eBay Grooms Another Phenom

Here's a little-known fact about eBay(EBAY Quote): It's not one of the most successful e-commerce companies in the world.

It's actually two of the most successful e-commerce companies in the world -- eBay, the global network of auction and retail sites, and PayPal, its online-payment technology subsidiary that fuels the bulk of eBay transactions. Of the two, PayPal may emerge as the bigger phenomenon in the long run.

In making PayPal the most common method of payment on its sites, eBay has slowly incubated the technology, working out its kinks and tightening up the seams that could make buyers and sellers alike consider it a lot easier, cheaper and safer to use than credit cards -- the default method of payment for online consumer transactions for now.

"In our wild aspirations, we think PayPal has the potential to be as big, if not bigger than, eBay," says Jeff Jordan, the eBay executive in charge of the PayPal subsidiary. (That Jordan was named PayPal chief in December after a five-year stint overseeing eBay's North American operations shows how seriously eBay is taking PayPal.) "But we have a whole lot of executing to do before we get there."

Jordan isn't exaggerating on either count. It's hard to overstate how far PayPal is from dethroning Visa, MasterCard and American Express as the three kings of online payments, but the opportunity is eBay's to botch. PayPal contributed only 21 cents of every dollar the company made in revenue last year, but it grew faster -- 59% compared with a 48% growth rate for the rest of eBay.

Analysts and investors are starting to wake up to the fact that PayPal may be more than just a technology to benefit eBay sellers. "We believe [PayPal] could be one of the more misunderstood and undervalued initiatives that the company is working on," said Scott Devitt, an analyst at Legg Mason. "PayPal has the platform to challenge the credit card infrastructure over time." (Legg Mason has no underwriting relationship with eBay.)