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impressive than the growth of the handheld device one, which was inexplicable, because the handheld device one was cool and the website was just a demo. Then all these people from a site called eBay were contacting us and saying, Can I put your logo in my auction And we were like, Why So we told them, No. Don t do it. So for a while we were fighting, tooth and nail, crazy eBay people: Go away, we don t want you. Eventually we realized that these guys were begging to be our users. We had the moment of epiphany, and for the next 12 months just iterated like crazy on the website version of the product, which is today s PayPal. Sometime by late 2000, we killed the handheld one because we peaked out at 12,000 users. They were still using it a little bit, and they were really upset when we killed it. They said, You were about the handheld transactions, not about this web stuff. We re like, No, we re pretty much about the web stuff.

Livingston: How many users did you have for the website when you killed the handheld product Levchin: I think we must have been 1.2 . . . 1.5 million users. It was an emo-

Livingston: When did you first notice fraudulent behavior Levchin: From day one. It was pretty funny because we met with all these

people in the banking and credit card processing industry, and they said, Fraud is going to eat you for lunch. We said, What fraud They said, You ll see, you ll see. I actually had an advisor or two from the financial industry, and they said, Get ready for chargebacks. You need to have some processing in place. We said, Uh huh. They said, You don t know what a chargeback is, do you

Livingston: So you didn t foresee this fraud Levchin: I had no idea what was going to happen. Livingston: But you weren t too surprised Levchin: We tried to attack the system for ourselves, like a good security person

would. How can you cheat and steal money and do whatever We made some provisions from day one to prevent fraud. We prevented all the obvious fraud, and then, I think 6 months into it, we saw the first chargeback and were like, Ah, one per week. OK. Then it was like an avalanche of losses; 2000 was basically the year of fraud, where we were just losing more and more and more money every month. At one point we were losing over $10 million per month in fraud. It was crazy. That was when I decided that that was going to be my next challenge. I started researching it, figuring out what could be done and attacking the problem.

Livingston: So you made a conscious decision to attack this problem Levchin: It was actually sort of a side effect. We had this merger with a company called X.com. It was a bit of a tough merger because the companies were

really competitive we were two large competitors in the same market. For a while, Peter took some time off. The guy who ran X.com became the CEO, and I remained the CTO. He was really into Windows, and I was really into Unix. So there was this bad blood for a while between the engineering teams. He was convinced that Windows was where it s at and that we have to switch to Windows, but the platform that we used was, I thought, built really well and I wanted to keep it. I wanted to stay on Unix. By summer 2000, it seemed like the Windows thing was going to happen because Peter was gone. He took a sabbatical to make sure there were no clashes between the CEOs. So, this other guy was pushing me toward accepting that Windows was going to be the platform. I said, Well, if this is really going to happen, I m not going to be able to provide much value, because I don t really know anything about Windows. I went to a school that was all Unix all the time, and I spent all my life coding for Unix. I had this intern that I hired before the merger, and we thought, We built all these cool Unix projects, but it s kind of pointless now because they are going to scrap the platform. We might as well do something else. So he and I decided we were going to find ourselves fun projects. We did one kind of mean project where we built a load tester package that would beat up on the Windows prototype (the next version was going to be in Windows). We built a load tester that would test against the Unix platform and the new Windows one and show in beautiful graphs that the Windows version had 1 percent of the scalability of the Unix one. Do you really want to do that It was me acting out, but it was kind of a low time for me because I was not happy with the way we were going. Part of having a CEO is that you can respectfully disagree, but you can resign if you don t like it that much. But then eventually I became interested in the economics of PayPal and trying to see what s going on in the back end, because I was getting distracted from code and technology. I realized that we were losing a lot more money in fraud than I thought we were. It was still early 2001. If you looked at the actual loss rates, they were fairly low. You could see that we were losing money, but, given the growth of the system and the growth of the fraud, fraud was not that big of a problem. It was less than 1 percent it was really low. But then, if you looked at the rate of growth of fraud, you could see that, if you don t stop it, it would become 5 percent, 10 percent of the system, which would have been prohibitive. So I started freaking out over it, and this intern and I wrote all sorts of packages very statistical stuff to analyze How did it happen; how do we lose money By the end of the summer, we thought, The world is going to end any minute now. It was obvious that we were really losing tons of money. By midsummer, it was already on a $10 million range per month and just very scary.

Livingston: Did the rest of the company know you were right Levchin: Through the summer, I think various people were slowly coming to

understand that this thing was really serious. It was pretty obvious at a certain point. I didn t have to really convince anyone. In the beginning some people