PayPal will become a separate, publicly traded company, allowing management to focus on the lucrative funds-transfer business, which all banks covet because of the fees involved in moving money around.
Two major factors are driving the decision by PayPal's parent, eBay (EBAY) - Get Report . The latest is Apple's (AAPL) - Get Report introduction this month of its Apple Pay service, in direct competition with PayPal.
The other factor is the move by Lending Club, a peer-to-peer lending company, to go public. Lending Club's decision was another signal that funds transfers were getting a lot of interest from investors, including Google (GOOG) - Get Report .
Of course, there was the earlier effort by billionaire investor Carl Icahn to get eBay to spin off PayPal so that it could focus on the funds-transfer business. Surely, this set the stage for the current decision.
The banking industry is clearly changing because of advances in information technology. But traditional banks have been slow to adapt, keeping outdated computer systems in place and resisting combining and upgrading systems following acquisitions.
Banks have also been reluctant to abandon their network of branches, which are costly but less important because so much banking is now done online.
The Great Recession also devastated the banking industry and brought on a host of new regulations, further discouraging banks from modernizing their payments systems. So new alternatives to "commercial" banking have arisen, including a number of technology-based start-ups, which are starting to define the financial industry.
PayPal is in good shape. It has a large customer base, is profitable, is growing rapidly and is the most successful of the "first movers" into the funds-transfer business.
Still, there are some who question whether PayPal has the right model for the new world of banking. It isn't altogether clear what the "right" model is.
Some other major players have tried to get into the arena and haven't done that well, Google being one of the most prominent. This is where Apple Pay comes into the picture, as many analysts think that Apple Pay "gets it right."
That is a huge threat to PayPal and an important reason for eBay to spin off the operation so that it can fully attend to the competition.
At the time of publication, the author held no positions in any of the stocks mentioned.
This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.
TheStreet Ratings team rates EBAY INC as a Buy with a ratings score of B. TheStreet Ratings Team has this to say about their recommendation:
"We rate EBAY INC (EBAY) a BUY. This is driven by some important positives, which we believe should have a greater impact than any weaknesses, and should give investors a better performance opportunity than most stocks we cover. The company's strengths can be seen in multiple areas, such as its growth in earnings per share, revenue growth, largely solid financial position with reasonable debt levels by most measures, good cash flow from operations and expanding profit margins. We feel these strengths outweigh the fact that the company has had somewhat disappointing return on equity."
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TheStreet Ratings team rates APPLE INC as a Buy with a ratings score of A+. TheStreet Ratings Team has this to say about their recommendation:
"We rate APPLE INC (AAPL) a BUY. This is based on the convergence of positive investment measures, which should help this stock outperform the majority of stocks that we rate. The company's strengths can be seen in multiple areas, such as its revenue growth, largely solid financial position with reasonable debt levels by most measures, notable return on equity, expanding profit margins and solid stock price performance. Although no company is perfect, currently we do not see any significant weaknesses which are likely to detract from the generally positive outlook."
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