Digital Transactions Authoritative, insightful and timely information for payments professionals
By John Stewart
PayPal Holdings Inc. and eBay Inc. went their separate ways just 45 days ago, but already the fallout from that split is beginning to make itself felt.
EBay is telling sellers on its main online marketplaces that starting Sept. 27 it will stop supporting three electronic payment services that compete with PayPal: Paymate, an Australian service; ProPay, a service owned by processor Total System Services Inc.; and Skrill, a U.K. processor that was acquired earlier this year by merchant-services provider Optimal Payments Plc.
The ostensible reason for the move is that the three services account for a small fraction of eBay sales. Fewer than 2,000 sellers worldwide are offering the payment methods, according to eBay, out of a total base of 25 million. “After a global review of current payment methods on eBay’s sites, we have decided to retire ProPay, Skrill, and Paymate due to low usage (far less than 1% of users),” says an eBay spokesperson in a statement emailed to Digital Transactions News. “Customers will have at least 30 days to make the necessary changes to an alternative payment method.”
In 2008, ProPay became one of the first electronic-payment methods authorized by eBay after it put an all-electronic payments policy into effect. Asked for comment, Total System released this statement on the matter: “We’re disappointed in [eBay's] decision to discontinue supporting ProPay's clients, but we realize markets and companies change. The amount of eBay volume ProPay processes has always been modest, due to the limited integration and marketing permitted by eBay. While we are disappointed to see our customers impacted through this decision, we are preparing to reach out to them with some options for a continuing relationship with ProPay. We don’t expect this decision to materially impact our business.”
A spokesperson for Optimal Payments said, “We are unable to comment on eBay’s announcement at this time.”
Some observers see a connection between eBay's move and some of the terms in the separation agreement between eBay and PayPal. One clause in that document refers to the percentage of eBay transactions processed by PayPal and provides for payments eBay must make to PayPal if that percentage—called the penetration rate—falls below the rate as it was measured at separation, stated to be 80%. By contrast, eBay stands to earn payments from PayPal if the rate exceeds 80%. The percentages are figured on so-called eBay covered properties—eBay.com and eBay marketplaces—and exclude other eBay holdings like StubHub.
“These payments are intended to provide an incentive to eBay to support the continued use of PayPal as a payment service on eBay Covered Properties…at current levels and to reward eBay if Penetration Rates on eBay Covered Properties increase,” says the clause.
The agreement also spells out the formula for computing the payments. Each year, PayPal must pay eBay $13 million for each percentage point by which the penetration rate exceeds the 80% “baseline.” But eBay must pay an equal amount to PayPal for each percentage-point drop from the baseline. If the decline exceeds 5 points, the toll on eBay gets even heavier. In this case, the company must pay PayPal $13 million for each of the first five percentage points and $50 million for each point beyond that. The companies agree to calculate the payments quarterly and settle up annually.
While the discontinued payment services may, as eBay indicates, account for a very small percentage of sales currently, eBay officials may fear that rate could have grown in the coming months, ultimately eating into the PayPal baseline and triggering payments by eBay.
“That creates the motivation for eBay to eliminate payments types that substitute for PayPal,” observes Gil Luria, an analyst at Wedbush Securities who follows PayPal, in an email message to Digital Transactions News. As he points out, the separation of the two companies has eased the way for eBay to make this move now. “If they cut off other payment types while they owned PayPal, that could have been considered anti-competitive,” Luria says. “Now that the two companies are independent, this is no longer a restriction and eBay is free to prioritize PayPal even more than when it owned it.”
Luria says it’s doubtful, however, that the sustained volume the separation agreement appears to provide for PayPal explains PayPal’s recent decision to drop all but the highest-level tier in its pricing schedule for smaller merchants. Rather, this move is explained by other factors. “PayPal’s larger retailers command a lower price and are becoming an increasingly large part of PayPal’s volume,” says Luria. “In order to make up for that pricing pressure, PayPal is raising prices for the smaller merchants that are in not as good of a negotiating position.”
In any case, the separation agreement isn’t for forever. It lasts five years, with possible one-year extensions. “At which point PayPal will compete on even footing with any other payment type, which could include Alipay or any other wallets that succeed by then,” says Luria.
