The relationship between PayPal (PYPL) and eBay (EBAY) is about to come to an end. In a recent release eBay confirmed that the longstanding relationship which has existed between it and the payments provider is about to scaled down initially, and then severed completely by 2023.
The news sent PayPal plunging as investors unsure about how to process the news, decided to sell shares in the payment processor. PayPal up until 2015 was a part of eBay, having been acquired by the e-commerce giant. But that relationship was evaluated in 2015, thanks in large part to the changing dynamics of online commerce. Sites like Amazon.com reshaped the ecommerce landscape in a big way and this says many analysts, was a big reason eBay decided to spin off PayPal.
The new arrangement gives PayPal some presence on eBay till 2023 although there are some reports that eBay will begin scaling back as early as this year (2018). In actual terms what will happen is that the ever-present PayPal logo that has served eBay buyers and sellers for over 10 years will no longer be there.
eBay for its part has shown what it intends fp0r the future of payment handling. In ditching PayPal, eBay has chosen Dutch provider Adyen BV to handle payments but with one crucial difference. Under the existing PayPal arrangement sellers on eBay were responsible for paying PayPal directly for handling transactions. This resulted in PayPal making significant revenues from the huge volume of transactions handled each year by eBay. Under the new arrangement with Adyen, sellers will pay eBay directly for processing of transactions. This is expected to bring in hue revenues for eBay.
PayPal, despite the sharp decline on the news, has indicated via its CEO that things will be fine. Speaking in the wake of the eBay announcement, PayPal CEO, Dan Schulman said the decision by eBay to part ways was a “manageable” one for PayPal. He then made things a lot clearer about the immediate future for PayPal, saying that, “I am very pleased to announce that PayPal and eBay have signed a term sheet to make PayPal available, as a way to pay on eBay, through July 2023.” He went on further, saying that “We enter 2018 with strong momentum supporting an increasingly differentiated and expansive value proposition, and a focused commitment to deliver increasing value to our customers and shareholders.”
Despite the momentary headwind PayPal looks to be on track to deliver a solid first quarter this year. Management has forecast potential earnings of 52 cents to 54 cents on projected revenue of around $15.15B. eBay for its part is coming off a better than expected fourth quarter with revenues of $9.1B. The strong revenue numbers come as a result of stronger overall increased in merchandise sales of $24.43B. eBay’s projections for its first quarter 2018 has been set at 54 cents per share on revenues of between $2.57B and $2.61B.
Perhaps the biggest winner come out of this new shift in strategy from eBay is the Dutch-based Adyen. Counting investors like Mark Zuckerberg and boasting clients as rich as Netflix (NFLX), the Dutch company has now set itself up for a large customer, and perhaps potentially huge revenues.