Apple Pay Triggered eBay-PayPal Spinoff

Apple Pay mobile apps

This morning eBay announced that it would split itself into two publicly traded companies in 2015: eBay and PayPal. Beyond ongoing pressure from investor Carl Icahn, the announcement of Apple Pay was likely the trigger for the decision.

Here’s what eBay said this morning:

eBay Inc. today said its Board of Directors, following a strategic review of the company’s growth strategies and structure, has approved a plan to separate the company’s eBay and PayPal businesses into independent publicly traded companies in 2015, subject to customary conditions.

Creating two standalone businesses best positions eBay and PayPal to capitalize on their respective growth opportunities in the rapidly changing global commerce and payments landscape, and is the best path for creating sustainable shareholder value, the company said…

However, a thorough strategic review with our board shows that keeping eBay and PayPal together beyond 2015 clearly becomes less advantageous to each business strategically and competitively. The industry landscape is changing, and each business faces different competitive opportunities and challenges.

While Square, Stripe, Google, Amazon and others are PayPal competitors there hasn’t been a company until Apple that could radically impact PayPal’s business. PayPal is well known but it’s brand and loyalty remain paradoxically weak.

Depending on how well Apple Pay actually works (usability) it could take much of PayPal’s mobile business and eventually blunt its offline growth in just a year or two. The outlook for PayPal could get very grim very quickly.

While PayPal is interested in working with Apple Pay so far the company doesn’t have a deal. These factors are what motivated eBay to decide that PayPal needs more dedicated and strategic focus and thus to become a stand-alone company.

PayPal has an “account base” of more than 220 million users globally. How active and loyal they are isf20

another matter. By comparison Apple has more than 800 million credit cards on file with iTunes. Apple’s brand is at least 10X as strong as PayPal.

Apple Pay is likely to quickly take hold for in-app payments as most commerce apps adopt it as a payment option on iOS. NFC/in-store payments will be slower to take off but eventually they will.

The anticipated ease of using Apple Pay (one thumb or one click) for in-app payments will make other payment methods (including PayPal) much less desirable. Just having to sign in to PayPal is a major competitive disadvantage. PayPal’s obnoxious use of your bank account (vs. credit card) as the default payment method is also a major disincentive to use the system.

Not having to sign a receipt or payment slip (and potentially skipping the line) will be drivers of in-store usage of Apple Pay, along with increased consumer awareness and merchant NFC-terminal adoption. But we’ll see in-app payments ramp very fast now and many of those will be for offline services (think OpenTable, Uber). If Apple Pay is genuinely secure and as easy to use as promised it will gain mass adoption quickly.

And that could be very bad news for PayPal.

Updated: here’s the story behind the story of why Apple isn’t working with PayPal. According to this report:

Apple and PayPal started talking early on in Apple’s development of Apple Pay, as Apple was setting up partnerships with the card issuing banks and card networks. Since PayPal’s a payments industry leader, it would have been shortsighted for Apple to not reach out to PayPal.

But while these talks were going on, PayPal went ahead and partnered with Samsung on the Galaxy S5 fingerprint scanner, a move that was reportedly forced onto PayPal by eBay CEO John Donahoe. PayPal’s now-former president David Marcus was purportedly categorically against the Samsung deal, knowing that it would jeopardize PayPal’s relationship with Apple. Donahoe won the day, however.

Donahoe miscalculated and now is forced to split his company in two probably to the ultimate detriment of both halves.

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