Earlier this year, the divorce between longtime partners eBay (NASDAQ:EBAY) and PayPal (NASDAQ:PYPL) took a somewhat nasty turn when eBay announced that it would begin to intermediate its own payments, in partnership with Dutch payments processor Adyen, taking over a task that PayPal had long performed. At the time, eBay justified its decision by saying it would result in lower costs and give more control to its merchants.
PayPal recently commissioned a comprehensive survey that spanned seven of the company's largest markets, and the results indicate that eBay may have made a key strategic error by dumping PayPal for a cheaper alternative.
No PayPal, no deal
The results of the study, commissioned by PayPal and conducted by Ipsos Research, were as surprising as they are troublesome for eBay. Consumers are more willing to buy when a business accepts PayPal, particularly in unfamiliar situations. Even more telling, a large percentage of PayPal users have abandoned a transaction when they discovered that PayPal wasn't a payment option.
The survey was conducted across the U.S., U.K., Germany, Australia, Italy, Spain, and Brazil, and found that consumers are much more likely to complete an online transaction when a business offers PayPal. This is especially true in situations that present digital shoppers with greater concerns, such as mobile purchases, cross-border transactions, buying unfamiliar brands, or purchasing a high-priced item. In these situations, consumers are 54% more willing to consummate a transaction if PayPal is available at checkout. In some countries, the numbers were even more stark -- customers in Germany (137%), Australia (66%), and Italy (57%) were even more likely to buy if a business accepted PayPal.
The study also found that for online purchases, PayPal is the most preferred payment method when comparing credit cards, debit cards, and a number of relevant digital wallets. The survey reported that 59% of people who use PayPal say they have abandoned a transaction, because PayPal wasn't available at checkout.
Many online shoppers, a full 25%, would abandon a purchase before it was complete if the business didn't offer their preferred payment provider, while 44% said they were more likely to trust a merchant and shop with it if they knew upfront that their favorite method of payment is accepted.
A new payments partner
During its fourth-quarter conference call to discuss its results, eBay announced that it would begin to unravel a portion of its relationship with PayPal, and would begin intermediating its own payments (being the payment processor of record), partnering with European processor Adyen.
Under the terms of its existing agreement with PayPal, eBay is permitted to begin testing new payment processors in 2018, representing up to 5% of its payment volume in two countries of its choosing. The company is then allowed to migrate up to 10% of its customers in 2019, and the remainder when the contract expires in July 2020. eBay also said that it expected the majority of its customers to be using the new payment platform by 2021, one year after the expiration of the operating agreement with PayPal.
Investors were clearly concerned by the ramifications of the study. Shares of eBay fell 9% -- to their lowest level in nearly two years -- the day after PayPal reported the results of its third quarter and talked up the findings of the study on its conference call.
PayPal president and CEO Dan Schulman said, "If you look at the seller feedback on the eBay seller forum and look at what those sellers are saying, those that have moved over to intermediated payments, you'll see comments from them that their sales have dropped 40% to 60% and they're clamoring to come back to PayPal."
In the months since eBay's announcement, PayPal has downplayed the importance of eBay's shrinking contribution to its business. In the third quarter, eBay represented just 11% of the payment volume on PayPal's platform, down from 20% three years ago. This latest revelation, however, seems to show that both companies could stand to benefit from a continuation of their long-standing payments collaboration, which could signal a more committed relationship between the two in the future.
Time will tell.
Danny Vena owns shares of PayPal Holdings and has the following options: long January 2019 $18 calls on eBay. The Motley Fool owns shares of and recommends PayPal Holdings. The Motley Fool has the following options: short January 2019 $82 calls on PayPal Holdings. The Motley Fool recommends eBay. The Motley Fool has a disclosure policy.