How Ditching PayPal Can Help eBay Compete With

While eBay (NASDAQ: EBAY) posted solid fourth-quarter results, the big news with its earnings release was that eBay will end its payment processing agreement with PayPal Holdings (NASDAQ: PYPL).

The transition from PayPal to eBay's own system, backed by Adyen, will take some time. eBay expects to complete the move shortly after its existing operating agreement with PayPal expires in the middle of 2020. In the meantime, eBay is able to intermediate 5% of transaction volume in two select markets this year, which increases to 10% next year.

eBay's goal with the transition is to simplify "the end-to-end experience for buyers and sellers," according to a press release announcing the change. It also expects to lower the costs for sellers while keeping more revenue for itself. As such, it should make eBay more attractive to third-party merchants looking to diversify away from (NASDAQ: AMZN).

eBay's competition with Amazon isn't for buyers; it's for sellers

eBay isn't short on customers. The company counted 170 million buyers on its platform in the fourth quarter. That's well short of Amazon's 310 million customers it last reported nearly two years ago, but it's certainly enough to create a thriving ecosystem.

But the amount of sales taking place on far exceeds sales on eBay, particularly in the United States. Amazon sold an estimated $197 billion worth of goods to U.S. customers last year. eBay sold about $31 billion, based on estimates from eMarketer. That gap indicates that sales are about much more than attracting buyers; eBay needs more sellers and product selection to compete.

Amazon has over 2 million third-party sellers on its platform. While that's significantly fewer than eBay's 25 million, the barriers to become a seller on eBay are considerably lower, attracting a lot more casual sellers. Amazon is dominating the market for small businesses and even attracting large third-party vendors thanks to its Fulfilled by Amazon service, as well as its other third-party seller services. Amazon brought in over $10 billion in revenue from third-party seller services in the fourth quarter alone -- more than eBay's full-year 2017 revenue.

How ditching PayPal can help

eBay expects the migration away from PayPal to benefit sellers in three ways.

First, it sees room to lower the overall costs for sellers. PayPal currently charges a relatively high processing fee compared with a roll-your-own solution eBay can put together with the help of a back-end provider like Adyen. In addition, eBay will be able to combine its payment processing fees into its seller fees, making it more streamlined for sellers to do business on eBay. And since payments will go through eBay, sellers will have more predictable access to their funds.

While it expects to save sellers money, management said it can still generate a significant profit from taking over from PayPal. Investors can expect an extra $500 million in operating revenue once the transition is complete.

The second benefit to sellers is eBay will be able to provide better sales tracking and measurement with full control over payments data. That means sellers will get better insight into how their business is performing without having to rely on third-party tools.

Finally, eBay expects the switch will improve buyer reach and conversions by offering shoppers more payment options.

An Amazon alternative

Amazon is already starting to get crowded, and sellers are desperate for an alternative marketplace. Last year, Walmart (NYSE: WMT) began a concerted effort to win over more third-party merchants to its online marketplace platform, and its success has been fairly evident. now has 70 million items for sale on its website as of the end of its fiscal third quarter. That's up from 23 million a year prior. What's more, Walmart grew online sales more than 50% in each of the first three-quarters of fiscal 2018.

My point is sellers are looking for an alternative to the increasingly crowded marketplace on Amazon. eBay and its 170 million shoppers present an excellent potential for sellers, but the economics have to work. Sellers don't want to pay the same fees if they have to store and ship products themselves. Reducing fees by ditching PayPal coupled with other initiatives to grow the reach of product listings could help eBay's gross merchandise volume reach back to levels consistent with the overall growth of the e-commerce market.

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John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Adam Levy owns shares of Amazon. The Motley Fool owns shares of and recommends Amazon, eBay, and PayPal Holdings. The Motley Fool has a disclosure policy.