Author(s): Raghu Gopal
Last week, eBay announced that it will take greater control over its customer payments by switching many of its transactions away from its long-time partner and one-time subsidiary, PayPal, to a Dutch financial technology company called Adyen. The move will enable eBay to collect some payment fees from sellers, which currently go to PayPal. eBay says it will also result in lower transaction fees for sellers.
Adyen isn't well-known in the US, but unlike PayPal, which in addition to offering payment processing services has big buttons plastered all over eBay's pages, Adyen focuses exclusively on the behind-the-curtains processing of transactions. eBay has indicated that the Dutch company will gradually take care of many of the payments on the buying and selling Web site, particularly in North America. Adyen supports payments in 150 currencies — significantly more than PayPal — and has high-profile clients such as Uber, Netflix and Spotify that use its technology for processing customer payments.
To be clear, PayPal won't disappear completely from eBay when their current agreement expires in 2020. It will remain as a payment option on eBay's Marketplace sites until 2023. PayPal has been growing beyond its former parent. Although eBay is certainly a big client for PayPal, it currently generates about 13 percent of total payments processed by PayPal. At its height, eBay accounted for close to 30 percent of its business.
PayPal became eBay's main payments provider in 2003, a few months after eBay had bought the company in a deal valued at $1.5 billion. In 2015, they split into two separate companies under pressure from some major investors, who believed that eBay was dragging PayPal's superior performance down, because of the troubles it was facing in the retail space at the time. Some argued that PayPal should be free to pursue business beyond eBay more keenly. The management team fiercely defended that the synergies between the two businesses were too great to pass up, but still lost the battle. After the split, the companies signed a five-year operating agreement to maintain a close relationship until mid-2020.
Since the separation, PayPal has been working to transform itself from a business that mainly handles payments for eBay to one that processes transactions for other big companies and their customers. More recently, PayPal's new strategic direction has led to partnerships with numerous large financial institutions and leading technology companies including Apple, Google, JPMorgan Chase, Mastercard and Visa.
PayPal's focus on partnerships and acquisitions has been paying off, with growth in payment volumes and user numbers. Despite the financial market's reaction to news about the split — PayPal's shares fell 10 percent — we believe that the company has the means to weather the development, as it has been diversifying its customer portfolio since 2015. The move will hurt PayPal in the short run, but it boasts a brand that's well-known among consumers as well as a dedicated group of users. PayPal is now growing up, moving well beyond its former parent, but this turn of events shows there's no room for complacency by any company.