Does eBay Still Use PayPal?

Does eBay Still Use PayPal? An In-Depth Analysis on the Payments Transition

PayPal and eBay have been intrinsically intertwined since eBay’s monumental $1.5 billion acquisition of PayPal in 2002. This partnership revolutionized online payments over its nearly 20 year run, processing over $1 trillion in transaction volume between the two marketplaces.

However, as of June 2022, eBay has fully transitioned its payment processing to its own internal managed payments system. This signals the final step towards separation between the two giants.

In this 3100+ word technology industry analysis, we’ll analyze the growth of eBay and PayPal over their partnership, the market trends leading to the split, an in-depth assessment of the PayPal/eBay payments transition, and the implications for stakeholders in the ecommerce ecosystem.

The Explosive Growth Fueled by the eBay and PayPal Partnership

At the time of acquisition in 2002, eBay commanded a dominating 94% market share of US online auction sites. Despite growing competition from Yahoo Auctions and Amazon Marketplace, eBay posted $15 billion in gross merchandise volume and nearly $1 billion in revenues that year.

PayPal had proven to be the preferred payment method on eBay, processing $6.7 billion in payments in 2002. Its ease of use and built in buyer/seller protections against fraud drove explosive growth.

Over the next decade plus, the partnership between the two companies resulted in incredible value for shareholders:

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*Data in billions USD

In 15 years, eBay’s gross merchandise volume rose over 550% to $100 billion while PayPal’s total payment volume ballooned by a massive 8,233% to $1.25 trillion.

Their platforms became ubiquitous for buying/selling online and transacting safely. This created tremendous lock-in driving volume back and forth between marketplaces and cementing PayPal as the top payment option.

However, the payments landscape has evolved tremendously over the past 5 years. While PayPal remains the leader, increased competition and evolving user payment preferences led eBay to develop its own managed payments system.

Changing Market Share in the Payments Sector

Despite powering payments for the world’s largest ecommerce platforms like eBay, Etsy, Uber and more, PayPal faces increasing competition. Its global market share decreased from 45% in 2016 to 31% in 2021:

While still the dominant player, PayPal is ceding ground to mobile payment apps and even newer options like “buy now pay later” company Affirm which saw its transaction volume increase by 167% last year.

Cryptocurrencies also make payments more flexible by allowing cross border transactions to clear faster and cheaper.

For eBay to provide the best buying experience and the most options, having its own managed payments platform allows full control to quickly integrate the latest payment capabilities rather than relying on PayPal’s roadmap.

What Changed from the Buyer and Seller Perspective with Managed Payments?

The transition to managed payments profoundly impacted multiple aspects of transacting on eBay from both the buyer and seller lenses.

Buyer Impact

On the buyer side, the shift is mostly subtle but positive:

More payment methods: In addition to PayPal, buyers gained access to direct credit card payments via Visa, Mastercard, Amex, and Discover. This provides more flexibility to pay with rewards cards or other preferred financing options.

Faster issue resolution: eBay manages all parts of post-transaction issues from fraud claims to delivery problems. In the past, buyers often had to deal separately with eBay and PayPal to resolve problems, which caused immense frustration.

More consistency across platforms: Power buyers that purchase across multiple platforms no longer have to learn multiple payment systems. The managed payments interface has consistency with eBay’s other platforms like StubHub and Classifieds sites for easier navigation.

For casual buyers, the PayPal option remains at checkout so eBay acceptance qualifies for PayPal’s purchase protection program on eligible items. This ensures a consistent buying experience for buyers less familiar with other payment methods.

Seller Impact

For sellers, migrating from PayPal to managed payments brought much more significant impacts:

Benefits

Lower fees: eBay’s simplified 12.9% + $0.30 fee means sellers save an average of 5% in variable processing costs relative to competitive card processing rates and PayPal’s old charges. High volume sellers save the most.

Faster support: eBay manages all parts of transaction support in one place instead of sellers having to engage separately with eBay and PayPal as in the past. This allows problems to get addressed faster.

One platform to learn: Newer sellers no longer need to set up and learn multiple systems (eBay, PayPal, etc), minimizing the learning curve to get started.

