eBay Inc (EBAY): The Making of A Payments Powerhouse

eBay Inc (NASDAQ:EBAY) has always been under the shadows of its high-flying rival, Amazon, in the e-Commerce business. However, eBay has steadily transformed itself from a standalone auction-based company to a major payments powerhouse. After a number of shrewd acquisitions the company now has an enviable portfolio of Internet companies. The combined entity is now slowly becoming a leader in the payments business powered by its PayPal division.

Growing Payments Ecosystem

PayPal has been growing at a rapid rate and now boasts of more 122 million active customers. PayPal’s presence in mobile is extremely strong and in 2012 mobile payments represented 10% of all transactions on the PayPal platform. Total payments on mobile last year were $14 billion and the management expects it to surge to $20 billion in 2013. The company’s mobile app has been downloaded on more than 120 million devices, and will be a great driver for future growth.

There is little doubt over PayPal’s utility and value proposition for the consumers in terms of offering a low cost and secure payment mechanism online. eBay’s growth has been increasingly coming from the payment’s division and the company’s Bill Me Later (BML) segment, which provides consumers credit at the Point-of-Sale (POS) checkout. The company’s management is strongly focused on making PayPal a leader in not only online, but on mobile and more importantly the huge offline market.

Wide Rollout of PayPal Here

The company will be launching PayPal Here, which is a clip on mobile-based card reader that allows merchants to accept payments anywhere with a mobile device and the PayPal Here App. The PayPal Here card reader will lock horns with Square, which is a leading mobile based payments enabler. Privately-held Square is backed by big names like Visa Inc (NYSE:V), Starbucks Corporation (NASDAQ:SBUX), and Richard Branson and is expected to IPO in the coming years. Square is already being used in thousands of Starbucks stores and processing millions of transactions daily.

However, the PayPal brand has much wider brand recognition around the world, and also undercuts Square’s swipe fees of 2.75%, and comes in at 2.70%. PayPal Here was previously being tested in a handful of cities, and will be widely launched across the U.S. in 2013, and should gain a lot of market share from the growing mobile payments space.

Eyeing the Huge Retail Market

PayPal has its sights set on the huge retail market, not only with mobile card reader, but also on offline check-out. PayPal has signed up a number of big retailers for providing Point of Sales (POS) solutions that will enable PayPal customers, to make payments through their accounts and is now accepted in more 18,000 locations throughout the U.S. Not only that, the Company struck a marquee deal with Discover Financial Services (NYSE:DFS) , which will bring PayPal to more 7 million retail locations that currently accept Discover.

Discover also has a huge global presence and PayPal will be available in the various international merchant locations as well. However, retail POS locations have lower profit margins relative to PayPal’s other payment solutions and would require high volume of transactions and significant customer adoption, while facing high expectations from offline retailers.