eBay's 3-Pronged Plan To Disrupt Payments Forever

By Daniel Sparks - December 20, 2012 | Tickers: DFS, EBAY, GOOG, V | 0 Comments

Daniel is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

On Black Friday, overall online sales in the U.S. were up 26%, year over year. Cyber Monday saw even better results, with online sales up 30%. These numbers were touted by the media as good signs--and they were. But the biggest winners were the middlemen, or the payment franchises like eBay's (NASDAQ: EBAY) PayPal. As eBay CEO John Danahoe outlined in the 2011 annual shareholders letter, "Commerce is at an inflection point. The lines between online and offline are blurring and consumers are changing how they shop and pay" (click to tweet this quote).

Poised to Benefit From Changing Payments

eBay's strengths were on full display during this year's Black Friday shopping weekend. On eBay's mobile platform, Black Friday gross merchandise volume (GMV) was up a whopping 150%. Furthermore, eBay continued to win votes in the evolving and growing world of e-commerce payments: PayPal witnessed a 193% year-over-year increase in payments. eBay has every intention to lead the way in the evolving payment space, both online and offline. Successful execution could be extremely rewarding for eBay shareholders.

As PayPal becomes more and more important to eBay, eBay's focus is changing as well:

"We are a different eBay today," eBay CEO John Donahoe said during an earnings call early in 2012. "No longer just an e-commerce leader but a stronger, more diverse global commerce company shaping the future of shopping and payments. We intend to make shopping more locally convenient and more globally accessible.”

Looking back on 2012, eBay has clearly lived up to this proclamation. Even better, eBay has a clear plan to continue to change payments, both online and offline, and execution is already underway. eBay's management refer to the plan as PayPal's three-pronged approach to changing payments:

Solicit direct merchant relationships. Home Depot, for instance, began accepting PayPal payments at all of its stores in the U.S. The PayPal store checkout program at Home Depot allows PayPal customers to pay with their mobile phone number and a pin at check out. In addition, customers can pay with an issued PayPal payment card.
Partnering with Discover (NYSE: DFS), accessing its 7 million retail locations in the U.S. As highlighted in the press release announcing the partnership, beginning in 2013 "Discover will work with PayPal to enable participating merchants to accept PayPal easily through their existing relationships with Discover."
PayPal Here competes internationally and domestically as a mobile tool to make and accept payments, competing with the likes of Square. With nothing more than an app and a triangular device that plugs into a phone, merchants can accept credit card payments, deposit checks, and have funds instantly available via a PayPal debit card.

Though each of these three approaches are important, it is PayPal's recent partnership with Discover that could result in near-term payoffs. In a matter of months, the clear leader in mobile commerce and payments became a formidable foe in offline commerce payments, as "the lines between online and offline are blurring."

The synergies resulting from the Discover partnership are plentiful, as outlined in the press release:

"To offer PayPal, merchants will not have to install or upgrade existing point-of-sale hardware or software and consumers will know of this additional payment option through in-store signage. As a leader in online payments, PayPal expects to bring brick-and-mortar merchants more shoppers in store and to extend convenience and utility for consumers through innovative mobile payment solutions. Additionally, PayPal's 50+ million active U.S. customers are expected to help increase customer engagement, loyalty and incremental sales at the physical point of sale."

A Space Worth Fighting For

This "inflection point" in payments is no secret. Many companies are fighting for the same space.

To fend off competition, Paypal has been busy acquiring smaller companies in the payment industry, including Where, Fig Card, Zong, and Card.io. But not all competition can be acquired.

Google (NASDAQ: GOOG) has no incentive to give up on its Google Checkout. If Google loses in the payment game, it won't have a large impact on the company; if it succeeds, there could be very large upside over the long haul. Google Checkout already offers a full spectrum of services including online mobile and PC payments and brick-and-mortar payments using Google's mobile app and near field communication (NFC).

On the small and micro merchant end of the spectrum, Square is a tough competitor. Plus, the privately held company is backed by a strategic investment from Visa (NYSE: V) in 2011. Furthermore, in the companies latest round of financing, the company received investments from Citi Ventures and Starbucks. These investmensts (especially Visa's) give Square greater resources to move into larger retailers. In March of 2012 Square announced that it was processing $4 billion a year in payments. In September, however, the company announced that it has already doubled that number, now processing over $8 billion in payments on an annualized basis.

Other formidable competitors include American Express, VeriFone, Groupon, and possibly even Apple.

The Bottom Line

As the payment space evolves, companies are fighting for market share. eBay's PayPal is poised for continued growth through its three-pronged approach to changing payments, especially in light of its recent partnership with Discover. But keep a close eye on PayPal's competitors.

DanielSparks has no positions in the stocks mentioned above. The Motley Fool owns shares of Google. Motley Fool newsletter services recommend eBay, Google, and Visa. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

eBay's 3-Pronged Plan To Disrupt Payments Forever

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