Nearly a year ago, PayPal (PYPL -1.14%) and eBay (EBAY 0.31%) announced they wouldn't renew their operating agreement when it ends in 2020. The news sent shares of PayPal cratering, while eBay stock climbed on the idea that it would save about $2 billion per year.
A year later, PayPal continues to improve its position as it distances itself from eBay. It's winning a presence in the checkout process of more and more top online merchants. Morgan Stanley analyst James Faucette says PayPal added eight more merchants in the top 500 internet retailers recently, giving it a presence at 82% of top 500 merchants.
PayPal's two-sided network strategy continues to enable it to grow payment volume faster than the overall e-commerce market. So, even as it prepares to lose a good chunk of eBay's business, it looks well prepared to keep growing for the next decade.
Check out the latest PayPal earnings call transcript.
Image source: PayPal
A recap of the eBay deal
PayPal's operating agreement with eBay ends midyear 2020. The agreement states PayPal will handle all of eBay's online payment processing. So, even when a customer types in his or her credit card details, PayPal is still receiving revenue from eBay for processing those cards on the back end.
eBay started to transition to its new payment processor Adyen at the beginning of last year. The agreement allows eBay to migrate 5% of its transactions in 2018 in two countries of its choice. That number steps up to 10% later this year, before the PayPal agreement ends in July 2020.
That business is valuable for PayPal, and its loss will sting. The company said 11% of its total payment volume came from eBay in the third quarter. That said, PayPal's presence on eBay isn't going anywhere. Customers will still be able to check out using the PayPal wallet by leaving the website.
Importantly for investors, eBay is growing sales at a much slower pace than the overall e-commerce market. E-commerce grew 14.3% year over year in the United States during the third quarter. eBay's gross merchandise volume increased just 3% in the U.S. during the same period. That makes it slightly less important to the future growth of PayPal.
Winning over more merchants
PayPal's ability to continue attracting more big online merchants will further diminish the impact of losing eBay's business next year. While PayPal faces challenges on the back-end processing business, its digital wallet stands well above the competition's. Faucette compares PayPal's presence in the top 500 internet retailers to Amazon Pay, which is available at just 12% of merchants.
Mobile has been a point of strength for PayPal. Over 10 million merchants use PayPal's One Touch service on mobile, which expedites customers through the checkout process. PayPal shows increased conversions for merchants using One Touch, so there's a strong incentive for internet retailers to integrate the service into their mobile apps and websites. As a result, mobile payment volume increased 45% for PayPal in the third quarter.
As more and more e-commerce moves to mobile, PayPal is well positioned to keep winning more and better positions in retailers' checkout flow thanks to the success of One Touch.
What's more, once its operating agreement with eBay lapses, PayPal will have more opportunities to work with some of the top internet retailers. PayPal's is confident it can win additional business it's currently precluded from by its eBay agreement. PayPal's results for other merchants are a strong indication it will be able to win some new business starting next year.
PayPal is consistently adding more merchants to its two-sided network, further enhancing its value to consumers. When the eBay deal ends next year, the digital payments company ought to be able to continue capitalizing on opportunities that show faster growth and better economics than its current business with its old parent company.
