When news broke last week that eBay Inc. will begin moving away from its tight embrace of PayPal Holdings Inc. for payment processing, investors immediately punished PayPal’s stock, interpreting the move as a big blow to the company’s business. But the frenzy of PayPal shorting may have overlooked one thing: eBay’s significance to PayPal is rapidly diminishing.
Still, the news shone a spotlight on Amsterdam-based processor Adyen, which eBay said will take over back-end payments processing. And it heralded a significant move by eBay back into a prominent payments role it walked away from in the summer of 2015 when it spun off PayPal to the public.
EBay last year accounted for 13% of PayPal’s $451 billion in total volume, down from a 19% share in 2015. By July 2020, when a five-year operating agreement between the two companies expires, eBay’s share of PayPal’s volume will have withered to 4%, PayPal’s management predicted late Wednesday after eBay’s news broke.
But by Monday morning, PayPal’s stock still hadn’t recovered. The stock stood at $77.80 at noon, little changed from early Thursday and down fully $8 from mid-week. “Investors assumed the eBay deal [with PayPal] was everlasting,” Larry Berlin, who follows PayPal at Chicago-based investment bank First Analysis Securities Corp., tells Digital Transactions News. Even so, he’s convinced investors will start buying PayPal again soon. “We think the market over-reacted,” he says.
There’s no question the tie-up with eBay is a coup for Adyen, which processed $90 billion worldwide in 2016, the latest figure available, or roughly one-third PayPal’s volume that year. Operating from its U.S. headquarters in San Francisco, Adyen will ultimately funnel all volume from eBay sellers into payments networks around the world, taking over a role PayPal has fulfilled. PayPal, meanwhile, will become one among several payment methods available on eBay.
Adyen refuses to comment on its eBay deal, except to issue this statement: “We are thrilled that eBay, one of the most successful e-commerce companies of all time, has chosen Adyen as its new, global payments processing partner. Adyen is uniquely positioned to meet the needs of high-volume global marketplaces like eBay.”
For its part, eBay isn’t losing any time. Its plan is to function as the payments provider for sellers on its massive marketplace, taking over as the merchant of record, with Adyen operating in the background. “That will provide eBay with an incremental revenue stream vs. the PayPal relationship, where PayPal brands, owns, and controls the merchant-to-consumer payment relationship,” says Rick Oglesby, principal at payments consultancy AZ Payments Group, Mesa, Ariz.
This so-called payments intermediation, as eBay calls it, will start “on a small scale in North America” in the second half of this year, the company says, with expansion next year. By 2021, eBay says it will have moved most of its merchants to the new platform.
That will open local payment methods worldwide directly to eBay merchants, which in turn should reduce sellers’ acceptance costs, some observers say. “Local payment methods’ fees are typically much lower than PayPal’s,” says Ralf Gladis, chief executive at Computop, a processor based in Bamberg, Germany. “EBay will probably be able to provide lower payment fees to its sellers and still secure a margin for itself in the process, given its large volume.”
In preparation for this move, eBay has built an experienced team, including: Alyssa Cutright, a former Square Inc. and PayPal executive, as vice president of payments; Jingming Li, formerly with Ant Financial; as vice president of the payments platform; and Yvette Bohanan, formerly with Alphabet Inc.’s Google unit, as vice president of risk management.
Still, there’s no need to weep for PayPal. As its top executives stressed last week, the expiration of the operating agreement will leave it free to seek business with other marketplaces globally. Plus, PayPal’s role as a payment option on eBay, which it says will continue until 2023, will likely generate significant volume. “At Computop, we can see PayPal processing a third of all payments in industries like fashion and shoes, for example,” says Gladis.