PayPal Spawn Have Advanced Where the Online Payments Giant Has Stood Still

PayPal's biggest threat as it prepares to split from eBay next year may come from former employees who back a crop of new businesses serving shoppers who increasingly prefer to pay with mobile phones rather than personal computers.

Though none of the new companies have the breadth of services offered by PayPal, which has more than 152 million users and deep ties to merchants like Home Depot both online and off, they are entering areas that the once-nimble online-payments service should own - but doesn't.

Stripe, which helps merchants like Apple Inc (AAPL.O) and car-sharing service Lyft accept payments made by smart phones, is backed by PayPal co-founder and former chief executive Peter Thiel and former chief financial officer Roelof Botha. Thiel co-founded Founders Fund while Botha is a partner at Sequoia Capital.

Square, a start-up that lets merchants accept credit-card payments over mobile phones and tablets with smaller fees than they had been paying via traditional credit-card networks, is also backed by Botha. Affirm, founded by Max Levchin, PayPal's former chief technology officer, offers split-second financing to shoppers.

"The reality is that innovation of payments is moving so fast and PayPal is behind the curve on every dimension," said Keith Rabois, a former PayPal vice president who now backs both Stripe and Square through Khosla Ventures and sits on Affirm's board. "I would expect that both (Stripe and Square) could be larger than PayPal."

PayPal's spinoff, announced on Tuesday, comes as Apple prepares to launch its own mobile wallet, Apple Pay, a move that payments experts said may fundamentally shift the payments landscape by letting customers pay for goods in stores by tapping their phones at a compatible point-of-sale system. The payments are authorized by their fingerprint and incorporate some aspects of Stripe.

Ebay said that as an independent company PayPal will be able to compete in all kinds of electronic payments. "PayPal's opportunities have never been greater – it is a rapidly growing global leader in digital payments and the most trusted digital wallet," an eBay spokeswoman said.

Some early PayPal employees, known as the PayPal "mafia" around Silicon Valley, think the company still has some zip.

"Most former senior PayPalians have been predicting some form of independence for a while," said Levchin, adding that PayPal would be a more formidable competitor as a separate company.

Other PayPal mafiosi said the company's upcoming independence won't be enough to overcome its reputation as risk-averse and late to adopt new technology, hampering its ability to recruit top engineers.

"It's a necessary, but not necessarily sufficient step, for PayPal," Rabois said.

The new competitors are poised to overtake PayPal when mobile transactions exceed those made using personal computers, analysts said.

EBay bought payment gateway Braintree last year for about $800 million to bolster its presence on mobile devices, where PayPal has lagged other fast-growing startups. Braintree's Venmo app allows consumers to make payments on their mobile phones and tablets.

The deal may have come too late to compete with Stripe, founded in 2010 and now valued at $1.75 billion, which is now considered the leader in mobile transaction payments. General Catalyst, a venture fund that has backed Stripe since its founding, announced a program Tuesday that makes investments of up to $500,000 in start-ups that are built on top of Stripe, including Baremetrics, a company that helps businesses analyze data they get from Stripe.

These upstarts have taken payment in directions PayPal was slow to try.

Stripe, for example, pioneered a system where the user never leaves the merchant's page to pay, compared with the PayPal method of drawing users temporarily to its own site to log in. Stripe's technology, adopted by companies such as Lyft and delivery service Postmates, is especially effective for companies that use mobile apps.

Stripe is also working with Alipay, the payments unit affiliated with Alibaba Group, the Chinese online juggernaut. Amazon and Google also beefing up their own payment services.

"They have a lot of ground to make up," John Collison, co-founder of Stripe, said of PayPal. "Maybe they can, maybe they can't."

(Reporting by Sarah McBride and Deepa Seetharaman. Editing by John Pickering)

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