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article imageCan PayPal survive splitting from eBay?

By Nicole Weddington     Oct 6, 2014 in Technology
Plans have been approved for PayPal to separate from eBay and form its own independent business. PayPal is currently responsible for handling one of every six dollars spent online and are looking to increase that figure.
It will be easier for the company to emphasize its role in online money transfers and its credit card services without being perceived as part of eBay.
Additionally, PayPal can position itself to offer its services to eBay’s rivals, like Amazon or Alibaba, without creating problems with its parent company. Alibaba choosing to use Stripe’s services for its US operations may have highlighted to both PayPal and eBay how much money was at stake in handling Alibaba’s non-Chinese transactions.
According to eBay, the move to spin off PayPal into its own independent business is about positioning “eBay and PayPal to capitalize on their respective growth opportunities in the rapidly changing global commerce and payments landscape, and is the best path for creating sustainable shareholder value.”
The split will allow both companies to pursue independent goals. This is especially important for PayPal after the announcement earlier this month that Apple will be jumping into the electronic payment market with Apple Pay — which will allow customers to use their iPhones to make credit card purchases in brick-and-mortar stores — and the successful IPO by Alibaba in late September. Alibaba has its own electronic payment system, Alipay, and they have partnered with Stripe to allow Alipay account holders to pay for electronic purchases outside of China with Stripe.
PayPal has released an ad that appears to highlight Apple’s recent security troubles by saying, “We the people want our money safer than our selfies.” Other companies, such as Google and Amazon, have their own payment services that compete against PayPal, as well.
The proliferation of rival companies may have been the catalyst for eBay’s change of heart about the future of PayPal. The online payment market has boomed in recent years, with companies such as Ria Money Transfer offering fast and affordable ways to send money across the world.
The proliferation of rival companies may have been the catalyst for eBay’s change of heart about the future of PayPal. The online payment market has boomed in recent years, with companies such as Ria Money Transfer offering fast and affordable ways to send money across the world. Other popular laternatives include WePay, Dwolla, and many more. Alt these have varying degrees of benefits and drawbacks.
As recently as February, eBay was opposed to PayPal becoming independent. This attitude was reversed over the summer. The official statements have been short on details on why eBay reversed their opinion on the split.
“eBay and PayPal are two great businesses with leading global positions in commerce and payments,” said eBay Inc. President and CEO John Donahoe on their website. “For more than a decade eBay and PayPal have mutually benefited from being part of one company, creating substantial shareholder value.”
The split in business will be concluded by the end of 2015. New CEOs are taking over both companies. eBay Marketplaces President Devin Wenig will take the helm at eBay and PayPal president Dan Schulman will occupy the CEO slot at PayPal.
“eBay and PayPal will be sharper and stronger, and more focused and competitive as leading, standalone companies in their respective markets,” Donahoe continued. “As independent companies, eBay and PayPal will enjoy added flexibility to pursue new market and partnership opportunities. And we are confident following a thorough assessment of the relationships between eBay and PayPal that operating agreements can maintain synergies going forward. Our board and management team believe that putting eBay and PayPal on independent paths in 2015 is best for each business and will create additional value for our shareholders.”
In 2008, eBay payments accounted for less than 50 percent of PayPal’s transactions and currently it stands at about 30 percent. It is expected to drop below 15 percent within the next three years. With the decline in importance of eBay to PayPal they have been focused on different sources for growth. If PayPal had not been part of eBay, it is possible that it could have partnered with Alibaba and gained a huge share of the Chinese market.
Alibaba is China’s largest online commerce company. It functions much like eBay, PayPal and Amazon combined do in the United States, with hundreds of millions of users. In 2013, Alibaba had over $248 billion in transactions, more than eBay and Amazon combined. Over 80 percent of all Chinese online shopping is done through Alibaba.
In the short run, PayPal benefits from the split with eBay. By no longer being shackled to the auction giant, PayPal can pursue projects that are opposed to eBay’s needs. In the long run, however, with the dilution of the market share by Stripe, Apple Pay and other services, PayPal may find itself losing ground to online money transfer companies that made the transition to mobile platforms quicker and better than PayPal has. If PayPal fails to dominate the online money transfer field, it may find itself an acquisition target of Google or Stripe.
In an interview with The New Yorker, Denee Carrington, an analyst with the research firm Forrester, said, “They can focus on doing what’s best for PayPal without being constrained by doing what’s best for eBay.”
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