Bill Me Later Extends eBay’s Payments Reach to Top Web Retailers

In praising online credit payment system Bill Me Later Inc. Monday morning, PayPal Inc. President Scott Thompson called Bill Me Later a “disruptive business” in the positive sense, and he credited PayPal for also being a disruptive payments player. And disruption of the status quo is quite possible with today's announcement that PayPal parent company eBay Inc. will buy the 8-year-old Bill Me Later for $820 million in cash and another $125 million of outstanding options net of option exercise proceeds. Bill Me Later chief executive officer Gary Marino will now report to Thompson. The upside for PayPal will be access to fast-growing Bill Me Later's approximately 1,000 merchants, 4 million consumer users, and $1 billion in payment volume this year, volume that's growing at a 37% annual clip. EBay expects the acquisition to add $150 million in revenue next year. PayPal calls Timonium, Md.-based Bill Me Later the No. 2 online alternative after itself. Most of Bill Me Later's merchants are bigger than the average PayPal merchant and generate much higher average tickets. Few of them currently accept PayPal. Thirty of the top 100 online merchants and 75 of the top 200 accept Bill Me Later. “Our focus is to continue to move upstream and capture the payment volume of large merchants, where much of online shopping exists today,” Thompson said at an eBay conference call today for analysts. He noted that most of PayPal's transaction volume today comes from eBay sellers and small and medium-sized off-eBay merchants. “For PayPal, it's a very interesting acquisition,” says Jennifer Roth, research director of global payments at Needham, Mass.-based TowerGroup Inc., an editorially independent unit of MasterCard Inc. “I think it's in the right direction.” She notes that Bill Me Later has signed online jewelers and other luxury-goods retailers. “They've got merchants PayPal doesn't have,” she says. A possible downside, however, is the end of Bill Me Later acceptance on Amazon.com Inc., the world's leading online retailer. Amazon has been building its payments business and has a small equity stake in Bill Me Later, which is the only one of the newer payment alternatives besides its own that Amazon accepts (Digital Transactions News, Dec. 11, 2007). “We are still accepting BML on the site, but I can't speculate as to what we might do in the future,” a spokesperson for Seattle-based Amazon tells Digital Transactions News by e-mail. Marino, however, is confident his company will remain in Amazon's good graces. “We feel we deliver a really strong value proposition both to Amazon and all of our clients, and I suspect that we're going to continue to do so,” he said in response to an analyst's question. The acquisition also throws into question PayPal's own credit program dubbed PayPal Pay Later, which is financed by General Electric Co.'s lending unit. “It'll be business as usual until the deal closes and through the holidays,” a PayPal spokesperson tells Digital Transactions News, also by e-mail. “Over the next few months, we plan to take the best of both Pay Later and Bill Me Later and integrate the two products to create a stronger offering for our customers. We will continue to operate and support Pay Later until this new, integrated service is available.” Adil Moussa, a payments analyst with Boston-based Aite Group LLC, says Pay Later never fulfilled PayPal's hopes of building higher-ticket sales and attracting bigger merchants. The solution for PayPal, he says, was simply to buy its competitor. “Bill Me Later has really been doing incredibly good, they have captured serious market share in large merchants,” he says. “[Pay Later] was supposed to be some kind of competition for Bill Me Later. The only thing?it never really caught on.” Another potential mixed blessing: the acquisition essentially turns PayPal into a direct lender for the first time. An industrial loan corporation, Salt Lake City, Utah-based CIT Bank, originates new Bill Me Later accounts and funds the sales when a consumer makes a purchase. But Bill Me Later continually buys the receivables from CIT and manages them?$550 million at present. PayPal will get profitable interest income, but analysts wondered why eBay and PayPal would want to expose themselves to the consumer credit market during such a volatile time. Marino assured them Bill Me Later could keep a handle on things, noting that his company makes credit decisions on a transaction-by-transaction basis, not on the basis of how much of a credit line is open to buy, as a regular credit card issuer would. “We do not sell credit and do not offer credit lines,” he said. “These are difficult to retract during economic downturns. Instead, we authorize transactions one at a time.” Bill Me Later currently has a net credit and fraud losses of 3.4%, well under average credit card loss rates. An upside for PayPal is the potential reduction of operating costs through Bill Me Later. Consumers fund a large share of their PayPal purchases through credit or signature debit card accounts, which means PayPal in effect is like any other merchant and must absorb transaction expense from interchange. Bill Me Later, in contrast, doesn't have that expense, according to Roth. “The more consumers that choose Bill Me Later within PayPal, the lower our processing cost and in turn the stronger our structural advantage is [for] PayPal as a whole,” eBay chief financial officer Robert H. Swan said. For Bill Me Later, PayPal brings potential access to its 63 million active users and possible expansion worldwide. “It made a lot of sense for what our ambitions are, which is to play on a global sale,” Mark Lavelle, vice president of corporate development, tells Digital Transactions News. “This gives us a tremendous amount of scale that would have taken years to get on our own.” Although they did not say exactly what brought them to the altar, the two companies have been talking with each other for some time. “We've known these guys for years, we've actually talked with them about a partnership or investment as early as two years ago,” says Lavelle. Although Marino will report to Thompson after the deal's expected close by year's end, Thompson indicated PayPal and Bill Me Later would be run as independent businesses for the time being. However, he said in response to an analyst's question that an integrated account-access process for both payment systems is being planned. The Bill Me Later announcement came on an extremely busy day for eBay in which the San Jose, Calif.-based company said it was buying two Danish online classified-advertising firms for $390 million in cash, and laying off 1,000 employees, or 10% of its global workforce, to cut costs.