eBay's Trump Card: It's Not Online Auctions, It's Paypal

| About: eBay Inc. (EBAY)

Let's get something out of the way. Amazon (NASDAQ:AMZN) is winning the online commerce battle. Even though eBay (NASDAQ:EBAY) is mostly an online auctions website and Amazon is an online superstore, Amazon is winning in both sales of new items and used items by an insurmountable margin. eBay's main service will never match Amazon's. It's too late, and people feel much more comfortable and safer buying and selling on Amazon than on eBay. So eBay's growth will most likely not be stellar in the next couple of years, at least not compared to Amazon's. But eBay, as a company, has something else up its sleeve, and that's Paypal. Just look at the recent revenue growth.

We are currently experiencing a huge, multiyear boom in online commerce. Look at any major seller of anything, and that company probably has an e-commerce website. In such an environment, it is important for businesses that customers feel comfortable making these purchases on their websites. In comes Paypal --- there is something slightly unsettling with giving out your credit card details online. Sure, when it's on the online Apple Store or on Amazon, everyone feels safe, but when you're buying from a smaller, less-known website, the fear of fraud and theft is always there. With Paypal, there are a few big advantages that make buying things online more comfortable:

  1. You don't share any of your credit card information with the websites you're buying from, only with Paypal, which is trusted.
  2. It's much easier to make payments --- you only have to log in, instead of entering annoying details from your card.
  3. All of your online purchases are clearly visible on Paypal, with features that help you deal with fraud if you are to encounter any.

So Paypal is set to, and already has been capitalising from growing online sales. As more and more malware and theft is targeted at online sales from industry growth, security will become more and more of a concern, and people will be happy to use a service like Paypal. Another big advantage of the service is for small businesses: it is much easier and much cheaper for them to set up online payment facilities for their customers through Paypal than through enabling credit card payments.

All the things above have already been happening for a while, but here's where is gets interesting. Paypal has another big catalyst: the upcoming rise of NFC (Near Field Communication) payments (see this article). This long-term development will be key for eBay and Paypal. From what I've see so far, replacing credit and debit cards with electronic versions on phones makes a lot of people uncomfortable, as they are scared that hackers and thieves could get their information from their phones. This fear sounds familiar doesn't it?

Once again, as with online payments, in comes Paypal. I think that Paypal's real potential comes as a mobile payments service for physical stores that works in the same way as the online service does. This would be extremely useful and successful, especially for smaller stores and businesses, just like it is useful for smaller websites online. Corner stores and stands could have Paypal set up --- instead of using dollar bills and coins for small purchases, you would swipe your smartphone and pay through Paypal. No one would have the worry of getting their credit card information stolen, as all payments and all of the information stored on their smartphones will simply be Paypal. I don't think that people will fully give up physical payment cards and switch to paying with their phones anytime soon, but with this kind of a service, a lot of people would make at least a partial transition much faster. Think about all of the potential:

  • The end of coins and dollar bills for those that want it. I don't know why we still use these things. But with Paypal, we could forget about them. Small businesses would allow electronic payments through Paypal for small purchases under $5, as they wouldn't be losing all the money in commissions like they do with major credit card payments.
  • Allowing kids and young adults to make some electronic payments without having to annoyingly sign them up for actual debit cards. Self explanatory.

One of my favourites:

  • Payments between individuals. Just win a bet when your friend "didn't have cash on him"? Get him to send it through the Paypal app on his phone. Owe someone money? Paypal swipe. Need to pay for a favor? Paypal swipe.

We are at a time in which things are changing rapidly in the virtual world, and eBay needs to make large investments to be significant in future business. I think that it should put a lot of focus on its Paypal platform, as it has the potential to become the Paypal of NFC payments, just as it is the Paypal of online payments. I hope that eBay follows this path, as in my opinion it will be the "critical point" for the company and its subsidiary.

Would you feel more comfortable with NFC payments if they were made through Paypal?

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.