e-Bay (NASDAQ:EBAY) announced recently that PayPal will team up with Discover Financial Services (NYSE:DFS) to extend its offline presence across the United States. The tie-up will give PayPal access to nearly 7 million merchant locations with the potential of many more worldwide in the future. Starting next year, the two companies will work together, enabling merchants to use PayPal through their existing relationships with Discover. With a user base of almost 113 million and a total payment value of $34.5 billion, PayPal constitutes almost 30% of our $50 price estimate for eBay.
Aggressive efforts to expand PayPal’s offline presence
As part of the Discover deal, PayPal will issue payment cards to its more than 50 million active users in the United States over the next year. The new card will have a Discover Issuer Identification Number, or IIN, a code that identifies the card holder, and will allow users to buy from the merchants that are part of Discover’s network. All that the user needs to do is swipe the card at the existing check-out machine and enter a four digit PIN. With no new hardware or software involved for the merchant, the deal could pay rich dividends for the company as the costs involved promise to be low. PayPal will charge merchants when users pay with the new cards, and, in turn, will pay Discover for access to its network, on a per-transaction basis.
We expect the enhanced ubiquity of the payment service to positively impact the number of transactions per account. Additional transactions are expected to come from the recently released device PayPal Here, which enables merchants to let shoppers pay by card instead of cash. The device is aimed at small businesses which are unwilling to bear costs associated with keeping cash registers.
Though these initiatives would be quite significant for PayPal, it will face tough competition from card companies such as Visa Inc. (NYS:V), MasterCard (NYS:MA) and American Express (NYS:AMX). To be successful, PayPal will need to convince users that its low hassle payment method is better than the old stale version of transacting. Additional competition for PayPal will come from Square, the brainchild of Twitter founder Jack Dorsey.
We currently have a $50 estimate for eBay, which is almost 7% more than the current market price.