PayPal (PYPL 0.59%) has confirmed it is taking its biggest step to date to expand its growing payments empire. The company said it will spend $2.2 billion to buy iZettle, a small-business tools and payments provider that has been called the "Square of Europe." 

The company's devices and platform are being used by an estimated 500,000 businesses in Europe and the Americas. This will help PayPal expand into a number of markets where it has little or no presence, while also giving the company a way into hundreds of thousands of physical stores and smaller brick-and-mortar retailers worldwide. 

This will also put PayPal on a collision course with Square Inc. (SQ 0.71%), the incumbent payment system used by many small businesses.

Three men standing standing with their arms around each others shoulders.

New partners: from left, Jacob de Geer, CEO and co-founder of iZettle; Dan Schulman, president and CEO of PayPal; and Bill Ready, executive vice-president and CEO of PayPal. Image source: PayPal.

No, not a new product from Cupertino

Currently, iZettle operates in 12 markets: Brazil, Denmark, Finland, France, Germany, Italy, Mexico, Netherlands, Norway, Spain, Sweden, and the U.K. (an  an area of great interest to Square where iZettle has a very substantial presence).

According to iZettle's website, the company offers a variety of tools to help small businesses: "We offer a range of payment and commerce solutions that used to be reserved for the big players -- like lightning-fast mobile card readers, intuitive point-of-sale systems, invoicing software, business funding and a site full of smart analytics so you can evaluate your output and keep getting better." 

The fintech start-up had filed for an IPO earlier this month, hoping to raise an estimated $227 million, valuing iZettle at about $1.1 billion. The company planned to use the funds to expand. Initially, co-founder Jacob de Geer said the company wasn't interested in being acquired, but reconsidered after a meeting with PayPal executives. 

This acquisition will put PayPal in direct competition with Square, which began life as a way for small business to process payments using its namesake device and a smartphone. The company later expanded to offer point-of-sale and payroll services and working capital loans. Square has also been aggressively expanding in the U.K.

The buyout will be PayPal's largest ever. The company acquired money transfer service Xoom for around $890 million in 2015, and bought out Braintree in 2013 for about $800 million to get its hands on Venmo.

A receipt printer and the iZettle app shown on numerous mobile devices.

iZettle helps 500,000 merchants worldwide. Image source: iZettle.

PayPal's jewel

The acquisition of Venmo has been particularly successful, and PayPal has called Venmo its "crown jewel." The social payments platform has been especially popular with millennials for sending money to friends, and as a way of splitting charges at restaurants or for paying rent. The platform processed more than $40 billion in payments over the trailing 12-month period. In the first quarter, Venmo generated payments of $12 billion, up 80% year over year, and added more new users than in any previous quarter.

It's important to note that PayPal has only just begun a move to profit from the app, which is free for consumers to use. The company recently launched Pay With Venmo, which allows users to pay merchants using the app anywhere PayPal is accepted. The company will generate revenue from the processing fees it charges merchants.

A match made in heaven

PayPal CEO Dan Schulman said: "iZettle and PayPal are a strategic fit, with a shared mission, values and culture -- and complementary product offerings and geographies. With nearly half a million merchants on their platform, Jacob de Geer and his team add best-in-class capabilities and talent that will expand PayPal's market opportunity to be a global one-stop solution for omni-channel commerce." 

PayPal expects the deal to close in the third quarter. Forecasts by iZettle call for revenue of $165 million this year, driven by $6 billion in total payment volume. While the company is not yet profitable, it expects to reach EBITDA profitability by 2020. PayPal said the deal will be dilutive to its full year 2018 non-GAAP earnings by $0.01 per share.