PayPal’s off-eBay Push Hits a Wall After Months of Steady Progress

Despite strong results in its off-eBay merchant-processing business, PayPal Inc.'s efforts to lessen its dependence on the online marketplace of its parent eBay Inc. hit a wall in the fourth quarter of 2006. The San Jose, Calif.-based online processor saw 36% of the $11 billion in transactions it handled in the period come from off-eBay merchants, essentially flat with the 37% the company recorded in the third quarter. This comes after a year of steady progress in which a number of high-profile signings of Internet merchants helped the processor build its non-eBay volume from 31% of payment volume in the fourth quarter of 2005. PayPal nonetheless enjoyed a strong year in its merchant-processing business, with off-eBay volume totaling $3.93 billion in the fourth quarter, up 57% over the year-earlier period, according to statistics released by eBay on Wednesday as part of the company's quarterly earnings report. Much of the growth came in the fourth quarter, with volume jumping 18% from $3.33 billion in the third quarter. PayPal processed 172 million payments overall in the quarter, up 23% from the year-earlier period. This volume does not include transactions processed through the online gateway business PayPal bought from Verisign Inc. in 2005. The 8-year-old processor has sought since 2004 to build its off-eBay business by increasing its efforts to court Web-based merchants. These efforts have included new technologies to make accepting PayPal easier, and have paid off recently with the enlistment of the e-commerce operations of recruiter Monster.com, bookseller Barnes & Noble Inc., and computer maker Hewlett-Packard Co. In December, PayPal said more such signings are on the way, and if so these merchants may cause the processor's off-eBay statistics to begin marching upward again. Much of PayPal's appeal to online merchants lies in its large account base, which reached 133 million in the fourth quarter, up 38% from the year-ago quarter. Of these, 37.6 million are considered active accounts, a 34% increase. Some 86 million of PayPal's accounts are in the U.S. PayPal has broadened its reach on the Web as well by introducing a so-called virtual debit card, branded by MasterCard, that can be accepted at any site that takes bank cards. The processor is testing the card now with a broad group of active accountholders (Digital Transactions News, Jan. 3). At the same time, eBay has taken steps to lock in PayPal's dominance in its online auctions. Recently, the company said it would no longer offer purchase protection on non-PayPal transactions. Instead, it doubled, to a limit of $2,000, the protection sellers who accept PayPal and meet certain feedback requirements can offer buyers to cover cases of non-delivery of merchandise and merchandise delivered not as described. Though PayPal held its revenues and costs steady as a proportion of its dollar volume, its losses owing to fraud and protection-program payouts jumped to 0.41% of volume from 0.35% in the prior quarter and from 0.33% in the final three months of 2005. In this measurement, PayPal includes dollar volume processed through its gateway business.