In order to help drive more sellers on to its platform, Valuentum’s Best Ideas Newsletter holding eBay Inc (NASDAQ:EBAY)announced new, less complicated fee structures. The firm already charged lower fees than Amazon.com, Inc. (NASDAQ:AMZN), but the new structure gives greater transparency to sellers. Instead of the previous 10%+ take-rates, eBay will now have more basic fees ranging from 4%-10% depending on the seller’s size and product mix.
The move is very positive, in my view, as I think it can help drive a stronger network of fixed price sellers to eBay Inc (NASDAQ:EBAY). Though it has been associated with auctions since its inception, eBay is in the process of becoming a destination for buyers of everything, much like Amazon.com, Inc. (NASDAQ:AMZN) has done successfully over the past several years. While Amazon may look slightly more attractive in the near-term because more buyers are on the site, I believe the cost savings at eBay Inc (NASDAQ:EBAY) could help drive sellers to the eBay marketplace.
As much as I love eBay and the PayPal payment processing, PayPal presents an obstacle for eBay to make its seller network as comprehensive as Amazon.com, Inc. (NASDAQ:AMZN)’s seller network. PayPal, while a great service, constricts eBay’s payment functionality. Those who do not have enough cash in their PayPal accounts or who simply wish to pay with a credit card for whatever reason are not given the option. A consumer can pay for an item on eBay through PayPal with a credit card—but only if they do not have ample cash to cover the payment. This type of restrictive ecosystem is wonderful for driving profitability, but it could potentially be a hurdle for eBay Inc (NASDAQ:EBAY)’s long-term marketplace growth.
Fortunately, I believe eBay can easily remedy this situation. There are three options to fixing this, and one is to start issuing credit via PayPal. This would make the service similar to American Express Company (NYSE:AXP) or Discover Financial Services (NYSE:DFS) rather than its Visa Inc (NYSE:V) -like toll collector model. PayPal already executes this function via Bill Me Later, but the program could be greatly expanded or rebranded to a PayPal name. However, I’m not a huge fan of this idea since I would rather the company not take on credit risk.
The second option to address the situation is to allow consumers to pay via PayPal with a credit card directly. I assume eBay doesn’t allow this because it helps PayPal’s competitors and likely lowers the fees PayPal earns, but with competing services like V.me coming into existence, I think PayPal should focus on making its service as compelling as possible. I see this as the lowest cost option for PayPal.
The final option, and one I doubt the company will consider, would be partnering with a financial institution and have PayPal work as the brand and a financial institution as the issuer. This is the relationship Visa and Mastercard Inc (NYSE:MA) have with several banks, and actually the same relationship Mastercard has with PayPal. I simply do not believe eBay has interest in this solution, so I doubt it happens.
As for Amazon.com, Inc. (NASDAQ:AMZN), I anticipate that it will fight back—particularly since profitability is not its top priority. Amazon’s fees typically run around 12% of the transaction value (versus 4%-10% for eBay), and the company doesn’t offer nearly as much shipping flexibility as eBay Inc (NASDAQ:EBAY). Amazon could easily attempt to compete on fees, especially as a growing amount of its revenues comes from third party sellers. However, Amazon.com, Inc. (NASDAQ:AMZN)’s superior network strength may give it the power to charge premium take rates—the sellers want their products in front of as many buyers as possible.
If Amazon is able to retain traffic, Visa in particular could benefit since Amazon markets Visa-branded rewards cards. This could boost Visa’s network traffic, and does not leave the firm with any credit risk, since Visa does not issue credit.
Overall, I do not think the new fee structure changes our fair value estimate for eBay or Amazon.com, Inc. (NASDAQ:AMZN), but I am concerned it could launch a price war as the two e-commerce giants go head-to-head for sellers (and buyers). Ultimately, I like both companies’ long-term prospects, but I am simply not a fan of Amazon.com, Inc. (NASDAQ:AMZN)’s valuation at this time. On the other hand, eBay Inc (NASDAQ:EBAY) remains a holding in the portfolio of our Best Ideas Newsletter. Both marketplaces have strength and weaknesses, so I believe the two can coexist; albeit perhaps not peacefully.
The article The E-Commerce War Between eBay and Amazon Heats Up originally appeared on Fool.com and is written by RJ Towner.
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