Digital Payments

eBay/PayPal: What Everyone Missed

The year was 1999.

eBay, then four years old, bought payments provider Billpoint to improve the payments experience on its site.

When eBay first launched in 1995, the primary way that buyers and sellers did business was via paper check and snail mail.

Back then, only the very, very large merchants had merchant accounts and could accept credit card payments online. And, since the vast majority of eBay sellers were very, very small, the only way to get paid was via a payment intermediary known as the postman.

At the time, eBay explained that having its own payments platform would give it the flexibility needed to improve the buyer/seller experience. Wells Fargo and Visa were Billpoint backers. At launch, eBay gave sellers incentives to sign up with Billpoint and gave buyers incentives to use it.

One year earlier, in 1998 — the same year Billpoint was founded — a software company by the name of Confinity was founded in Silicon Valley by Max Levchin, Peter Thiel and a few others. Confinity’s first product, released in 1999, was PayPal — a (peer-to-peer) P2P payments platform that would let users send money to each other via Palm Pilots and on the web.

Levchin and Thiel knew that getting PayPal off the ground meant getting a critical mass of senders and receivers on board. They looked around for places that had a large concentration of senders and receivers online and a use case for payments that needed a digital upgrade.

eBay fit the bill.

For sellers, PayPal solved an enormous payments pain point.

PayPal became as the merchant of record for the little guys who couldn’t get a merchant account from traditional acquirers, serving as the stand-in seller to offer buyers a digital way to pay. And, unlike traditional acquirers, PayPal made it easy for tiny sellers to come on board.

Meanwhile, buyers could use PayPal to buy the doodads collecting dust in someone’s basement or attic without having to share their credit card account credentials with that seller.

After a rocky start, PayPal’s technology street cred became its risk/fraud engine, which helped it take on and manage the attendant buyer/seller risk that came along with PayPal’s new business model. That risk guarantee helped increase buyers’ and sellers’ comfort levels with doing business online, ensuring there were protections in place that kept them from being duped by bad actors.

The flywheel that PayPal hoped for started to spin.

More sellers with stuff to unload jumped on board with eBay, knowing buyers now had an easy way to pay them — one that accelerated the time to get money into their bank accounts.

eBay’s homegrown alternative just sputtered along.

Three years later, in 2002, eBay bought PayPal for $1.5 billion and shuttered Billpoint.

At that time, it was reported that the vast majority of eBay sellers — 70 percent — accepted PayPal.

Despite having its own payment processor, eBay was willing to pay $1.5 billion for the payments platform for one simple reason: Buyers liked using PayPal on eBay, and sellers liked getting paid that way.

 

eBay’s Groundhog Day

The year is 2018.

Last Wednesday, at the opening of eBay’s 2017 Q4 earnings call, CEO Devin Wenig announced that eBay would, once again, bring payments in-house.

eBay said it had selected Adyen to be its primary processor for card payments. Adyen, headquartered in Amsterdam, has built its business on connecting merchants to a variety of online payment methods, including localized ones like iDEAL and Swish.

It’s not known what the terms of the deal between Adyen and eBay are, but it is rumored to be aggressively priced, in exchange for an important payments credential outside of Europe.

eBay’s pitch to investors is remarkably similar to its pitch in 1999: The ability to exercise more control over payments will give consumers more choice over how they pay when buying from an eBay seller. And it will give sellers more choice over the payments options they can accept — and less expensively.

eBay also said that the move to bring payments in-house and to use Adyen for payments processing is intended to reduce the cost of payments to its sellers.

Today, of course, PayPal accounts for the vast majority of eBay payments. PayPal comprised 70 percent back in 2002, and almost surely a lot more today.

Perhaps it wasn’t a coincidence that eBay’s announcement was made two days before Groundhog Day.

 

Digging into the Details

Headlines immediately following the news gave the thumbs-up to eBay: “A Smart Move for eBay.” And they lowered the boom on PayPal: “eBay Chooses A New Dance Partner While Dunking PayPal.

Others just got it all wrong.

Analysts, with concerns over the longer-term implications of the move on eBay’s part to intermediate payments, got spooked.

Since eBay’s announcement on Jan. 31, PayPal’s stock has taken a drubbing, closing on Feb. 2 at $76.57.

Two days earlier, it was trading at $86.17.

eBay’s stock, on the other hand, has seen an uptick, closing on Friday at $44.30, down from a high of $46.78 on Feb. 1, but up from the $40.58 where it was trading moments before the announcement was made.

The angst over PayPal and the hype over eBay are both overblown — and even feel a bit like déjà vu.

According to sources at PayPal, under the terms of the deal, Adyen will process the unbranded card payments on eBay starting in mid-2018, and then only for a small number of pilots that will account for a small (think single digits) volume of payments. And even though eBay will require sellers to establish an account with eBay, it will not be at the exclusion of eBay merchants keeping their PayPal accounts up and running. Through 2023, PayPal will continue to operate as the payments intermediary for the branded PayPal transactions that happen on eBay.

The unbranded part of eBay’s business — the part that Adyen will handle for a few markets beginning later this year, and then starting in 2023 for all unbranded business — is not only the smallest portion of eBay’s current overall payments volume, but also represents the most highly commoditized part of payments.

Of course, eBay hopes it becomes much more than that.

For the buyers and sellers who wish to transact using PayPal, it seems that it will pretty much be business as usual for the next five years.

Which also means that the economics for the “vast majority” of transactions taking place on eBay — where PayPal makes its profits managing payments on eBay today — won’t change much either.

 

Mitigating the Flight Risk

eBay has fielded an extremely talented team to get its in-house payments platform off the ground. But it will have its work cut out for itself if it really wants to displace PayPal long-term.

