(October 8, 2008) Ebay Inc.’s $945 million acquisition of online payment processor Bill Me Later Inc., announced this week (Digital Transactions News, Oct. 6), places a powerful payment-generating tool in the online auctioneer’s hands and simultaneously denies that tool to competitors like Google Inc. and Amazon.com Inc., experts tell Digital Transactions News. And the deal comes at a time when alternative-payments products are poised to swipe an increasing share of online sales volume from network-branded cards, crimping more and more of the flow of interchange income banks earn from those cards, a report released this week says.

The deal hands San Jose, Calif.-based eBay a payment product that complements PayPal, the online processor eBay bought six years ago. PayPal has been successful with auction sellers and other small merchants, while 8-year-old Bill Me Later has penetrated big-name online merchants, with 75 of the 200 largest accepting it. But Bill Me Later’s biggest selling point is its ability to deliver credit and delayed-payment plans to users, who can use the product like an online credit card. That feature appeals to merchants and consumers alike, and has helped the Timonium, Md.-based processor reach 1,000 merchants in all and $1 billion in annual volume.

Now, says payments consultant Steve Mott, there’s growing demand among even smaller online merchants for the kind of transactional credit programs Bill Me Later delivers. “You’ve got to be a well-heeled consumer to use this option, and the well-heeled consumer is who every merchant wants,” notes Mott, principal of Stamford, Conn.-based BetterBuyDesign. “I wouldn’t be surprised to see other instant-credit plays enter the market. There’s a lot of demand.” Indeed, PayPal itself introduced last year a similar feature, called PayPal Pay Later, partly in response to Bill Me Later.

But the deal is also a defensive tactic, says Red Gillen, an analyst at researcher Celent LLC, Boston. By snapping up Bill Me Later, he says, eBay kept it out of the hands of Google and Amazon, both of which have introduced online payment products that compete with PayPal. This is especially noteworthy in the case of Amazon, which last year bought a minority stake in Bill Me Later and later started accepting it on its massive domestic site (Digital Transactions News, Dec. 11, 2007). “This was a very strategic defensive measure,” Gillen says. He argues that Google, for example, could have merged Bill Me Later with its search, Adwords, and Checkout capabilities to offer a compelling product. “What a powerful combination,” he says. “But eBay beat them to it.” Google’s Adwords feature allows companies to run hyperlinks to their sites next to search results.

The deal comes amid growing influence for alternatives to Visa and MasterCard for online payments. A report Celent released this week says consumer perceptions of greater data security, together with merchant perceptions of lower transaction costs, are helping to propel the growth of products like Bill Me Later and PayPal. To the extent that these services divert transactions from the card networks (this is partly true of PayPal and entirely true of Bill Me Later), their growth means a loss of interchange income for Visa and MasterCard issuers. Gillen, who wrote the report, estimates this loss at $345 million this year, up from $215 million in 2007. That number is likely to grow to $480 million in 2009 and reach almost $1.7 billion by 2013, Gillen says.

The alternatives most likely to succeed, Gillen says, are those like Bill Me Later that offer transactional credit or other features that not only enable consumers to pay online, but also induce them to. These features deliver the sales lift merchants are looking for, he says, and can be hard for the card networks to replicate. That could now prove to be a potent advantage for eBay and PayPal, whose president, Scott Thompson, will also have responsibility for Bill Me Later. “The challenge for PayPal now is, do we extend [Bill Me Later] to anyone who wants it, or just to those who want PayPal,” says Mott. “[Ebay and PayPal] control the keys to the kingdom.”