On its own: How eBay is running payments without PayPal

EBay is going it alone.

PayPal and eBay have been intertwined for decades, even before the companies were corporately joined. Thousands of eBay sellers sported PayPal T-shirts at a 2002 conference — a sight that helped force then-eBay-CEO Meg Whitman's hand in ongoing acquisition talks. That, and the overwhelming number of eBay auctions that featured PayPal as a preferred payment method. She bought PayPal the next month.

After 13 years in which PayPal was tightly integrated with eBay, it spun out in 2015, with an agreement that PayPal would keep handling payments on eBay for a five-year transition. With that time period winding down, eBay has had to build its payments capabilities up from scratch — and deal with an army of sellers who have grown used to using PayPal not just to collect money for sales but pay their eBay fees, print shipping labels and even stock up on supplies.

Undoing that relationship has largely fallen to Alyssa Cutright, who helped build it in the first place. She spent 12 years at PayPal before and after the eBay acquisition, working at Square and Plastiq before rejoining eBay in July 2016 to oversee payments, risk and billing. PayPal's post-split exclusivity deal expired in July 2020, and Cutright has been working to shift its 19 million sellers to its in-house service.

The end of the deal has freed eBay up to offer options like Apple Pay or Afterpay "buy now, pay later" installments. But it's also meant confusion for consumers and merchants who had grown used to the eBay-PayPal link. For eBay, payments isn't just about processing credit cards; it's about handling listing fees and shipping costs, payouts for merchants and the risk of fraud.

The spinoff agreement let eBay start testing its own payments in 2018. By the end of 2020, only 1 million sellers had moved over to eBay payments, though by the end of the year, 38% of the value of goods sold on eBay had payment processed in-house. The transition is complex, since sellers include big retailers like Adidas and Dyson as well as individuals clearing out their garage.

Half of eBay's U.S. sellers have now migrated to what it calls Managed Payments. "We are moving very quickly," Cutright said. "We expect to be done with the full migration by the end of this year."

Building from scratch

Even when eBay owned PayPal, sellers had to set up separate accounts. When a buyer clicked "buy," PayPal managed the whole experience.

"Every time a seller came to list and sell on eBay they also needed to go establish a relationship with PayPal," Cutright said.

That meant PayPal charged its own fees on top of eBay, ran its own customer service and made its own decisions about when to reject a transaction.

Under the new system, sellers just have an eBay account. To make this happen, eBay built its own checkout and payments process which uses Adyen on the back end. (eBay and PayPal agreed to keep PayPal as a payment option for consumers, but the proceeds now go to the merchant's bank account, not a PayPal account.)

The shift also meant eBay had to build its own risk system. Previously eBay managed risk for buyers and sellers on inventory, but it wasn't part of the yes-or-no decision on payments transactions — for example, judging if a payment might be made with a stolen credit card. Now eBay handles this.

Account takeovers are more of a security worry now that financial information is kept there.

"There's a lot of fraud in ecommerce," Cutright said. "A big part of transactional risk capabilities is keeping the site safe."

To build this system, eBay created a new team from the ground up. Cutright declined to say how big it is, but LinkedIn lists more than 400 eBay employees self-identifying as working in payments or risk.

When Cutright got to eBay in July 2016, she spent her first six months educating the executive team and board on the payments landscape and options and what other marketplaces do, and recommended a strategy. In January 2018, eBay announced it would have its own payments system, with Adyen as payments processor. The goals: lower cost, more simplicity, higher conversions. And of course, more revenue for eBay.

Rebuilding its payments system is a little like rebuilding an airplane in flight. eBay has buyers in 190 markets globally, which all need locally relevant forms of payment, Cutright said.

For buyers, they can now use other forms of payment such as Apple Pay, which PayPal doesn't support, as well as other options in different geographies, such as Afterpay in Australia or direct debit in Germany.

Fewer fees, but some headaches for sellers

PayPal charged most sellers a 2.9% payments fee, deducted from the sale, while eBay charged a 10.2% final value fee, invoiced monthly. Sellers had an option to have eBay fees automatically deducted from their PayPal accounts.

Under eBay's new system, it charges a 12.55% final value fee that's deducted from the sale for most categories. (Those who have an eBay Store pay 11.7%.)

Some sellers say they are paying more in fees for certain categories of items or in certain geographies because the final value fee now includes shipping and taxes. (Confusingly, eBay didn't include taxes in calculating its fee, while PayPal did.) "Stating 'most sellers' will see a savings with managed payments is false advertising in my opinion," one seller wrote on an eBay discussion board.

Others generally like the new fee structure. "My business is saving a considerable amount over what I used to pay when PayPal processed my payments," Don Heiden, an eBay seller, wrote in a review of the system. "And not just from the final value fees I pay, but also from the large increases of free listings eBay added for those in managed payments."

"Most of our sellers will actually see a savings with us managing payments internally," Cutright said. "But structurally it is a considerable change."

Some sellers have complained about the speed of getting paid under the new system. Previously sellers could access their funds immediately in their PayPal wallet — if, for example, they wanted to turn around and buy supplies or new inventory. Now eBay sends seller proceeds daily using ACH. That can mean funds don't clear on the weekends.

Cutright acknowledges that was a benefit of PayPal's stored-value wallet. However, now eBay sellers don't have to go to PayPal to move money from PayPal to their bank account, she said. "We're settling like everyone else settles," Cutright said. "We're at the mercy of the receiving bank and clearing."

The net promoter score of sellers who have moved to the new system is 10 points higher than those still on the old system, eBay said.

For eBay's bottom line, the change has an obvious benefit. It expects to see an "incremental $2 billion in revenue and $500 million in operating income annually in 2022," per its February earnings report. The company's "transaction take rate" has also increased to 9.8%, at least partly due to its new payments system.

Investors seem happy, with shares now trading above $63. Riding a wave of strong ecommerce demand during the pandemic, shares of the company have risen along with the rest of the tech sector over the past year. But PayPal remains the real success story of the 2015 split: The spinoff is worth nearly seven times as much as its former parent, underscoring how much of the value in ecommerce lies in payments.

There are other gains for eBay. Controlling its own payments also means higher payment authorization rates, because it doesn't have as high of a bar for risk as PayPal's wallet, Cutright said. That's because the marketplace has more information about its buyers and sellers.

That kind of control over payments is something eBay sought for decades, dating back to the days when buyers sent sellers checks and money orders. Before it decided to buy PayPal, eBay tried building its own in-house service with Wells Fargo called Billpoint. It never took off. Now Cutright has a chance to do it right.