PayPal partners with MasterCard

PayPal, a unit of internet auctioneer eBay, will introduce a new service that allows its 164 million account holders to make payments on ecommerce sites that take MasterCard but have not agreed to accept PayPal.

The service is part of the unit's strategy to reduce its dependence on eBay auction transactions, but some observers said PayPal's move is a gambit that could over the long term diminish its brand and reduce profit margins.

PayPal's new service, dubbed Secure Card, will be available through a software download that can automatically generate single-use MasterCard numbers that customers can use when they want to make payments to internet retailers that don't accept PayPal.

The aim is to enable PayPal customers to use their accounts more widely across the internet. The unit has pushed hard to convince more internet retailers to accept PayPal payments, part of an effort to reduce its reliance on processing sales generated through eBay's maturing auction service.

Having trouble?

"This product is a way for PayPal account holders to initiate transactions with merchants that don't accept PayPal," said Bruce Cundiff, analyst at Javelin Strategy & Research. "This will increase affinity among PayPal users."

But Larry Witt, equity analyst at Morningstar, worried that the partnership could limit PayPal's ability to increase the number of ecommerce sites that directly accept its payments.

PayPal said hundreds of thousands of online sellers, including 29 of the top 100 ecommerce sites, accept its payments. But some of the biggest internet retailers, including Amazon, Best Buy and Wal-Mart Stores, do not accept PayPal payments.

"Why would merchants have any incentive now to accept PayPal?" asked Witt. "They have recently touted their success in signing up new merchants. This is a move that would almost suggest they are having trouble signing up new merchants."

Another drawback is that PayPal will have to share all revenues generated through its agreement with MasterCard, raising questions about the payment unit's ability to maintain its profit margins.

A PayPal spokesperson confirmed that transaction fees generated through the new partnership would be collected by MasterCard issuer JPMorgan Chase & Co, but she was unable to clarify how the revenue would be distributed.

Growth opportunities

PayPal strongly denied it was having trouble boosting its so-called "off-eBay" merchant business, seen as one of its parent company's most promising growth opportunities. Non-eBay businesses accounted for 44% of PayPal's $12.2bn in total payment volume in the third quarter this year, up from 37% in the same period last year.

The company last month reported that PayPal's off-eBay transaction volume rose 61% year over year, prompting American Research technology analyst Tim Boyd to write in a note that "PayPal is gobbling up share of the massive off-eBay payments opportunity".

PayPal and other alternative payment systems currently account for about 5% of all online transactions, compared with 86% for credit cards and debit cards, according to a recent report by Javelin. Store-branded cards, gift cards and other instruments account for the remaining transactions, estimated at $150bn in 2007.

Javelin estimated that the value of online transactions will reach $355bn by 2012, with PayPal and other alternative systems will account for about 11% of that amount.

- Dow Jones News