The all-cash deal is a big win for eBay's PayPal business. Already a leader in online payments, PayPal hopes to benefit from Braintree's expertise in mobile transactions.
Braintree has evolved from a start-up into a mobile payments powerhouse with popular clients including Uber, LivingSocial, and OpenTable. Braintree charges these businesses a $0.30 transaction fee and takes 2.9% of each transaction. The company currently processes more than $10 billion a year using this model, according to The Wall Street Journal.
Braintree's mobile application Venmo is an important part of the acquisition because it gives PayPal an edge against rivals in the mobile payments space. Google's (NASDAQ: GOOG ) virtual wallet service and Starbucks-backed (NASDAQ: SBUX ) Square are both strong contenders in the mobile payments war.
Google Wallet is a free digital wallet app that lets smartphone users send money, shop in stores, and buy online using credit cards stored in their phones. Similar to Braintree, Google Wallet charges a 2.9% commission for credit card transactions. Similarly, Square links to a user's credit card and lets him or her make payments using a smartphone. Last year, Starbucks invested $25 million in the start-up payments company and integrated Square's mobile technology into 7,000 Starbucks locations throughout the United States.
These companies pose a bigger threat to PayPal as their payment platforms become more widely used. Fortunately, Braintree's Venmo service should give PayPal a much-needed defense against its competitors. PayPal expects mobile payment volume of more than $20 billion this year. Going forward, that figure should continue to grow with the help of Braintree's mobile platform. The deal is expected to close before the end of the year.