Elon Musk is not yet 30 and already he has sold his first start-up for $300 million, founded another aimed at transforming financial services, and orchestrated a major redirection for the new company.
The 29-year-old is abandoning his plan to make X.com, which he founded 18 months ago, into a one-stop shop for financial services. Rather than offer a wide range of banking and related services, the Palo Alto, Calif., company will become a global payment system, he said.
The foundation of this plan is the PayPal person-to-person system, which has four million customers and is listed as a preferred payment provider for 50% of auctions on eBay.
"Our long-term goal is to process one trillion transactions," Mr. Musk said.
Originally, person-to-person payments were to be just one component of X.com's financial services plans, which also included offering banking accounts and selling mutual funds.
X.com still has an option to buy First Western National Bank of La Jara, Colo., Mr. Musk said. The purchase would give it access to Federal Deposit Insurance for its online accounts, but X.com will take a pass, he said.
The plan now is to hone its payments expertise, much of which it gained by acquiring PayPal.com two months after X.com's founding. It quickly multiplied PayPal accounts by working through online auctions and offering an incentive program in which it deposited $10 in the accounts of customers who referred friends to the service.
X.com also wants to become an international provider in business-to-business and consumer-to-business transactions. Rather than create its own financial products, it will partner with banks, insurers, and lenders, who will cross-sell their products to X.com customers.
"There is tremendous cross-selling capability in our system," Mr. Musk said.
To make a payment, customers simply e-mail money from their X.com account to another customer's account. The accounts are funded through deposits executed through the automated clearing house or by credit card payments.
X.com says tests show that its customers trust the system and would buy financial products from the X.com site. Mr. Musk conceded, however, that many banks are reluctant to work with his company because they see it as a threat.
"How much can one company do?" he asked. "The Citibanks, Bank of Americas, and Wells Fargos have little to worry about, and we will be happy to drive customers to their sites."
X.com has broken barriers with some banks. Barclays Bank plans to offer a money market account through X.com, Bank One expects to offer a MasterCard-branded debit card through it in six to eight weeks, and X.com has partnered with Wells Fargo to process ACH transfers.
X.com could be a threat to banks, said James Van Dyke, a senior analyst at Jupiter Communications, "but there is no reason why they couldn't have a cooperative start with banks." The advantages X.com brings are its customer base and marketing savvy; Mr. Musk "is a brilliant strategic marketer," he said.
Much of X.com's payment growth in recent months has come from business accounts. It adds about 4,000 such accounts daily and has just surpassed 300,000.
An agreement struck last week with Intuit Inc. should further boost X.com's business-account rolls. Under the five-year deal, it will become the exclusive Internet payment provider for users of Intuit's small-business products, including QuickBooks. Through Intuit, X.com will get access to three million small-business customers, or 80% of the market, Mr. Musk said.
He said succeeding in the small-business market is crucial, since X.com loses money on pure consumer-to-consumer payments, which are free. Businesses will pay a 1.9% per-transaction fee to receive X.com payments. The company, which expects to be profitable in 2002, also earns revenue from interest earned on money held in its accounts.
X.com plans a three-phase international expansion. In the first phase, which is expected to begin this fall, it will let non-U.S. customers open X.com accounts in the United States to send and receive U.S. dollar payments. In the second it will set up local-currency exchanges in the European Union countries, as well as Japan and South America, by yearend. Phase 3, slated to launch next year, will add instant multicurrency international transactions.
Mr. Musk's banking experience consists of a summer internship at a Canadian Bank and an undergraduate degree in finance from the Wharton School. He also has an undergraduate degree in physics from the University of Pennsylvania.
To fill in gaps in his knowledge of financial services, Mr. Musk, a native of South Africa, is seeking the help of seasoned financial services executives. He is also looking for a new chief executive officer; William Harris, the former chief executive of Intuit, joined X.com as CEO in December but left after six months.
"It just wasn't working," Mr. Musk said.
Mr. Musk does have experience launching a successful Internet company. He started Zip2.com, his first Web venture, in 1995 after dropping out of graduate school at Stanford, where he was pursuing a doctorate in energy physics. He sold the company to Compaq Computer Corp. last year for $300 million, and Zip2 is now the technology platform for the search engine Alta Vista.
Mr. Musk is now the largest shareholder of X.com, which has received $170 million of investments from companies including Sequoia Capital, Nokia Ventures LP, Goldman Sachs, Deutsche Bank Alex. Brown, Qualcomm Inc., Lab Morgan, Technology Associates Management Corp., Idealab Capital Partners, and Credit Agricole. The French bank contributed $30 million of that sum, earmarked to help X.com expand internationally.
Mr. Musk said he has invested more than $10 million of his own money in X.com.
X.com revamped its security policies and systems after some negative publicity and instances of fraud. In August, after 125 people used PayPal to purchase hard drives at an online auction but never received the merchandise, it implemented Cybersource Fraud Scan, which verifies that a prospective customer has a valid bank account.
Previously X.com issued a disclaimer relinquishing all responsibility for fraudulent purchases or goods that were not shipped. Now it offers a full refund on payments made by customers who have verified their bank accounts through Cybersource Fraud Scan.
"I don't think PayPal has suffered an unexpected and inordinate amount of fraud," Mr. Van Dyke said. "P-to-p will continue to grow and will be a force to be reckoned with by the banking industry."
