Payment Volume, Platform Response Swell for an Upbeat PayPal

PayPal Inc. this week reported a vigorous response from developers to its new open platform and posted strong results in the fourth quarter. More than 12,000 software developers have signed up so far to use new application programming interfaces (APIs) PayPal introduced in November as part of an effort to open its payments platform to third-party applications (Digital Transactions News, Nov. 3, 2009), John Donahoe, chief executive of PayPal parent eBay Inc., told equity analysts on Wednesday. He added that the first payments applications have already launched. “It's a strong response,” Beth Robertson, director of payments research and consulting at Javelin Strategy & Research, a Pleasanton, Calif.-based payments researcher, tells Digital Transactions News. She said the open-platform initiative, called Platform X, has helped smooth relations between PayPal and banks, which have historically regarded PayPal as a competitive threat. “PayPal has an attitude of very much working cooperatively with banks to further the development of the payments industry,” she says. “They realize there's a lot of opportunity for banks and PayPal if they work together. The open platform is a way to do that.” PayPal enjoyed a strong final quarter last year, according to results released by eBay. The San Jose, Calif.-based processor of e-commerce transactions surpassed $20 billion in quarterly dollar volume for the first time, with a 34% surge over the same quarter in 2008 to $21.4 billion. Much of the gain came from PayPal's merchant-services unit, which processes transactions for e-commerce merchants off-eBay. The unit racked up a 50% increase, to $12.1 billion. It now accounts for fully 57% of the company's total dollar volume. By contrast, off-eBay volume came to just 29% of total volume five years ago. Transaction volume, meanwhile, shot up 31%, to just under 330 million, resulting in very little change to PayPal's average ticket. The company also continued as a major contributor to eBay's corporate coffers. Its transaction margin for the quarter?the amount left over after transaction expenses and fraud losses, as a percentage of revenue per transaction?came to 62.1%, up slightly over the third quarter and stronger than the 60.6% recorded a year earlier. “PayPal posted terrific results,” Donahoe said. The processor saw some progress with Bill Me Later, the online transactional credit provider eBay acquired in 2008. Despite a tough economy and high unemployment, Bill Me Later's net chargeoffs declined slightly from the third quarter, though they still exceeded 11%, up from 8.75% at the end of 2008. Bill Me Later accounts for 1% of PayPal's total payment volume, a proportion that hasn't changed since the company started including the unit in its results. With Bill Me Later, some see a bigger positive than negative for PayPal. During the conference call, Ebay officials pointed to Bill Me Later's penetration of large e-commerce retailers, which complements PayPal's position with smaller merchants. “Bill Me Later's credit situation may be difficult, but that doesn't necessarily make Bill Me Later a liability, especially on a long-term basis,” says Javelin's Robertson. “Overall, it positions them well to offer a broader array of payment options.” Indeed, some e-commerce processors have seen a need to start offering a credit option, most recently Moneta Inc. (Digital Transactions News, Dec. 29, 2009). On the whole, Donahoe saw PayPal's results reflecting a strong performance for e-commerce sales in general. “E-commerce continues to gain share versus offline retail, we saw that in the fourth quarter,” he told analysts. “There's a lot of opportunity for multiple winners.”