Ditching eBay is the only way PayPal can grow

PayPal announced it will spin off from parent company eBay in 2015. The departure marks a new road ahead for the payments giant — and just in time:

Digital payments are heating up, and PayPal is facing competition on all fronts.

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A number of smaller players have emerged to compete with PayPal as e-commerce payment processors, including Stripe, Dwolla, Balanced, and Braintree (which PayPal acquired last year). There’s also the small merchant-friendly Square, which developed a simple credit card reader for mobile devices and a platform for in-person mobile payment processing.

Those payment processors chip away at PayPal’s business, but none of them has really given PayPal a run for its money.

Most recently, PayPal has come to face competition in mobile payments and peer-to-peer transactions — Square offers a peer-to-peer payments app named Cash, not to mention Google Wallet — which PayPal has dominated for over a decade. PayPal acquired one of its competitors, a small startup called Venmo, but plenty of others remain.

Probably PayPal’s biggest competition in this space is a product that hasn’t launched yet: Apple Pay. Due to debut in October, Apple Pay is expected to expand adoption of in-store mobile payments using NFC technology. PayPal has had an app that facilitates in-store purchases with a fairly wide network of stores since 2011. But consumers have been slow to adopt the phone-as-wallet concept because swiping a credit card is just as simple as pulling out a phone.

“The pace of change accelerated over the past six months” eBay’s chief executive John Donahoe said referring to the payments sector, in an interview with the New York Times. The article says Donahoe mentioned both Apple Pay and Alibaba’s IPO as signs of a rapidly changing market. So a split with eBay is not unwise for PayPal. The company will soon be coming up against Apple in a fierce fight to win over consumers. As an independent entity, PayPal may be better positioned to hold its ground in this arena.

PayPal and eBay have been married for 12 years. The digital payment transfer service became the primary vehicle for transactions on eBay, which has helped the company accrue 152 million active online accounts, according to Statista. Over the years, PayPal has grown its payment processing API for e-commerce sites, but that API hasn’t caught on with e-retailers that view eBay as a competitor. In this way, eBay has stifled PayPal’s potential opportunity. Alibaba, for example, uses Alipay for payment processing.

“PayPal needs speed and flexibility to effectively defend and grow its business without worrying about whether it is helping a competitor to eBay,” Denée Carrington, senior research analyst at Forrester Research, told VentureBeat in an email.

E-commerce is still a growing field. In the second quarter of 2014, e-commerce sales were estimated to be worth $75 billion, according to the U.S. Census Bureau. Compare that with nearly $1.2 trillion in sales from traditional brick-and-mortar stores during the same quarter, and you can begin to understand the opportunity here. There is still plenty of room for PayPal to attract new e-retailers, especially among budding businesses.

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As I said earlier, proximity payments made with mobile devices is a big up-and-coming market. But it’s still the Wild West for mobile payments. No single company has a stronghold here. Among the roughly 15.9 million U.S. consumers that will use in-store mobile payments in 2014, most will be paying for small things, like a cup of coffee, according to eMarketer. Overall, consumers will each spend $220 on average for the entire year. But eMarketer expects to see 57 million U.S. consumers using the technology by 2018, with the average user making more than $2,000 in mobile payments throughout the year.

Again, this all points to more opportunity for PayPal, especially as an independent, publicly traded company. “The split must lead to faster growth by PayPal and could result in interesting partners that may not be fully available to PayPal today,” Carrington says.

PayPal’s blessing and its curse is that it occupies so many facets of the digital payments space. It’s a payment processor, digital wallet, peer-to-peer transactor, proximity payment facilitator, and e-commerce API. That means it has a lot of competition from small nimble players who are focused on getting one feature or application right.

In order to keep competing, PayPal needs this split, so it can really put its nose to the grindstone.

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