eBay's Quest for Dongle Domination

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Have you ever been at a store that doesn't take credit cards and gotten stuck in line behind someone who just can't seem to find correct change? This scene could've been avoided if the owner of the shop had found a cost-effective way to accept plastic. Thanks to eBay (Nasdaq: EBAY  ) , you may never have to worry about this debacle again.

eBay and PayPal
In 1995, Pierre Omidyar created the world's largest online auction house. Seventeen years later, eBay is still going strong, thanks in part to one segment drastically outperforming all others, increasing revenue 26% year over year, and blowing away the competition: PayPal.

Acquired as an easier way for buyers to purchase things from eBay, PayPal has grown to become a strong company in its own right. eBay can thank PayPal for 38% of the company's revenue from last year. With more than 113 million registered accounts, PayPal has been an incredible investment for eBay, and now the company is growing on a whole new level.

What's a dongle?
PayPal wants to jump off your computer screen and into the real world; that's why it has recently unveiled its new PayPal Here device. The triangular dongle (no, really, that's the technical name for it) plugs into a merchant's mobile device and allows the seller to swipe a buyer's credit card. PayPal takes a 2.7% cut of the transaction, while the seller gets to work with customers who don't have to dig around for loose change and not make everyone in line want to jump in front of a bus.

The benefits of such a system are obvious for small businesses that want to sell to customers without cash and don't want to buy a register. But even some bigger names have gotten behind PayPal. Recently Home Depot, Abercrombie & Fitch, Jos. A Bank, and others have integrated PayPal into their existing register platforms. A successful implementation may see more widespread use.

In the Here and now
There are some obvious benefits to Here for eBay as well, not the least of which is the potential to revolutionize payment methods. Of course, before that happens, the Here needs to break the current barriers surrounding it. That means making inroads into different businesses, convincing them that the low hassle payment method is better than the old and stale version of yore. And I really do mean low hassle; the "fees" section of Here's website is all of one page. Compare that with Visa's (NYSE: V  ) four pages (packed quite tightly with 152 different categories of rates), or MasterCard's (NYSE: MA  ) 131-page behemoth, and you can see why sellers might prefer to deal with PayPal.

Also note that PayPal has made Here available to merchants for the best possible price: free. All an aspiring Here user needs to do is download the Here app (also free, not to mention capable of scanning a check for that slow customer ahead of you in line), and then request a Here dongle. In a few days it will be at your door and ready to scan some happy customers and their voluptuous credit accounts. Compare this with point-of-sale systems, which can run a business anywhere from $1,500 to upwards of $20,000, and the advantages to Here only become more obvious.

A Square latte
Standing in PayPal's way (much like the guy who only pays for things in quarters) is Square, the brainchild of Twitter founder Jack Dorsey. Square's main product is its payment dongle shaped like a ... well, you know. Although created well before PayPal's Here, Square hasn't gained too much traction with large merchants -- until now.

Earlier this week, Starbucks (Nasdaq: SBUX  ) announced that it has teamed up with Square, cutting a deal that will move Square payment systems into 7,000 Starbucks stores all over the United States. The deal has clear benefits for both sides: Square gains huge media and consumer attention by being brought into the largest coffee chain in the world, while Starbucks gets an easier method for customers to pay.

All you've gotta do is pay, pal
So what's all this mean for an investor like yourself? It means that eBay is sitting on a potential game-changer, one that challenges the old payment methods with an innovative and accessible way for business to accept money. With other great projects down the pipeline (like its new same-day delivery), excellent financials, and a cheap P/E of 15.8, eBay looks like a mighty tempting investment right now. Keep that in mind as you stand in line behind the fool (small "f") who just dropped the handful of pennies he'd spent 20 minutes digging up, and be content in the knowledge that this could all change one day.

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Fool contributor Mark Reeth doesn't own any of the stocks mentioned in this story, but he thinks the future has never been more convenient. The Motley Fool owns shares of Starbucks. Motley Fool newsletter services have recommended buying shares of Visa, eBay, Starbucks, and Home Depot and writing covered calls on Starbucks. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days. The Motley Fool has a disclosure policy.

Read/Post Comments (4) | Recommend This Article (6)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On August 16, 2012, at 8:46 AM, NobodysFool2011 wrote:

    [Have you ever been at a store that doesn't take credit cards and gotten stuck in line behind someone who just can't seem to find correct change?]

    This is 2012, not 1985. Maybe if you're shopping at a hot dog cart or a bodega in the ghetto, they don't take credit cards but seriously !

    Any business would have to be desperate or uninformed to use Paypal for processing payments.

    If random account freezes and holds aren't enough to scare you, try calling customer service.

    Paypal isn't a bank, it's unregulated, only carries FDIC pass-through insurance, etc... The only place Paypal should EVER be used is when buying or selling on eBay and that's because it's FORCED on consumers. Which is the reason Paypal even has so many users, It's forced on anyone using eBay.

  • Report this Comment On August 17, 2012, at 11:36 AM, PondRipples wrote:

    So - Competition is Good!!

    Maybe Square will drive Ebay to re-evaluate how it does business and that could result in a Win - Win situation.

  • Report this Comment On August 19, 2012, at 1:49 PM, jpmcginty wrote:

    Both Square and PP Here and iZettle (which does a similar process but with Chip and PIN) have advantages and disadvantages to their solutions.

    The key blocker to both dongle solution is that its not scalable as a large vendor will have till technology (for PP In store app it needs a scanner), will struggle to use these in busy locations and are dependant on a radio connection (be that WIFI or GSM/mobile).

    Square's strength is in user experience - a nice book it and pick it up from the consumer and vendor with face recognition - not sure how viable this is having seen Facebook and LinkedIn photos not necessarily up-to-date).

    Whilst PP have customers already - they have 1000s of cards already registered which could offer a true alternative when buying - 20% off this purchase if you pay with PP ...

    Both will have to be weary of the Apple store check out solution which is very slick but only in Apple Stores and Google and their troubled wallet which has potential due to work with Mastercard but customers are strugglng to trust a search engine with their money.

    Either way there will always to be cash - people like to see the colour of money

  • Report this Comment On August 19, 2012, at 2:06 PM, jpmcginty wrote:

    Google Wallet - with Fries in the US

    The key here is the combination of phone, OS and vendor ...!/search/google%20wallet/slideshow/vide...

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