The Long Relationship Between eBay and PayPal Hits a Rough Patch

A substantial portion of the success enjoyed by electronic payments giant PayPal can be attributed to its long relationship with legendary auction and e-commerce giant eBay; however, it now seems as if these two tech pioneers are no longer as close as they used to be.

According to a news report published by tech news website Re/Code, eBay has formally announced that PayPal will be phased out as the preferred payments processor of its online retail marketplace by the year 2020. Effective immediately, a portion of the eBay purchase and escrow transactions handled by PayPal will be transferred to Adyen, a Dutch financial technoloy firm that provides payments for companies such as Netflix, Spotify and Uber.

What this announcement means for eBay users is that they will notice the PayPal button being less prominent as a payment option. PayPal will remain on eBay; however, all other payments will be processed by Adyen without shoppers noticing it. Under the current scheme, PayPal handles eBay transactions paid with credit and debit cards; even though shoppers may not be aware of this, PayPal uses this opportunity to market its services by riding piggyback on every payment.

Once Adyen takes over payments for eBay, the online auction company expects to pocket $2 billion as it charges sellers for handling their online retail payment transactions, which is what PayPal has been doing since 2003. PayPal investors reacted swiftly to the news with a major sell-off on Wall Street that reduced the price of shares by 12 percent in just one day, prompting day traders to swoop in and take advantage of a potential rebound.

Although it is too early to determine whether Adyen will be a better option than PayPal for eBay sellers, it should be noted that the company expects to charge less for various reasons. First of all, eBay is in a position to acquire a large stake in Adyen, a company that is planning on filing an initial placement offer (IPO) later this year; second, eBay could decide to completely acquire the payments processor and become another player in the lucrative, yet highly competitive, digital payments sector.

It should be noted that eBay was at one time the parent company of PayPal; the two entities split up in 2015 and drafted an operating agreement whereby the payments processor retained preferred status until 2020. In recent years, PayPal has attempted to retain its position as a digital payments market leader; however, multiple competitors have leveled the playing field.