PayPal Reports Strong Growth, Including a Young But Booming Mobile Business

When eBay Inc. released its fourth-quarter results back in January, the company’s top executives spent some time during their conference call with analysts discussing the potential effect of the Durbin Amendment on PayPal Inc., eBay’s e-commerce transaction processor. Durbin and its restrictions on debit card pricing and transaction routing remain a hot topic for the payments industry, but it wasn’t even mentioned during this week’s conference call on eBay’s first-quarter results. Instead, eBay’s top officials touted another strong first quarter for PayPal and focused on emerging markets like mobile payments.

San Jose, Calif.-based PayPal expects to process more than $2 billion in mobile payments this year, nearly three times the $750 million processed in 2010, John Donahoe, eBay’s chief executive, said during the call, according to a transcript from SeekingAlpha. “Mobile payments has strong traction and momentum for PayPal,” Donahoe said. He said payments on mobile devices have been held back by consumers’ security concerns, especially concerns about entering card information. Since PayPal requires no such data entry, “the fact is PayPal is the only safe way to pay on mobile phones,” he told the analysts.

PayPal’s growth in mobile payments is paving the way for the processor to penetrate the physical point of sale for the first time, a fact the company has been referring to as a “blurring” of the traditional line between Internet and brick-and-mortar retailing. Agreements last year with mobile-payments provider Bling Nation and POS terminal maker VeriFone Systems Inc. have helped PayPal build bridges to physical merchants.

Overall, PayPal saw its first-quarter payments volume grow 28% year-over-year, to $27.4 billion, with 43% of that coming from outside the United States. Merchant services, a metric PayPal watches closely, now accounts for 63% of that volume. This is volume generated by Web merchants directly rather than volume from eBay, which at one time accounted for the bulk of PayPal’s traffic. Ebay acquired PayPal in 2002.

Ebay’s transactional credit unit, Bill Me Later, racked up $324 million in volume in the quarter, up 42% from $228 million in 2010’s first quarter. Bill Me Later, which is part of the PayPal wallet and has been seeing increasing usage on eBay, lets online shoppers pay for goods with on-the-spot credit. Though it was pummeled during the credit crunch, sustaining a sharp rise in delinquencies, the unit appears to have steadied itself. Net chargeoffs came in at 4.9% for the quarter, down from 9.5% in the first quarter a year ago. “Bill Me Later is hitting its stride,” said Donahoe. “We feel good about the progress, but even better about the outlook,” added Robert Swan, chief financial officer at eBay.

The officials also reported progress with PayPal’s open-platform initiative, which it launched in November 2009. The open PayPal X platform allows outside developers to introduce innovations using an application programming interface from PayPal. “We recognized a couple years ago that we didn’t want to be the bottleneck on innovation off the PayPal platform,” said Donahoe. He said 60,000 developers are now using PayPal X, and have launched 1,500 live applications.

Ebay reported 97.7 million accounts worldwide for PayPal, up from 84.3 million in the year-ago period. People are signing up to use the payment service at the rate of 1 million per month. “On our current trajectory, PayPal will pass 100 million active accounts during [the second quarter],” said Donahoe. That ranks PayPal, usually thought of as an alternative payments player, as one of the largest payments operations in the world by number of users.