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SAN FRANCISCO – Most people know eBay Inc. for its online marketplace, where deals abound on items as varied as gadgets and antique furniture. But soon, eBay’s biggest business will likely be PayPal, the online payments service that has grown steadily even as the economy has stumbled.
EBay has spent much of the past two years trying to improve its faltering marketplaces business, which includes the main eBay.com Web site and other sites such as Shopping.com, hoping to increase buyers’ trust and clean up the look of its Web site. In the meantime, PayPal has thrived as more consumers and merchants use it to send money online.
Its growth is expected to continue in spite of competition from Amazon.com Inc. and Google Inc., which have services that online retailers sometimes offer alongside PayPal.
PayPal bills itself as a shopper’s online wallet. Users set up accounts and link them to bank accounts and credit cards, making it easy to transfer cash into the account. Then users can make payments through PayPal using either their cash balances or the underlying credit card. PayPal users can also send cash to someone based on as little information as an e-mail address or cell phone number.
But unlike what happens with a credit or debit card online, PayPal doesn’t share your financial information with merchants. That brings peace of mind to people who might otherwise worry about shopping at a site they’ve never heard of.
PayPal, which began in 1998 as a way for people to beam cash from one Palm Pilot to another, was bought by eBay for $1.5 billion in 2002 and has been a steady performer.
It charges fees for certain transactions, and in the most recent quarter, it reported $688 million in revenue, a 15 percent jump from last year. At the end of September, 78 million people had active PayPal accounts, up from 65 million a year ago.
PayPal has kept its big lead in online payments largely because people find it convenient and because building a competing system is hard. Shoppers and merchants both need to embrace an online payment system for it to have any value, and it has to accommodate e-commerce rules that vary by state and country.
PayPal has passed these hurdles – it accepts payment in 24 currencies – and analysts don’t yet see Checkout By Amazon or Google Checkout as much of a threat.
John Donahoe, eBay’s CEO, has said he expects PayPal to surpass the marketplaces business in revenue simply because PayPal targets all of e-commerce while eBay is one of many online sales sites.
“PayPal can go well beyond that in the next three to five years,” he said.
The company projects PayPal’s revenue will be between $4 billion and $5 billion in 2011. EBay’s forecast for the marketplaces business calls for $5 billion to $7 billion in revenue that year.
Donahoe also thinks PayPal can eventually earn more profit than the marketplaces business, too, even though its profit margins are lower.
To try to maintain its advantage, PayPal this month opened its system to third-party developers, which will mean PayPal can be built in to all sorts of applications. For instance, an iPhone app could let consumers order a pizza and pay for it with PayPal.
More than 1,000 entrepreneurs have been testing the system, known as PayPal X. Among them is Michael Ivey, the founder and CEO of Twitpay, a startup that lets people send money over short-messaging site Twitter.
When Twitpay started last year, it used Amazon’s payments service to transfer funds. PayPal’s huge user base clinched the decision to make the change, he said.
