Source: insidermonkey.com

Activist investor Carl Icahn is known for taking on big fights. Recently he's been agitating the waters at online auction giant eBay (EBAY 1.39%). A major piece of this battle is over the current and future potential of PayPal. Whether or not the payment processor gets broken out of eBay, Icahn is right about its value.

More than an auction house
eBay has been a near universal hit with customers and PayPal was an integral part of that success. The payment intermediary, which started as a third-party service, made using eBay financially simple. It was such a great tool that, after failing to gain traction with a similar offering, eBay bought PayPal for $1.5 billion in the early part of this century.

PayPal was so easy to use and had gained such traction that it quickly went from a way to pay for an auction to an almost universally accepted online payment system. And more recently, eBay has taken PayPal from the virtual world into the real world of brick and mortar stores. And that puts this Internet connected player into the big leagues with giants like Visa (V 0.39%), MasterCard (MA 0.55%), and American Express (AXP 3.02%).

A giant by the numbers
In the fourth quarter of 2013, PayPal added 5.2 million customer accounts. It ended the year with a total of 143 million accounts, up 16% year over year. That's a huge customer base. For comparison, American Express ended 2013 with 107 million cards in force.

American Express largely targets wealthier customers, and its impressive historical performance shows that's a great business model. So it's understandable that AMEX would have fewer customers than PayPal, which will give an account to just about anyone. However, targeting the wealthy means AMEX has to wait until customers are established and then convince them that they want to use one of its cards.

PayPal's customers are young and wired right into the Internet. Although there's surely some overlap between the two customer bases, PayPal already has many of American Express' future target customers and it's giving them a way to grow with a company they, effectively, helped create. No need to convince them of how good PayPal is, they already know, use, and love the brand.

And there's giant growth potential
So eBay's PayPal already has an entrenched seat at the table of the next generation of spenders. But how big is that opportunity? In 2013, PayPal processed nearly 3 billion transactions. Visa processed 58 billion during its last fiscal year, ended September.

(Source: Lotus Head, via Wikimedia Commons)

That's a big difference and speaks to the pair's different business models. Visa acts as a middle man, letting others issue cards in its name. PayPal doesn't do that, but the number of transactions going across Visa's networks gives a hint about the scale of the market PayPal is looking at.

And it's worth noting that PayPal's fourth quarter transaction volume was up 16% year over year. MasterCard's transaction volume advanced 13% in the same period. Like Visa and American Express, MasterCard is a much bigger business than PayPal, but comparing this up and coming payment processor with these established giants highlights PayPal's potential and its successes.

More than just eBay
Another interesting aspect of PayPal is where its business comes from. eBay accounts for about 30% of PayPal's transaction volume—clearly PayPal is much bigger than just auctions. Which is part of the reason why Icahn is asking eBay to issue PayPal shares into the market. It would allow investors to put a price tag on just the PayPal business which, if Icahn is right, will help unlock value now hidden under the eBay banner.

(Source: Bigroger27509, via Wikimedia Commons)

It will be hard to unseat Visa, MasterCard, or American Express, but PayPal doesn't need to do that to have a hugely successful business. In fact the Discover card, which came out of retailer Sears, proves that there's plenty of room for competition. And eBay's PayPal is positioned to blossom right along with the customers that helped turn it into an online giant. Even if eBay fends off Icahn's advances, PayPal will remain a star that's only just starting to shine.