E-commerce giant eBay (NASDAQ:EBAY) finally has the green light to fully expand its managed payments service, which offers payment processing and deposit services for sellers on its marketplace. 

The vast majority of sellers still use PayPal (NASDAQ:PYPL) due to the operating agreement the two companies signed after eBay spun off the payments company back in 2015. eBay expects to transition the majority of sellers to its managed payments service by the end of next year, with practically all of them using eBay's service by the end of 2022.

"We expect it to deliver $2 billion in revenue and $500 million of operating income in 2022," CEO Jamie Iannone said of managed payments. That reiterates what his predecessor, Scott Schenkel, said in 2018 when eBay and PayPal announced the plans to end the operating agreement.

Neon eBay sign on top of a building at dusk

Image source: eBay.

Where does that $2 billion come from?

Calculating the revenue opportunity is as simple as applying eBay's take rate for managed payments to its gross merchandise volume. eBay charges as little as 2.35% for some sellers. 2019 Marketplace GMV totaled about $85.5 billion. So, multiplying those numbers together produces about $2 billion in revenue.

Importantly, that revenue is coming from PayPal. eBay accounted for about 14% of PayPal's revenue in 2019, the latter's management said on its fourth-quarter earnings call. That's about $2.5 billion. That said, eBay is making up a smaller percentage of revenue and total payment volume over time. Management previously estimated eBay would account for just 6% of payment volume by the middle of this year (although a higher percentage of revenue).

What will the profits look like?

eBay spent the last 2.5 years building out its payment intermediation platform and testing it on a small group of sellers. It's taken losses on that build-out since it was limited in scale, but it appears to be on track to reach $500 million in operating income by the time it starts intermediating payments for all of its sellers.

That $500 million would represent a 25% operating margin on eBay's transaction revenue. That's well above PayPal's 15.3% operating margin in 2019. However, PayPal operates loss-making businesses like Venmo. In fact, payment processing may be its most profitable segment.

Considering eBay also isn't looking to intermediate payments beyond its own platform, it won't have overhead costs associated with marketing and sales, which came to about 7.9% of revenue for PayPal last year. So, taking out that expense alone will get eBay pretty close to that target operating margin assuming it can scale its service efficiently.

The $500 million in additional operating income will have a significant impact on the company. Operating income totaled just $2.3 billion last year. eBay is significantly slimmed down in 2020 following the divestiture of Stubhub and its classifieds business, so it'll have a lot of cash to invest or return to shareholders. It may have room to increase the dividend it started paying last year, as activist investor Elliott Management has encouraged it to do. 

As eBay moves to intermediate payments itself, look for commentary from management during the earnings call about where it's investing to grow the core eBay platform or how it plans to return more profits to shareholders.