taker, which had a lower capital ratio requirement. This move alone would lower working capital demands by 55 million euros in the first year;
- Setting up an Asian headquarters to handle Asian business, instead of handling it from Europe. This freed up another 26 million euros of working capital after being established in December 2006;
- Negotiating contract improvements with credit card processors for international cards, which cut collection times by five days, freeing up another 30 million euros; and
- Reducing the company's capital cushion by 5%, freeing up another 16 million euros.

Overall, the fixes cut PayPal's equity-financed capital costs by 97 million euros, easing the way for further international growth, while at the same time making operations faster and more efficient. "This was one of those traditional treasury-type projects," says Banas, who came to eBay after working for several financial services firms. "But it ended up going way beyond even the function of the CFO. That's the fun of being treasurer in a financial services company: You're actually a critical part of the widget manufacturing, because the product is cash."

So is the problem fixed now? Basically, says Banas. "The great news in a place like eBay/PayPal is that we're growing incredibly fast. The industry also changes rapidly so you have to continuously make updates to your processes and monitor your use of working capital."

Banas' boss, eBay Treasurer Ceran, says, "What stands out about this project is the role that great teamwork played. This business is moving so quickly you don't have time to stop to work out a problem. And you have to make sure that decisions that seem good here aren't bad somewhere else."

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