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PayPal is Powering eBay

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As 2012 nears its end, a quick look at the top 25 industry sectors as ranked by Investor’s Business Daily (IBD) leads to a startling realization. Not a single technology group features among these 25 despite the fact that the Internet network solutions group and a few others have put in good performances at different points of the year.

At number 31, Retail-Internet is the highest ranked technology group which features on the IBD lineup of 127 industry groups. eBay Inc. (EBAY - Free Report) leads this 25 company group which has had a chequered run through the year. After a mid-year decline, the group has recovered and has gained around 35% since Mid-July.

The Internet-Solutions group which was among the leading industry sectors in the IBD rankings at the beginning of 2012 has now fallen behind. The group is now ranked 58 with Akamai Technologies, Inc. (AKAM - Free Report) leading with the highest composite rating, followed by the likes of SolarWinds, Inc. (SWI), Rackspace Hosting, Inc. and Equinix, Inc. (EQIX - Free Report) ., Inc. (AMZN - Free Report) is the largest member of the Retail-Internet group in terms of market cap. The group has ended the year on a positive note, despite the fact that it includes the likes of daily-deals website Groupon, Inc. (GRPN) whose performance leaves much to be desired. Ranked at 56, Computer Software-Enterprise is the lone computer software group to feature in the top 100 IBD industry groups.

Amazon has relied heavily on the Kindle, which is primarily a platform for its ebook and media sales, as an engine for future growth. eBay on the other hand is increasingly being powered by PayPal  which has become its cash cow. One can also argue that the company’s growth is closely tied to the growth of PayPal. This is clearly borne out by revenue numbers.

If we examine third quarter results, we can see that PayPal’s revenue touched $1.4 billion and its total payment volume increased to $35.2 billion. This means that PayPal’s revenue grew 24%, accounting for 41.1% of eBay’s total third quarter revenue. eBay expects to collect over $10 billion in mobile payments alone by the end of fiscal 2012. Meanwhile, PayPal continues to command a high merchant transaction margin of 64.8%.

PayPal is attempting to grab an even larger portion of the payments pie, both offline and online through a mix of various measures. It is looking to build strong direct merchant relationships. The Home Depot, Inc. (HD - Free Report) has already begun accepting payments made through PayPal at all its stores in the U.S. Customers can pay using their mobile phones or use a payment card. Its partnership with Discover Financial Services (DFS - Free Report) has also given it access to 7 million retail locations.

However, the biggest component of its strategy going forward seems to be mobile payments. It is already competing with the likes of Square as a mobile payment tool, even at smaller retail outlets. Using a special application and a triangular device which is connected to a phone, even small store owners can conduct electronic financial transactions such as credit card payments, deposit cheques as well as enable customers to use the PayPal debit card. 

Revenue from mobile payments is expected to grow from $240 billion to $640 billion by 2015. PayPal is witnessing very healthy growth from this segment. Mobile payments on PayPal increased 133% on Thanksgiving, 153% on Black Friday and 196% on Cyber Monday. Meanwhile, Intuit Inc. (INTU - Free Report) and even financial majors such as Bank of America Corporation (BAC - Free Report) are emerging as major players in this space.

Square is backed by a strategic investment from Visa Inc. (V - Free Report) made in 2012. Citi Ventures and Starbucks Corporation (SBUX - Free Report) are also invested in the firm and these investments will give it access to bigger retailers. Google Checkout is the other major threat. This offering from Google Inc. offers a wide range of services which includes online, mobile, PC as well as brick and mortar payments using a mobile app and near field communication (‘NFC’).

What could give eBay the edge is what is known in banking parlance as “share of wallet”. This refers to how much of a customer’s total expenditure is made using the products and services of a particular firm. If this figure is high it consequently increases the customer’s switching cost. PayPal already has 117 million active users. If PayPal can convince them to conduct their mobile and online purchases through them as well as use their Bill Me Later service then it would be more convenient for customers to stick to PayPal rather than resort to switching.

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