Why PayPal and eBay grew apart

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Paypal evolved to an online payment platform

eBay’s (EBAY) marketplace business represents ~30% of PayPal’s revenue. eBay’s transactions account for more than 30% of PayPal’s current total volume. It’s estimated to fall to more than 15% in three years.

PayPal evolved from eBay’s payments processing platform. It’s an online payment platform for third-party websites, businesses, and individuals. It installed payment kiosks, placed Bluetooth beacons in brick-and-mortar stores, issued physical cards, and launched card-swiping dongles for smartphones—like Samsung (SSNLF) and Google’s Android (GOOGL). The dongles are like in-store payment options—like checkout registers. They generate new sales that are independent from eBay’s marketplace site.

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When the news was released that celebrity photos leaked from Apple’s (AAPL) iCloud system, PayPal release an advertisement. It highlighted PayPal’s efficiency. It said “We the people want our money safer than our selfies.” To learn more about how the celebrity photo leaks impacted Apple, please click here.

paypal contribution
The above chart shows eBay and PayPal’s growth and contribution towards overall revenues.

PayPal is a threat to credit card business

With PayPal, some of its transactions are funded through automated clearing houses. Some of the transactions are funded by money that’s already in PayPal accounts. PayPal offers merchants a lower fee for processing payments. It could pose a threat to traditional credit cards.

Spin off decision

In 2013, PayPal earned $7.2 billion in revenue. It accounted for 41% of eBay’s total revenues. This was an increase of 19%—compared to the 12% revenue growth at eBay’s Marketplace division. It accounted for 52%, or $9.9 billion, of the company’s top line.

The gap widened every quarter. This prompted investors—like Carl Icahn—to suggest that PayPal should spin off to form a new company. According to FactSet, Carl Icahn’s firm is eBay’s sixth largest shareholder. It’s stake is ~2.5%.

The relationship between eBay and PayPal made it difficult for PayPal to pursue partnerships with e-commerce competitors like Amazon (AMZN). After splitting off from eBay, PayPal won’t have a natural conflict when it works closer with brick-and-mortar shops.

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