Despite PayPal’s strong growth, eBay’s (NASDAQ:EBAY) stock slumped after the company released its Q2 2013 earnings due to a weaker outlook. It now expects the annual results to be near the lower end of the guidance as macroeconomic headwinds in Europe and Korea impact the business in the second half of the year. The company has been taking several initiatives to make its service more widespread, attractive and simpler, and the impact of these initiatives might take some time to become apparent.
PayPal continued to be star performer for eBay and added another 5 million new accounts taking the total to 132 million.  The service expanded its global footprint and benefited from increased merchant coverage and higher share of checkout. This means that more customers are buying goods and services through PayPal and many merchants believe that integrating PayPal has been helpful in acquiring new customers. Overall, we believe that eBay has a strong market position and growing global e-commerce volumes will enable it to post impressive growth in the long term. We expect the company to enable more than $200 billion in commerce volume in 2013, up from $175 billion in 2012. By 2015, eBay expects this figure to reach $300 billion. 
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How PayPal Will Propel eBay
We estimate that PayPal constitutes close to 45% of eBay’s value. The service has 132 million active accounts globally, and this figure just keeps growing every quarter at an impressive rate. In addition to this, the number of payments made per PayPal account are increasing which reflects the global growth in e-commerce. Excluding currency movements, PayPal’s revenues grew by 21% in the second quarter amounting to $1.6 billion.  This can be attributed to 25% growth in the total payment volume, partially offset by a decline in the average payment size which has been coming down in recent years.  In addition to this, the business also found some support from an increase in its penetration rate on eBay.
Besides the growth in e-commerce, PayPal will benefit from following trends and initiatives.
Mobile is going to be one of the key growth areas for PayPal, and the company is promoting mobile transactions as an alternative to payment by cards through its mobile app. The service works through the PayPal app that customers can use to check-in to the store. PayPal has partnered with point of sale technology companies such as MICROS, Island Pacific, Kounta and Vend and will soon add more retailers and hospitality partners into the mix. eBay expects PayPal to do $20 billion of mobile commerce and payments volume in 2013. 
Tie-Up With Discover Financial Services
PayPal announced an arrangement with Discover last year under which PayPal has been issuing payment cards to its active users in the U.S. The new card will have a Discover Issuer Identification Number which is a code that identifies the card holder, and will allow users to buy from merchants that are part of Discover’s network. We expect the enhanced ubiquity of the payment service will positively impact the number of transactions per PayPal account.
However, PayPal, will face tough competition from other card companies such as Visa Inc. (NYS:V), MasterCard (NYS:MA) and American Express (NYS:AMX). To be successful, it 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.
‘PayPal Here’ As A Replacement For Cash Registers
PayPal launched a point of sales solution PayPal Here in 2012. The solution will serve as a replacement for cash registers. It enables merchants to use a card reader attached to a mobile device to accept payments. The card reader device is aimed at small businesses who are unwilling to bear costs associated with keeping cash registers. With several big brands such as Home Depot, Abercrombie & Fitch, Jos. A Bank, etc. integrating PayPal into their existing payment platforms, the future for PayPal, subject to an effective implementation of the technology, looks promising. In Q2 2013, RadioShack implemented PayPal’s point of sale options in the majority of its U.S. locations.
‘PayPal Here’ Customized According To The Markets
The company has been careful about the local preferences when designing the PayPal Here devices for the individual markets. For example in Europe, the company has launched a version of the device that is different from the one in the U.S. In Europe, most credit and debit cards use a chip-and-pin type of authentication, which is more complex than the swipe-based cards that U.S. shoppers use.
We are currently in the process of updating our pricing model for PayPal in the light of recently announced earnings.Notes: