Why PayPal Did Not Extend the eBay Operating Agreement

A lot of sellers are trying to figure out what eBay's announcement last week about payment changes means for them. From a corporate standpoint, eBay and PayPal split in July 2015. But from a user's point of view, not much has changed thanks to a 5-year operating agreement between the two companies. 

If you go to checkout on eBay, you generally see three options: pay with PayPal, PayPal credit, or Credit or debit card. But PayPal handles all aspects - the "branded" (PayPal), and the "unbranded" (credit or debit card). In all cases, the buyer paid into the individual seller's PayPal account (note in some cases, the merchant offers its own credit card processing).

Last week it was revealed that eBay signed an agreement with payments processing firm Adyen to become its major payments partner, and signed an agreement with PayPal that extends its PayPal branded service at least through July of 2023.

All indications are that buyers will continue to see a similar checkout experience by the time the 2015 Operating Agreement between eBay and PayPal expires, but sellers will see some big changes. Adyen will handle the credit and debit card processing on eBay's behalf (which would likely then be in a position to add additional options, such as bank transfers). And rather than a buyer paying into a seller's PayPal account, they'll pay into eBay's PayPal account.

How do we know this for sure, given the dearth of information in eBay's announcement to sellers last week? eBay CFO was more forthright with Wall Street analysts in November when he explained what it would mean for eBay to become the merchant of record: "eBay would start to be the seller and in doing so would aggregate that volume and be able to get lower PayPal or other payment operator rates."

PayPal CEO Dan Schulman told Wall Street analysts last week why he chose not to extend the existing Operating Agreement (OA) with eBay, but instead, enter into an additional agreement that extends into 2023: PayPal will be able to officially court other marketplaces beginning in 2020. 

eBay had created a list of marketplaces with whom it did not wish PayPal to engage with during the 5-year operating agreement. Schulman called them fast-growing, next-gen marketplaces, and no doubt Amazon and Facebook are on the list (PayPal is allowed to work with Facebook Messenger).

Here's what Schulman had to say last week about PayPal's relationship with eBay:

One, we renewed the "branded" relationship with eBay because it is far and away the most profitable element of the relationship. And two, it's the most important to our mutual customers. And three, it also happens to be the largest part of the business by far and away today. 

The "private-branded" processing is highly undifferentiated, it's commoditized and as a result it yields little to no profit. 

And as we go through this, we are going to be able to shed substantial cost because we aren't going to be doing that "unbranded" piece of it.

We'll still maintain the "branded," we'll still maintain the most profitable part of this business and what is today the largest part, but there is one other really important element, the OA, the operating agreement, also restricts PayPal from partnering with the largest and fastest growing marketplaces in the world as an MOR (Merchant of Record). So, if we had simply done an extension of the full operating agreement, that would have kept that prohibition in place and prevented us from becoming a fully neutral third-party platform. And the opportunity to partner with the world's largest marketplaces is immense.

Note that when Schulman said PayPal would be able to "shed substantial cost because we aren't going to be doing that "unbranded" piece of it," that means eBay will have to figure out how to offer customer service directly or through a third party. That's another change that users will have to deal with in the future - and given the importance of payments, getting good customer service is imperative.