Every few hours at the eBay Live! conference in Boston, the audio speakers explode with Kool & the Gang's song Celebration. For eBay's (EBAY) executives, it's a way of reminding everyone that, despite declining growth in its main shopping business, the company has reasons to party.
Reason No. 1? PayPal. If eBay Live! is a celebration, then eBay's online payment service is the guest of honor. PayPal's first-quarter revenue grew 31%, to $439 million, at a time when eBay's core shopping business grew just 23% and active buyers and sellers grew 10%. PayPal is proving that its success, while connected to the growth of eBay's shopping sites, is not solely dependent on it.
Top executives used their keynote speeches on June 14 to announce new PayPal security initiatives, including a service for eBay sellers that will alert them to potentially risky buyers. The company also announced an eBay site redesign intended to improve auction search results while making it easier to view product photos and details about the auction.
PayPal has designs on the greater e-commerce market, which is expected to top $300 billion in the U.S. alone by 2010, up more than 50% from current levels. Last year, PayPal processed about 6% of all online payments worldwide. And in the first quarter, roughly 40% of the $11.36 billion in payments that PayPal processed originated on sites other than eBay's shopping properties. "The off-eBay business will, at some point, eclipse the on-eBay business," says Scott Thompson, PayPal's chief technology officer.
In the off-eBay world, most purchases are still made with credit and debit cards, so PayPal's main rivals for online dollars are Visa, MasterCard (MA), American Express (AXP), and the banks that issue their cards. Though PayPal has a lofty 143 million accounts, Visa has more than a billion.
To compete with banks, PayPal is becoming more like a bank itself. For the past year, PayPal has tested a virtual debit card enabling users to make purchases with PayPal on Web sites that do not offer it as a payment option. The service, which PayPal plans to launch broadly before the holiday shopping season, provides a one-time MasterCard number for a given purchase. The money is then debited from the user's PayPal account.
Also like a bank, PayPal has long doled out interest on balances left in PayPal accounts. The rate, often more than 4%, is typically higher than that offered by brick-and-mortar banks. It also offers actual plastic credit cards, through a partnership with GE Consumer Finance (GE), for which it gives buyers 1% back on transactions. In addition, PayPal allows users to wire money through eBay's Skype online phone service. There also are plans to give users the ability to view receipts for past transactions online, says Thompson.
Google Backs Down
Last month, PayPal received a banking license with the Luxembourg bank authority. Starting July 2, all European accounts will be transferred to the PayPal Luxembourg bank. (PayPal is not regulated as a bank in the U.S., in part because its services are offered in conjunction with regulated entities such as GE and MasterCard.)
PayPal's bank-like extras have given it an edge over services such as Google Checkout (GOOG), which does not offer credit cards or interest on deposits. Despite aggressively promoting Checkout to its search advertisers, Google has yet to match PayPal's strength or popularity. Google blames this partly on eBay's refusal to allow Checkout as a form of payment on eBay's auction and shopping sites (see BusinessWeek.com, 1/25/07, "eBay Holds Its Turf Against Google").
EBay, which calls Google's year-old service unproven, has given no sign it plans to invite Checkout to the party. That point was stressed anew this week when Google tried to throw a "Let Freedom Ring" protest party in Boston during the eBay convention, hoping to rally eBay sellers behind Checkout. EBay responded with its own preemptive protest: The auctioneer pulled all its ads from Google's U.S. search results in retaliation for such behavior by a purported partner in other arenas.
Google canceled the party. In a post on the blog of Google's Checkout Team, Tom Oliveri wrote, "After speaking with officials at eBay, we at Google agreed that it was better for us not to feature this event during the eBay Live conference."
EBay does accept major credit and debit cards on its shopping sites—but only through PayPal. In an effort to avoid the transaction fees charged by card companies, however, eBay encourages customers to deposit money directly into PayPal accounts. As an incentive, it offers higher interest rates on PayPal accounts than those offered by the banks from which the debit cards draw.
To compete with plastic, PayPal is also taking security steps above and beyond those taken by many banks. EBay is launching a program with VeriSign (VRSN) to sell $5 wireless tags that display a new security code every 30 seconds. Users will punch in the code during a purchase in addition to their regular passwords. However, VeriSign is hoping to interest banks in this security-key service as well.
The new security measures announced June 14 included an alert service through which PayPal will notify an eBay seller if a buyer is risky. For example, PayPal would flag a buyer who has regularly purchased items and then stopped payment—perhaps claiming a problem with the item, then keeping it without paying.
Welcome Web Site Tweaks
EBay's top executives also spent much of their speeches discussing plans to reinvigorate growth on eBay's core shopping sites. Chief Executive Meg Whitman spoke about the company's efforts to combine community and commerce, something she calls "social commerce," to increase purchases on eBay auctions. The company has enhanced ways for users to set up detailed profiles, similar to blogs, to discuss their favorite shopping items. The goal is to become more of a bazaar or mall, a place where people go to hang out and browse, as well as shop for specific items. In this way, eBay hopes to grab more casual shoppers.
EBay also announced a site redesign. In the coming months, users will see photos in response to search results for a specific item or category. A click on an item would bring up a box on the side of the screen detailing when the auction ends, the current bid, the price to purchase it outright, shipping costs, and information about the seller.
Sellers have long complained that eBay's site needed a revamp to make search results more relevant and display them more attractively. "Everyone has been picking on eBay about the search on its site," says Scot Wingo, president and CEO of ChannelAdvisor, a provider of software and other services for Internet retailers.
Whether buyers will respond by spending more on eBay remains to be seen. But if they do spend more on eBay's shopping sites, they will spend more using PayPal. That would give eBay two reasons to celebrate.