October 31, 2005, 12:00 AM

PayPal moves more into mainstream payments

PayPal is taking a giant step forward to expanding beyond its eBay base by acquiring VeriSign`s online payment gateway business, which handles $40 billion on online payments annually. "This is an opportunity for us to expand our merchant services business," says Stephanie Tilenius, vice president of merchant services.

When PayPal broke onto the online retail payment scene in December 1998, it had a very narrow focus: facilitate payments between buyers and sellers on eBay.

When it decided to become a broader payment option a few years later, it faced a set of entrenched online payment vehicles--credit cards.

PayPal proved that a market exists outside of eBay when retailers such as Tiger Direct Inc. adopted it as a payment option. Now PayPal, a subsidiary of eBay Inc., is ­taking another giant step forward to expanding beyond its eBay base by ­acquiring VeriSign Inc.`s online payment gateway business, which handles $40 billion in online ­payments annually.

"This is an opportunity for us to expand our merchant services business," says Stephanie Tilenius, PayPal`s vice president of merchant services. She notes that VeriSign is the leading gateway for small and medium-size businesses, ­representing about 22% of U.S. e-commerce. Payment gateways ­provide the ­technological ­infrastructure for transmitting transaction information to the card networks.

Pursuing global merchants

In recent years, PayPal has been aggressively pursuing the global merchant services market, which represents about $300 billion in annual volume, about 10 times the size of eBay volume, Tilenius says. Currently, about 30% of PayPal`s volume is from outside eBay.

"This is a way for us to accelerate adoption of our services," she says. "We can extend the PayPal product seamlessly into the VeriSign gateway and offer it to all those tens of thousands of VeriSign customers." VeriSign has more than 150,000 retailers worldwide.

Under the agreement with VeriSign, PayPal will pay about $370 million in cash or eBay stock to acquire VeriSign`s payment ­gateway. The gateway business, including synergies with PayPal`s merchant services business, is expected to generate $100 million in incremental revenue next year.

Suite of security services

As part of the agreement, VeriSign also will provide eBay and PayPal with a suite of security services that includes the deployment of VeriSign`s two-factor authentication token, which gives customers a one-time password or digital certificate to help protect against online identity theft. EBay has agreed to purchase up to 1 million of the tokens, which will be rolled out to eBay and PayPal customers beginning next year.

The acquisition is subject to regulatory and other approvals, and is expected to close this quarter.

PayPal`s acquisition of the VeriSign gateway has the potential to remake the online payment market by giving non-eBay ­retailers a low-cost alternative to credit and debit cards, says Avivah Litan, analyst with Gartner Research.

"PayPal could eventually replace credit/debit cards as the dominant online payment mechanism, if it can maintain low merchant rates while increasing customer service, responsiveness, and chargeback ease so that its policies and practices are as consumer friendly as are the card companies`," Litan says.

The small guys

Merchant charges for PayPal range from a per ­transaction fee of between 1.9% and 2.9% of the transaction for the ­standard PayPal service to a $20 monthly fee and a per transaction fee of between 2.2% and 2.9% for the Website Payments Pro service.

PayPal began edging into credit card merchant ­acquiring in June, when it launched Website Payments Pro. Using Wells Fargo Co. as its processor, PayPal began offering credit card ­merchant accounts in addition to the ­traditional PayPal product. Website Payments Pro targets the same small and medium-size businesses--those with annual sales volume of between $250,000 and $5 million--that use the VeriSign gateway.

Prior to Website Payments Pro, PayPal merchants could accept card payments only indirectly via ­customers funding their PayPal accounts with credit or debit cards.

Nearly 79 million people--both buyers and sellers--in 56 markets have PayPal accounts. That amounts to about one in three online ­shoppers, Tilenius says.

But PayPal will have to achieve more consumer acceptance if it wants to catch the attention of large retailers such as Amazon.com and Walmart.com, Litan says. "They`re going to have to get ­critical mass in the small and mid-size market first," she says.

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