(October 22, 2009) A sour economy isn’t hobbling PayPal Inc.’s online-payments steamroller, but the downturn and the seemingly fragile recovery are creating some challenges for Bill Me Later, the online credit processor PayPal parent eBay Inc. bought a year ago and this week integrated with PayPal. Meanwhile, rumors continue to swirl around the industry that eBay, which expects soon to sell its Skype online-communications business, will likely spin off PayPal some time in the coming months.

San Jose, Calif.-based online auctioneer eBay is encouraging a strong cross-sell effort for PayPal and Bill Me Later, said eBay chief executive John Donahoe during a conference call with analysts on Wednesday as eBay released its third-quarter results. He said more than 100 new merchant clients have adopted either PayPal or Bill Me Later so far this year, while some 24 online merchants now offer both payment methods, double the number a year ago. This week, eBay announced that Bill Me Later has been fully integrated into PayPal’s wallet as a funding source.

Bill Me Later, which extends credit to online users for each discrete transaction rather than as a fixed credit line, saw its chargeoff rate soar to 11.53% by the end of the quarter, up almost 300 basis points from the end of 2008, according to statistics released by eBay on Wednesday. Its 90-day delinquency rate is 4.97%, up from 3.94% nine months earlier. During the conference call, eBay officials acknowledged the deteriorating credit performance but noted that Bill Me Later’s risk-adjusted margin (8.98%) remains better than industry averages.

But PayPal posted strong results. The payments processor saw its total volume climb to $17.7 billion in the quarter ended Sept. 30, up 19% over the prior-year quarter, on 273.9 million transactions, a 28% increase. These figures include Bill Me Later transactions but not traffic through PayPal’s gateway business. Bill Me Later accounts for 1% of PayPal’s overall dollar volume. Meanwhile, the proportion of PayPal business with online merchants, rather than on eBay, continues to climb. Volume off-eBay accounted for 56% of total volume, up from 51% a year earlier. Active accounts totaled 78 million, up 19%. “PayPal continues to gain share and drive strong global growth,” said Donahoe during the conference call.

PayPal also continues to remain very profitable for eBay. It generated a transaction margin of 62% in the third quarter, flat with the previous period. This result takes into account PayPal’s overall revenue as a percentage of volume (3.67%) and deducts its processing expense rate (1.16%) and loss rate (0.25%).

PayPal on Nov. 3 expects to unveil a new payments platform, its so-called Platform X, which it is opening up to developers with application programming interfaces (APIs) that will let third parties create their own payment services. “We’re engaging developers as new customers,” said Donahoe. “We expect to see a wave of innovation.” PayPal’s move follows a strategy pursued by rival Amazon.com Inc., whose Flexible Payments Service was created as a tool for outside developers.

Meanwhile, industry sources say eBay, whose online marketplace is seen as struggling to regain its footing, will probably follow up its Skype sale with a spinoff of PayPal. “My Wall Street contacts assure me that PayPal will be spun out of eBay within a year,” says electronic-payments consultant Steve Mott, principal of Stamford, Conn.-based BetterBuyDesign, in an e-mail message. Addressing an e-commerce conference last month, Donahoe didn’t rule out the idea, though he said the move would only come if he felt PayPal would be better off as a separate business.