Has PayPal outgrown eBay?
10 October 2014 by Lucinda Stacey
The popular online site eBay is planning to split its payments system PayPal into a separate company. News of this potential move has increased eBay’s shares by 7.5% in value. The completion of this new idea is rumoured to occur in the later half of 2015 as a result of a reversal of strategy on the part of eBay. Such a move is somewhat surprising as eBay has previously resisted the pressure to split earlier this year.
PayPal is becoming increasing popular as a result of online purchasing increasing, as revenues have been seen to grow at 19% a year, twice as quickly as eBay’s revenue which is growing at 10% per year. Its success is down to the fact that the payment system is available in 203 markets worldwide and more impressively, is expected to process one billion mobile payments this year alone. PayPal’s annual revenue is £4.5 billion by comparison.
EBay bought PayPal in 2002 for $1.5 billion and the payments company is now eBay’s fastest-growing business, with 143 million active users at the end of 2013, up 16% from a year earlier. Earlier this year, activist investor Carl Icahn, started pressing for eBay to sell PayPal which was resisted by the eBay board. Icahn has recently released a statement stating that he is “happy that eBay’s board and management have acted responsibly concerning the separation- perhaps a little later than they should have, but earlier than expected”.
EBay’s chief executive, John Donahoe has said that “a thorough strategic review… shows that keeping eBay and PayPal together beyond 2015 clearly becomes less advantageous to each business strategically and competitively”. Clearly the logic for running the companies jointly has changed and has resulted in the decision to split. It has been said that breaking off from eBay will provide PayPal with more autonomy to compete in the payments space, particularly with regards to the new entrant in to the online payment market and director competitor, Apple Pay.
Apple recently announced plans for its own online payments system which enables people to pay for everything with their smartphone. According to reports, Apple are in a strong position to make the system work as they have a strong record of simplifying complex technology and have a strong market of loyal Apple addicts to introduce their product to.
Furthermore, two of the companies Apple are working with, MasterCard and Visa, have estimated purchase volumes of $3.3 and $4.7 trillion, figures which completely dwarf PayPal’s $203 billion. EBay are hoping that by splitting PayPal off into a separate business, it will give the company the focus they need to stay ahead of the new competitor. But Apple has once again displayed their dominance through partnerships with MasterCard, Visa and American Express, powerful and influential payment companies which are currently used in shops and online worldwide, while PayPal only operates online.
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