PayPal Saw a Fall of 15% on Loss of it’s Biggest Customer

The story of eBay and PayPal’s romance, breakup, and eventual divorce is not of love, hate, or bitterness. It is simply business and in business, we only care about profit and loss. Unfortunately, this tale has no happy ending, at least not yet.

As it stands, PayPal is the biggest loser in this protracted case as their shares are down by about 15%. Meanwhile, eBay saw a rise of over 10% in its stock and an upward trend is predicted by financial experts, especially as Adyen, eBay’s new found love, is expected to go public soon. Sit back and enjoy the beginning of the relationship which, to a large extent, revolutionized Silicon Valley.

The Beginning of eBay and PayPal

In July 2002, eBay purchased PayPal in a deal worth over 1.5 billion dollars. The aim was simple; create a secure and easy-to-use system of payment for the largest online marketplace. Even though many experts claim that the biggest mistake the founders of PayPal made was selling too early, at the time it seemed like a really good business venture.

Over the years, PayPal became an integral part of eBay’s structure. PayPal changed the face of online credit card payments and made e-commerce transactions undeniably seamless. The relationship was highly fortuitous while it lasted, with eBay boasting a revenue growth of about 11%. PayPal also enjoyed the mutual growth, seeing its user base grow to over 110 million and the payment volume reaching $34 billion as at 2012.

This period, however, was marred by a few dark experiences. eBay’s core marketplace business was in ruins. Incessant reports of bad user experience coupled with the advent of other e-commerce channels had a devastating effect on the business and this, perhaps, contributed to the breakup.

The Breakup

The CEO of eBay at that time, John Donahoe, after reviewing the company’s options, was convinced that PayPal and eBay were better off as independent companies. The conclusion was that this spinoff would enable both companies to focus on their individual goals and grow faster.

It seemed like a win-win at that time. PayPal contributed about $1.37 billion in sales (40% of eBay’s revenue) while the finance company accessed eBay’s database and records to their advancement. Although, the news flying around was that eBay was hindering the growth of the fast-burgeoning PayPal. At the time, eBay accounted for less than 40% of PayPal’s transaction and the latter company wanted to focus more on other sources of growth.

The rise of startups such as Stripe and Square signaled the beginning of many storms PayPal would eventually face. The situation was worsened when Alibaba went public and PayPal wasn’t listed as one of the payment partners. The business further languished when Apple announced Apple Pay; a system which allowed Apple users pay for transactions, thereby kicking PayPal to the sidelines.

Even though they went separate ways and became individual companies, eBay and PayPal still maintained a close working relationship at the time. eBay accounted for 22% of PayPal’s total revenue in 2016. The figures were even higher in previous years with eBay accounting for 29% and 26% in 2014 and 2015 respectively.

eBay Moves on

Unfortunately, eBay couldn’t continue with the seemingly dysfunctional relationship. It saw the opportunities for advancement and fell in love with a burgeoning payment service company, Adyen. eBay announced that the aim of this new merger is to improve the customer experience and simplify transactions for both buyers and sellers. The implementation of this, though, will take a while.

Currently, PayPal and eBay have an operating agreement which remains valid until 2020. The implication of this is that PayPal will remain a payment option at checkout for buyers at least until 2023. eBay listed some of the benefits of this arrangement and they include lower payment processing costs for sellers, more options for buyers, and a streamlined consumer experience.

Adyen itself is a very versatile and widely used payment partner. The company supports over 150 currencies and there are more than 200 methods by which buyers on the platform can pay. The takeover will begin on a small scale in the second half of 2018, starting with North America. The reach will extend slowly in 2019 as eBay is still subject to an agreement with PayPal until 2020.

PayPal’s Loss (or not)

When Devin Wang, eBay’s current CEO, announced the agreement with Adyen, the stock in PayPal fell by 15 percent almost instantaneously. eBay’s announcement eclipsed that of PayPal which reported that the company’s profit rose by 59% in the last quarter of 2017.

It is estimated that the eventual impact on PayPal will be a manageable one. According to the Chief Financial Officer, John Rainey, eBay accounted for just 13% of PayPal’s total volume in the last quarter of 2017. Also, it is estimated that this volume brought about just 10% of PayPal’s total revenue. John was quoted saying that his company valued the volume they were getting, however, profit was more important.

Another reason for PayPal’s positivity is the agreement they recently signed with companies like Walt Disney, Dillard’s Inc., and QVC. It is expected that these deals would go a long way in supporting the company, thereby mitigating the impact of the breakup.

As of the last quarter, PayPal’s total volume amounts to 131.5 billion dollars, seeing over 30% increase from the previous year. The mobile payments service, Venmo, also managed almost 10.5 billion dollars in volume. Only time will tell whether PayPal will truly survive this storm.

— The Option Specialist

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About the Author: The Option Specialist