PayPal Pays Up to Get Into Stores

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PYPL 2.77%

has long been the king of peer-to-peer payments and a big player in online payments, but has had a very limited presence in stores.

The company’s $2.2 billion acquisition of a fast-growing Swedish payments company called iZettle is a smart but expensive way to fill that gap. The deal will put it in clear competition with Square, a payments processor that has gained a huge following among small businesses, and big point-of-sale terminal providers such as Worldpay.

PayPal is paying a high price for a small company in a market that is already fairly crowded—but it is the right move strategically because retailers increasingly want to be able to accept payment in any form, online or in-store, quickly and easily.

If successful, the deal will make PayPal look more like WorldPay, which provides the full-blown checkout terminals at retailers. The industry has been busy with consolidation—Worldpay was created last year when


of the U.S. took over the U.K.’s WorldPay.

But iZettle technology is mobile or tablet based, with a small, light card reader that is cheap compared with full-blown checkout terminals. That gives PayPal a lower cost option that should be useful for its own small business customers, and gives it the cool factor to help it compete with Square, the payments company set up by


Jack Dorsey.

The question will be how quickly it can roll out iZettle’s technology: the Swedish group has just 500,000 small business customers so far; PayPal has 19 million. Square is also much bigger. Over the past four quarters, it processed gross payment volume of $69.5 billion. According to PayPal’s press release, iZettle is expected to have a gross payment volume of $6 billion in 2018.

The price looks steep. iZettle said only this month that it aimed to list on


in Stockholm with a valuation expected to be about $1.1 billion. PayPal has just doubled that.

PayPal’s headquarters in San Jose, Calif.


Justin Sullivan/Getty Images

iZettle is loss making and according to PayPal should become profitable in 2020. But it has been growing rapidly with revenues after fees to banks and card networks up 60% a year over the past three years to reach an estimated $130 million for 2018. If that growth rate continues, the $2.2 billion that PayPal is shelling out would be about 11 times 2019 revenues.

That is much higher than PayPal itself, or Worldpay, which trade at enterprise values of 5.1 and 7.7 times 2019 revenues, respectively. However, it is a 15% discount to Square, according to analysts at

Deutsche Bank

PayPal is late to the innovations that Square helped pioneer and is paying a high price to catch up. But the cost is necessary to plug the gap.

Write to Paul J. Davies at

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