EBay-PayPal nuptial could improve services

EBay's announcement that it will buy online payment company PayPal Inc. for US$1.5 billion in stock should lead to a better overall experience for people who already use both services, according to an industry expert.

However, PayPal customers who don't use EBay could face higher rates and declining service as a result of the long-anticipated merger.

Dual Users to Benefit

Customers who benefit most are likely to be those who buy and sell through EBay auctions and already make and receive auction payments through PayPal, says Avivah Litan, vice president and research director at Gartner Research.

"As long as they use both, they'll probably be better off," Litan says. "Over time EBay can make PayPal's features more tightly integrated."

Improved integration should lead to simpler transactions, including the ability to make a purchase through EBay in fewer clicks, she explains. That pleases both buyer and seller.

Improved integration and happier customers are certainly among the goals of the combined company, says Kevin Pursglove, EBay's senior director of communications.

"This strengthens the user experience," he says. "Payment is a crucial part of the online trading experience, just as valuable as listing, searching, and shipping. Integrating PayPal into our platform will help current and future EBay and PayPal users to trade easier, better, faster, and safer."

Customer Service Woes

Under EBay, PayPal's customer service may improve, Litan says. PayPal has drawn fire from customers who complain it is slow to answer requests for help. Because EBay knows so much more about each of its customers, it may be able to better help them when problems arise, she says.

EBay's Pursglove acknowledges that PayPal has encountered some service problems during its rise to the top. However, he notes, the company was creating a business unlike anything in the analog world. It's a path EBay traveled years earlier, he says.

"PayPal is going through an evolutionary process," he says. "EBay went through a similar evolution years ago. The reality is when you're doing as much e-commerce as we do, while the great majority of transactions are fine, sometimes problems occur."

The key is to make that very small percentage of bad transactions even smaller, he says.

Not Everyone Happy

Small online retailers are among those who probably won't benefit from the proposed merger, Litan says. These companies rely on PayPal's online payment service in lieu of more-expensive credit card merchant accounts.

"This is bad news for the mom-and-pop shops that are not part of the EBay community," Litan says. "Either prices will go up, or the service will go away."

PayPal's merchant account is expensive because servicing small companies is a risky business, Litan notes. Once PayPal is part of EBay the company may no longer see the risk as worthwhile.

EBay's Pursglove declined to speculate on future services and pricing.

Less Competition

The purchase could also reduce competition in the online payment arena in general, Litan suggests. While PayPal is the clear leader, EBay's own EBay Payments (formerly Billpoint) is the number two provider, pushing PayPal to improve, she says. EBay plans to shutter EBay Payments by early next year. (Pursglove declined to specify how EBay would transition its EBay Payments customers to PayPal.)"It always hurts when there is less competition," Litan says. "Every time number one gobbles up number two, it always gets less interesting--competition forces them to try to outdo each other. There will be less innovation now."

PayPal did a great job of increasing its service, expanding into new areas with good ideas and clever promotions, she says. Expect those promotions to slow dramatically under EBay, she predicts.

Under the merger, PayPal is less likely to evolve into the ubiquitous online payment service some expected it to become.

As an independent company Paypal leveled the online playing field, allowing all types of people and companies to sell items without having to pay the high prices associated with credit card processing, she says. Once PayPal begins to focus on serving EBay customers--and not all online retailers--the level playing field vanishes.

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