Over the next two and a half years — as eBay allocates resources (money and people) to upgrade its technology platform, build its risk/fraud engine and improve its merchant services capabilities — it is also faced with keeping its core business from becoming destabilized in the face of these new developments.

That means keeping the buyers happy — and, more importantly for eBay, keeping their sellers from defecting.

Most eBay sellers sell on many other marketplaces that also accept PayPal, and likely value the convenience of having a single merchant account to manage all of their payments flows. Via PayPal, these sellers also get access to other value-added services, such as the option to extend other services, like PayPal Credit, and working capital for the entirety of their businesses across all their online channels and across borders.

eBay’s bet on becoming a payments intermediary comes with a lot of risky assumptions.

Assumption: Most Buyers Ditch PayPal for Other Forms of Payment

Making payments cheaper for sellers and for eBay means moving buyers off PayPal. Using PayPal on eBay is pretty slick and seamless — and as we have observed, payments habits are hard to break. If buyers wanted to use credit cards to pay for things on eBay today — and for the last 16 years — they could have. As we’ve been told, it seems the vast majority don’t — and haven’t. It will require a big investment by eBay to get enough buyers willing to switch to a new form of payment — and to stick with it. The road to good payments intentions is well paved with players who think that offering sellers cheap payments is enough to get buyers on board – all buyers care about is being able to use the method of payment they like and want to use.

Assumption: Most Sellers Ditch PayPal for eBay Direct Payments

eBay’s move to intermediate payments has been compared to Etsy’s move to do the same thing. That journey has come with a lot of well-publicized bumps and bruises, including a payments outage that lasted five days, a turnover of three CEOs and seller fees that aren’t all that much cheap(er). The value proposition for sellers must come with something more than just “it’s cheaper to process card payments.”

Assumption: Sellers Don’t Bail for Other Online Platforms

Seller turnover is the nature of the beast on any marketplace, but it’s a real threat to eBay during this critical juncture. It’s been reported that over the years, fees have driven large sellers to defect from eBay to Amazon and other platforms — but I’m not sure that’s the only reason or even, perhaps, the primary one for that churn.

Sellers like to be where there’s a steady stream of buyers, since what gets them out of bed in the morning is selling stuff. I know that I’m going to get killed for saying this, but paying fees in exchange for the ability to access buyers and sell lots of stuff to them is a high-class problem. It’s possible that among the reasons for eBay seller defections is not having enough of those buyers to make it worthwhile to stay there.

Assumption: All of This Ends Up Cheaper for eBay to Support

And that will be a function of all of the above, plus eBay’s ability to manage fraud and risk at scale — and across all of the global markets in which it operates today.

Seems hard.

It makes one wonder why this move, and why now, given the distractions that such an enormous shift will create for a marketplace that analysts still view quite cautiously.

And at a time when eBay needs to, first and foremost, make itself the place that lots of buyers and sellers really want to do business.

Tomorrow, Tomorrow — You’re Only Five Years Away

The big eBay payments countdown clock isn’t mid-2018, or 2020 — it’s 2023, when the term sheet that eBay and PayPal just signed comes to an end. That’s about two years after eBay expects most sellers will have migrated to their direct payments model.

A lot can happen over the next five years, which, these days, seems a lot more like dog years than anything else.

It might also mean that what we heard last week from eBay is just the first move in a very strategic game of payments chess, as the company prepares for something bigger and bolder over the next several years.

I wrote a piece last year suggesting that eBay needed such a big and bold move to give its marketplace a boost, and that perhaps Facebook might like to allocate some of its billions to buy it. What sounded like a crazy strategy then, for both eBay and Facebook, might not sound all that nutty now.

Maybe it’s an opportunity for eBay to get Walmart in play. The Amazon/Walmart rivalry is at a fever pitch, and Walmart has made some aggressive moves to buy online properties in the past. Could buying eBay give Walmart access to a global online marketplace? Maybe that possibility isn’t so far-fetched either.

Or a shot at moving buyers to use their bank accounts and alt credit platforms like Klarna – in an attempt to build their own version of PayPal?  That really would be Groundhog’s Day.

Then again, maybe it’s a convoluted move to negotiate different terms with PayPal. Adyen processes payments, but it doesn’t provide the depth of merchant services that eBay sellers now get from PayPal. Is there a world in which Adyen handles the low-cost payments processing side of the business and PayPal’s suite of high-margin seller services are made available to eBay in some way?

We live in a world where (almost) anything is possible.

 

The Next Move

CEO Dan Schulman told investors last week that PayPal expects a continued reduction in the percentage of its business that is eBay-dependent. He expects that percentage to decline to roughly 4 percent by 2023.

Even though PayPal’s stock has taken a hit over the last couple of days, it’s still two times what it was this time last year, with a market cap of $92 billion.

That said, PayPal also has its payments to-do list for the next couple of years.

PayPal, today, remains the leading acceptance mark online but obviously needs to keep buyers engaged in using it on eBay and everywhere else. That means PayPal must continue to expand the number of its use cases and may even require a rethinking of its business model to be a contender for some of those cases.

The emergence of new, voice-activated payments channels represents both an opportunity and a threat for PayPal. Asking Alexa to pay for something using PayPal will elicit the same reaction as asking Alexa to “Ask Google”: She won’t understand.

I’ll mention that Alexa also didn’t think the Patriots would win the Super Bowl, so she might have super powers after all. #painful

Where does that leave us?

Hard to know, but it will be fascinating to watch.

And just think, we have another 11 whole months to go, too, in 2018.

One thing’s for certain: Whatever happens, with eBay and payments, it won’t be buying PayPal this time around.

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