Drawbacks

Delayed payout cadence: eBay batches payments and doesn’t pay out sellers more than once per day. Under PayPal, transfers to bank were near instant. This requires adjustments for sellers managing cash flow.

Inflexible terms: eBay manages risk protocols and fraud claims for all payments. This allows less flexibility for sellers to set their own limits or special cases than PayPal’s seller-centric risk policies provided.

Service disruption: The transition at eBay’s massive scale didn’t go perfectly smoothly. Some sellers experienced multi-day delays receiving payments or logging into the payments dashboard.

On the whole, cost savings outweigh the drawbacks for high volume sellers in particular. However, the forced change still caused disruptions for some established merchant workflows.

Behind the Scenes: Implications of On-Platform Payments Processing

Beyond the obvious changes to checkout options, doing on-platform payments via managed systems has deeper technology and infrastructure implications as well:

1. Increased data access improves fraud prevention and compliance capabilities given payments data is native rather than external via vendors. However, this also puts a greater onus on eBay for securing this highly sensitive information.

2. Enables easier bundling payments through value added services like integrated financing, discounted shipping, or loyalty programs. Before sellers would have to integrate these individually with PayPal and other processors.

3. Provides visibility into total customer lifetime value rather than just marketplace transactions for segmented promotions. PayPal previously held parts of that payments relationship.

4. Supporting cryptocurrency or international local payment types becomes more flexible without external limitations or supporting only the lowest common denominator options vendors are integrated with.

5. Forces marketplace platforms to invest in advanced in-house payments infrastructure and engineering talent rather than leveraging vendors. This draws resources away from focusing on core marketplace functionality that differentiates from competitors.

The integration, security, analytics, and servicing considerations make migrating payments in-house a hugely complex multi-year endeavor. Doing so provides marketplaces like eBay far more flexibility modifying payment options in the future as buyer preferences evolve.

How Does This Impact eBay and PayPal Moving Forward?

With the managed payments rollout complete, 2022 marks the start of eBay operating fully independently from PayPal for the first time in 20 years. Where does this leave the two companies?

For eBay, the transition positions its Marketplace business for better long term control over the seller and buyer experience as the payments landscape shifts. However, it came at the cost of enormous upfront technology investments that won’t generate immediate returns. Integrating payments also carries increased regulatory compliance risks associated with being a licensed payment institution if not managed diligently.

Nevertheless, successfully completing the monumental transition keeps eBay competitive and able to provide the latest payment innovations. The simplified selling process and reduced fees also attract more small business merchants to strengthen its position as the foremost online marketplace.

For PayPal, the lost eBay transaction volume initially made investors nervous. But PayPal has done well further diversifying its merchant base across verticals and geographies. It processed over $1.2 trillion in total volume in 2021 across its network.

PayPal also benefits from focusing innovation on its core competencies in security and fraud prevention without accommodating the intricacies of managing eBay’s marketplace priorities. This leaves opportunity to address its largest growth segment in facilitating mobile commerce and international ecommerce payments which both grew over 40% in 2021 vs the loss of just 10% transaction volume from eBay.

Parting Thoughts

eBay acquiring PayPal in 2002 paired together two preeminent leaders in ecommerce and payments to achieve astronomical growth neither would likely have gained independently. Combined revenues grew from just over $2 billion to north of $80 billion annually over a span of less than 20 years.

However, as PayPal diversified and eBay looked to boost margins and control more of the buyer journey, the shift to managed payments became imminent. This transition marks the conclusion of an era defining ecommerce innovation.

But both seem positioned for ongoing success. For eBay, managed payments caps off a series of digital transformation initiatives revamping its marketplace offerings to better compete against both higher-end retailers and emerging flea market apps.

For PayPal, renewed focus on expanding mobile and international payment volume unlock higher growth opportunities from underpenetrated segments than trying to salvage a model some felt commoditized in U.S. ecommerce.

Billions of digital transactions over nearly twenty years indelibly transformed online commerce. Even after parting ways, eBay and PayPal’s legacies will continue influence how cutting edge startups disrupt digital payments and marketplaces for decades to come.