eBay and PayPal Split: What’s Next?

Navigator Edition: November 2014
By: Jeff Crawford and Chris Razzano

By the end of 2015 eBay and PayPal will become independent, publicly-traded entities. A combination of shareholder pressure and competitive innovation is believed to be the source of eBay’s September 30th announcement to spin off PayPal. Carl Icahn, who acquired a 0.82% stake in eBay, had been calling for a split since January 2014, saying eBay was holding PayPal back from bigger opportunities. eBay’s recent strategic reversal to divest its payments unit, PayPal, comes at an eventful time in mobile payments with recent developments within the industry setting the stage for an overhaul of all market participants. PayPal’s newfound freedom may provide both companies with an opportunity to meaningfully increase their value for shareholders and consumers with new services.

Figure 1: eBay Revenue Distribution

Fig-1_-eBay-Revenue-DistributionSource: eBay Annual Reports.

Over the past nine months, Carl Icahn has been very vocal in his views towards PayPal. Icahn argued that a sell-off would provide PayPal with the opportunity to focus on its core business and pursue more external opportunities. John Donahoe (eBay’s CEO) remained steadfast in his assertions that eBay and PayPal benefited from synergies that would be in the company’s long-term interests. Growth has been a major point of contention for pro-split advocates. Revenue growth over the last quarter for eBay was 6%, compared to PayPal’s 20%. PayPal seems poised to surpass eBay’s marketplace revenue in the upcoming year leading critics to believe PayPal’s potential has been limited by serving as a crutch for eBay’s progress.

Recent developments in mobile payments may have also incentivized eBay to heed Icahn’s call for a split. The release of Apple Pay, Alibaba’s IPO, and Square’s recent $6B valuation have recently shaken up the already fragmented mobile payment industry in the U.S. After establishing partnerships with retailers and credit card networks, Apple’s entrance into payments has raised mCommerce standards with its cardless, tokenized NFC appraoch. Alibaba’s IPO early September also poses a threat to the mobile payments industry with its innovative mobile payment processing platform: Alipay. Alipay, the Chinese company’s PayPal-like payments processor is evolving into an all-in-one financial management platform. While not yet be available to U.S. consumers, its extensive offerings may be replicated and improved upon by PayPal. Finally, companies such as Square and Stripe have been able to pursue a wider variety of initiatives as independent players.

On the one hand, the spin-off should not impact the way that PayPal interacts with the industry at large (merchants, banks, acquirers, PSPs) as their model, value proposition, and core business drivers remain the same. However, the spin-off will allow PayPal to partner with other networks, POS platforms, eCommerce marketplaces, and financial institutions, while maintaining a competitive presence in the mobile payment space. In the past, many of these potential partnerships would have been a conflict of interest. Processing payments for Amazon, Google, and other online marketplaces will no longer be a conflict of interest once the service is no longer linked to a direct competitor. In addition to the Internet giants, any brick-and-mortar stores seeking eCommerce solutions may be able to take advantage of PayPal’s newfound freedom, potentially creating more competition for merchant acquiring. Another potential outcome for the two separate companies could be a discounted purchase from a competitor. Once eBay and PayPal are independent, eCommerce platforms may be interested in buying a cheaper eBay that is not linked to PayPal.

Figure 2: eBay Net Transaction Revenue by Type
Fig-2_-eBay-Net-Transaction-Revenue-by-TypeSource: eBay Annual Reports.

The split of eBay and PayPal could bode well for both if they are able to chart courses that continue to accelerate recent growth trends. For eBay, this means focusing on its core competency in all other areas of commerce outside of payments, while for PayPal, moving from niche acceptance to mainstream online and offline purchase acceptance will be critical. Both entities will likely take time to shake off their previous association, but a focus and competency in mobile commerce leaves them well positioned for future growth.

For more information, please contact Jeff Crawford, Manager,; or Chris Razzano, Analyst, chris.razzano@, members of the Deposit Access Practice, specializing in Debit and Prepaid.

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