Here’s What Gave Up to Take On eBay Inc’s PayPal

Bezos gave up data gold to enter the payments business.

Brian Stoffel
Brian Stoffel
Jun 9, 2014 at 1:00PM
Consumer Goods

It's amazing to think about how small and focused the company once was. It started out just being about books. But before long, (NASDAQ:AMZN) was expanding into other physical merchandise. Then came the Kindle, which opened the e-reader floodgates.

Next was the cloud service—an afterthought that's now responsible for up to 5% of the company's revenue and is growing at a 50% yearly clip. After that, of course, came movies. And most recently: a grocery delivery service.

The graveyard of industry stalwarts that have been reduced to shells of their former selves—or gone outright bankrupt—is long: Border's Books, any number of not-to-be-mentioned-here big box electronic stores, and the country's top two discount retailers.

Of course, grocers and delivery services (remember those drones?) could be next, but today, Amazon is squarely taking aim at PayPal—which accounted for 43% of eBay's (NASDAQ:EBAY) revenue last quarter.

An interface just like this could be coming to a screen near you--only it will be from Amazon. Source: PayPal .

According to a report  from Reuters, starting today, Amazon will begin leveraging its 240 million active-member base to help it become an intermediary in third party payment systems. When customers purchase things on-line, have to pay their monthly bills, or want a recurring subscription to be charged to their credit card automatically, they can use Amazon—and the credit cards it has on-file for members—to do just that.

If that sounds a little confusing, think about how you can sign into many of your favorite sites via your social media account. It's just like that, except for payments.

To start with, Amazon is focusing on start-ups and other smaller companies. These players would likely jump at the chance to use Amazon—as it would lend an air of legitimacy to the business. The bigger question, however, is whether Amazon can convince some of the bigger e-commerce companies to favor its payment system over PayPal in the years to come.

CEO Jeff Bezos is famous for undercutting the competition; he once famously quipped: "Your margin is my opportunity." If Bezos offers a deal whereby third-party sellers pay less in fees for accepting Amazon payments than they do through PayPal, it would be a serious blow to PayPal. Even if eBay lowers fees to match Amazon, it would spell the end of high bottom-line growth for the service.

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Though there are no details available right now to support this thesis, it would certainly be in keeping with how Amazon goes about doing its business.

The one thing Amazon had to forgo
Surprisingly, however, Bezos appears to be ceding one key area to enter the third-party payments game. Many of the companies that could end up offering Amazon payment have been wary of allowing Amazon access to information regarding customer-purchasing habits. In the era of Big Data, that kind of information is gold.  But Amazon is willing to give that information up, in order to be in merchants' good graces.

According to Amazon VP Tom Taylor, Amazon will only be collecting actual dollars and cents information for each transaction. Of course, this could eventually lead to some type of proprietary information, but the fact that Bezos was willing to forgo the collection of such data shows how important moving into payments is to the company.

No, PayPal isn't in trouble right now. It will take a while to see whether or not merchants warm up to the idea of using Amazon payments. But a decade down the road, it's entirely possible that we'll look back to June 9, 2014 as the beginning of the end for PayPal.