Acquiring VeriSign Inc.’s payment gateway business would give PayPal Inc. a significant boost in transaction volume and a new customer base that it covets, as well as making the eBay Inc. subsidiary a more direct competitor to banks.
Last year PayPal handled $19 billion of payments, but roughly 70% of those transactions were for online auctions conducted by its San Jose parent, and the unit has repeatedly said it wants to become a common payment option for other Internet merchants.
The VeriSign business handled more than $40 billion of payments last year. And perhaps even more importantly to PayPal, VeriSign has more than 100,000 small and midsize business customers.
On Monday, PayPal said it would pay $370 million in cash and stock for the VeriSign business. PayPal expects the deal to close this quarter and said the business would add $100 million to its revenue next year.
“With the acquisition of VeriSign’s payment gateway, we can accelerate our merchant services business,” said Stephanie Tilenius, the vice president and general manager of PayPal’s merchant services division. “Merchant services is one of our key growth strategies.”
VeriSign’s gateway lets merchants authorize and manage online payments, but Ms. Tilenius said the service is far less powerful than those her company already offers to merchants.
By offering its own payment capabilities to VeriSign’s customers, PayPal would be able to make a bigger profit on them than VeriSign ever did, she said. “VeriSign is simply a gateway. We are a gateway, a merchant account, and a processor all in one. … This is a broader relationship.”
Brendan Lewis, a senior corporate communications manager with VeriSign, of Mountain View, Calif., conceded that PayPal is more focused on payments than his company, and said that giving up the payments business “allows us to return to what we do best,”which is digital security.
PayPal plans to integrate some of its merchant services, such the Express Checkout service it introduced in June, into VeriSign’s back-end processing software, Ms. Tilenius said.
One of the services PayPal plans to integrate into the software is the direct payment service, which lets online merchants accept credit card transactions and route the payments to their PayPal accounts. The behind-the-scenes service in effect makes PayPal an alternative to a traditional merchant processor.
Avivah Litan, a vice president and research director at the Stamford, Conn., market research company Gartner Inc., agreed that VeriSign’s customers could be more valuable to PayPal.
“What was someone else’s commodity service is PayPal’s treasure — it’s PayPal’s entree into doubling its profits,” she said. “Kiss a toad, you get a prince.”
PayPal is becoming a more appealing service provider to merchants, so it is also becoming more of a threat to traditional financial services companies, Ms. Litan said. “Banks and credit card issuers should feel uncomfortable about this acquisition,” because they stand to lose revenue if merchants turn to PayPal instead of credit cards for accepting customer payments.
Diana Bostany, a jewelry designer who sells her crafts online, was one of the customers who tested PayPal’s direct payment service. Previously, she accepted only PayPal payments and checks. In June, she wrote in an e-mail that the direct service had increased her business. “I’m getting more orders, and my customers are spending more money.”
The PayPal service also changed her mix of payments. After she began using it in April, she did not receive a single check, and by June about 95% of her customers were paying with a credit card; the rest were using PayPal accounts.
Edward Neumann, a managing director at the Fairfax, Va., financial services consulting firm CC Pace Systems Inc., said the deal for the VeriSign business is an important step forward for PayPal.
PayPal has been struggling to convince online retailers that it can be a merchant acquirer for the past few years, he said. “They really have not gained the traction that people thought they would,” but with the VeriSign deal, “in one fell swoop, PayPal becomes a major player in a rapidly growing sector of the industry … and positions itself as a leading provider.”
The deal is part of “a continuing trend of nonbanks leveraging bank-built and operated payment systems for their financial gain,” Mr. Neumann said.
Gwenn Bezard, a research director at Aite Group LLC of Boston, said that PayPal probably would not gain a foothold in the merchant acquiring business without a deal like this.
“For PayPal to really get into merchant acquiring, beyond the mom-and-pop merchants they are serving today, trying to cannibalize” VeriSign’s customers simply by marketing to them “was not going to be enough,” he said. “They had to make an acquisition.”
PayPal said it has ordered a million of VeriSign’s one-time password-generating devices.
Ms. Tilenius said that eBay sellers are “the primary target” for the devices, since they are the most likely to be targeted by criminals trying to take over PayPal accounts. Her company has not decided whether to charge for the devices, nor does it know how many people would use them. “We’re focused on getting to one million, but we could get higher,” she said. “This is a nascent market.”
