The online auction site announced yesterday that it will be ditching PayPal as its main payment option, turning instead to an integrated solution from Adyen.
In after hours trading, PYPL stock was down 11% on the news, while EBAY stock was up over 8%, reflecting who is likely to come out ahead on this deal.
eBay Announces Ayden Will Replace PayPal
Yesterday evening, eBay’s newsroom announced it is moving to an integrated payment system for its auction websites. That means PayPal — the payment service that’s been the primary way of paying for goods on the site since 2003 — is out. Instead, the company is choosing to go with Amsterdam-based Adyen. Ayden also processes payments for Uber and Netflix, Inc. (NASDAQ:NFLX).
While PayPal will remain a payment option for shoppers once the move goes into effect, the primary method will use Adyen’s integrated system, which won’t require them to log into another website, making the transaction seamless.
“eBay will manage the entire checkout experience, delivering a more streamlined experience for consumers.”
PayPal will also lose eBay’s card payment processing business. EBay says this will reduce payment processing costs for most sellers on the site. According to Re-Code, the move will also add as much as $2 billion yearly to eBay’s revenue as it will be charging sellers for payment processing instead of that money going to PayPal.
In other words, this deal appears to be pretty much all upside for eBay, with nothing but bad news for PayPal. Since the announcement, PYPL stock dropped 8%, while EBAY stock is about 12.5%.
The End Of A 15-Year Relationship
For most people eBay and PayPal are are so closely related that they may as well be part of the same organization. In fact, for over a decade, they were.
eBay bought PayPal back in 2003, making it the primary payment method for its online auctions. With the market for mobile payments getting more competitive as Apple Inc. (NASDAQ:AAPL) launched Apple Pay, PayPal spun off as a standalone company in 2014.
PayPal will remain a primary payment option for eBay customers until 2020. While eBay says it will continue to offer PayPal as a secondary payment option for customers through July 2023, the close relationship between the two companies appears to have come to an end.
EBay remains the single largest contributor to PayPal revenue and transaction volume. In 2016, the auction site accounted for 22% of PayPal revenue. With Apple Pay Cash coming after PayPal’s Vemo mobile payment system, and now Adyen supplanting it at eBay, PayPal suddenly finds itself in a challenging position.
PYPL stock has been steadily gaining since the payment service provider split from eBay and consumers increasingly jumped on the mobile payment bandwagon. Now those gains –146% since 2015– are in jeopardy.
The 8% PYPL stock drop after the announced split likely marks the start of challenging times for PayPal.
Timing Of The Transition
The move won’t happen overnight. (The auction site’s current operating agreement with PayPal is set to end in 2020.) But eBay says it will begin transitioning to payment processing using Adyen in North America starting in the second half of 2018.
The company expects to have the “‘majority of its Marketplace customers” moved to the new system by 2021.
As of this writing, Brad Moon did not hold a position in any of the aforementioned securities.