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Betfair launched in 2000. The brainchild of entrepreneurs Andrew Black and Edward Wray, it was the worlds first Internet betting exchange. Betting exchanges take a different approach to traditional betting sites by cutting out the bookmaker and allowing customers to bet directly against each other and Betfair was set to revolutionise the gambling industry. A fact they underlined with publicity stunts, such as parading through the streets of London carrying coffins proclaiming "The Death of the Bookmaker".

After being turned down for investment Black used his savings to launch the company, along with an investment of £1m from Black and Wrays family and friends. Although other online betting exchanges launched around the same time, Betfairs approach differed in operating more along the lines of a financial exchange. Instead of allowing only single bets it also allowed, among other things, multiple small bets to cover a position offered by someone who wished to place a large stake on a wager.

Despite stiff competition in the early years, Betfair dominated the market.  After acquiring their competitor Flutter.com in 2001, they soon owned more than 90% of the bet exchange market share.

Betfair claims to have over 4 million users and a turnover of over £50 million a week. It also claims that users can get an average of 20% better odds by betting on the site than by going through a traditional bookmaker. Betfair makes money by charging 2-5% commission on all winning bets placed through the site. Since 2008 they also levy premium charges on some customers if their total charges paid amount to less than 20% of their gross profits on the site, although Betfair estimate these charges affect less than 0.5% of customers.

Betfair's history is not without controversy. Their in-play betting system on horse racing drew concerns that broadcast delays of up to 5 seconds may allow companies using software that places high-speed automated bets to gain an advantage using courtside information that would not yet be available to regular customers. The bet exchange model has also attracted extensive criticism from traditional bookmakers who claim that it has increased gambling related corruption within sports. Betfair counter this claim by pointing out they keep personal records on all gamblers and have information sharing systems in place with a variety of sports bodies to ensure that suspicious betting patterns are fully investigated.

Betfair is part of a small group of companies to have won the Queen's Award for Enterprise multiple times. In 2003 they received the Queen's Award for Innovation and again in 2008 the Queen's Award for International Trade as over half of its customers now come from outside of the UK.

In October 2010 Betfair floated on the Stock Exchange with a share price of £13 that valued the company at around £1.4billion. In 2015 a merger between Paddy Power and Betfair was announced. The new entity Paddy Power Betfair maintains separate brands in the UK, Ireland and Italy.

Today Betfair offers not only an internet betting exchange, but a full range of online betting and gaming, including a live casino, online poker and bet exchange innovations such as Price Rush, where gamblers can get better odds if there are better offers on the exchange, and Cash Out, which allows customers to cut their losses by withdrawing part of their stake at any time.