Should eBay Become PayPal?

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

When most people think of online auctions, eBay (NASDAQ: EBAY) is the first name that comes to mind. The company has spent a lot of money and endured ups and downs, but becoming synonymous with a category always was the goal. The online auctions site has a division called PayPal, that most would say will be more important going forward than the traditional auctions business. In fact, according to eBay's most recent earnings, that tipping point may be closer than most people realize.

Ebay's earnings report shows the company's traditional Marketplace membership at 102.7 million registered users, up about 7% from last year. As of this same report, PayPal shows 109.8 million registered accounts, which grew by 12% year-over-year. Considering that PayPal already has more registered users, and is growing at a rate much faster, you can see why PayPal is looked at as eBay's growth engine of the future. When it comes to revenues, PayPal isn't quite to the halfway point, but it's getting close. In the most recent report, PayPal revenue totaled $1.309 billion versus the $1.728 billion generated by eBay Marketplaces. The difference in growth between the two divisions is staggering. PayPal saw revenue jump 32% while eBay Marketplaces grew revenues by 11%. Clearly PayPal is going to take over as eBay's primary business at some point. This is important because while eBay is the leading online auction site, the payments industry should be more attractive longer-term.

The reason is, PayPal faces less pure competition than eBay. In theory, eBay's competition is every single retailer, whether they are brick-and-mortar or online. In the online space, companies like (NASDAQ: AMZN) are growing their retail business faster with 33% revenue growth in the last quarter, versus eBay's recent 11% increase in Marketplaces revenue. In the big box world, Wal-Mart's (NYSE: WMT) size gives them pricing power that few can match. Think about this, last year Walmart sold over $100 billion worth of goods and services per quarter, eBay Marketplaces sold $16 billion of gross merchandise volume in the last quarter. If size is power in retail, eBay is going to have trouble matching up with Wal-Mart. Now granted, eBay sales include items that Wal-Mart may never carry like collectibles, used items, and others. However, as a full retail sales destination, and Wal-Mart make it tough for eBay to become the dominant force in retail. Clearly the competition in retail is tough. Am I really saying that the competition in the payments industry isn't just as tough?

In a word, yes. The payments industry is basically ruled by two huge names Visa (NYSE: V) and Mastercard. According to a recent survey, Visa and MasterCard processed about $1.45 trillion in payments for full year ending December 2011. In the last quarter, PayPal processed $34 billion of payments. This same survey, indicated there are about 610 million credit cards issued currently. Looking at PayPal's 109.8 million accounts, this is just 18% of the total cards issued. While no doubt Visa and MasterCard are tough competitors, most people like the convenience that eBay provides. The fact is, eBay has benefited tremendously by integrating PayPal into their payment platform. PayPal is secure, easy to use, and acts as an intermediary between the buyer and seller. PayPal also gives the customer the benefit of multiple types of payments, such as PayPal cash balance, a debit from a checking account, or a credit card. This flexibility is just not matched by Visa and MasterCard. The challenge eBay faces is trying to get PayPal to move from an online payment tool to a real world payment tool as well.

When it comes to non-online payments, PayPal is already making huge strides. The company is already in nearly every Home Depot store, giving the company a foothold in one of the largest U.S. retailers. In addition, eBay just signed a huge deal with VeriFone (NYSE: PAY). In agreeing to cross-promote each other, PayPal gets access to VeriFone's retail network. Since VeriFone's customer base represents “80% of the top 2000 largest retailers in the U.S.” This deal will eventually allow customers to choose PayPal instead of the traditional Visa, MasterCard, or other payment options. The biggest difference between paying with PayPal versus a traditional credit card is the need for that piece of plastic. Choosing to pay with PayPal means just using a wireless phone number and a PIN.

This is a huge benefit to customers as they don't have to worry about losing their credit card, or finding the card in their wallet or purse. In addition, the merchant should save time on the transaction because they don't have to verify the credit card or check I.D. The company is taking this one step further offering PayPal Here service in the U.S., Australia, Canada, and Hong Kong which allows for credit card payments through mobile phone either for online or offline purchases. I'm not suggesting that Visa and MasterCard will go away, because in many cases the funds to make these purchases through PayPal are coming from a Visa or MasterCard account. What I am suggesting is, at some point you may see less physical plastic cards, and more people using their phone number and a PIN to make their payments. In the future I'm sure that the PIN will go away as NFC (near field communications) between smartphones and credit card terminals becomes more commonplace. If PayPal's next growth phase is in the retail payment field, what else can PayPal do to make the service even more attractive to customers as their one payment shop?

Honestly, the biggest payment field that PayPal does not participate in is bill payments. While store purchases represent a huge market, there are other bills that customers could use PayPal for as well. Imagine if you could set up PayPal to make a payment for your cell phone bill, electric bill, or other invoices. The customer would benefit because they could centralize all of their payments through this one service. If they had a question about whether something was paid, rather than looking at a bank statement, and multiple credit card statements, they could just go to PayPal. This should be the next frontier for PayPal to move into. If eBay can make PayPal synonymous with payments, in the way that most people connect eBay and auctions, the company really should change its name to PayPal, Inc.

MHenage has no positions in the stocks mentioned above. The Motley Fool owns shares of, MasterCard, and VeriFone Holdings. Motley Fool newsletter services recommend, eBay, 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.If you have questions about this post or the Fool’s blog network, click here for information.

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