Eyeing Expansion of PayPal, eBay Buys VeriSign Payment Gateway

Looking to beef up its PayPal online payment service and enhance its reputation with online merchants outside of its online auction kingdom in particular, eBay said it would acquire the payment gateway system of security company VeriSign.

EBay said its PayPal unit, which it took over in a US$1.5 billion acquisition more than three years ago, would acquire the VeriSign payment solution in a deal worth around $370 million. The prize in the buy is VeriSign’s payment gateway, which handled some $40 billion in online payments last year.

The acquisition will be used to offer PayPal as a payment solution to “tens of thousands” of new small and mid-sized businesses that engage in various types of online commerce, eBay said.

Added Security

In addition to the acquisition, eBay said the deal calls for VeriSign to provide eBay security support services and technology advice, including the purchase of 2 million security tokens. Tokens are physical devices, often key-chain sized USB plug-ins, that are used to create so-called two-factor security, which requires users to provide both a security password and the physical token.

PayPal President Jeff Jordan said VeriSign’s gateway “perfectly complements” the existing PayPal technology. “This acquisition allows PayPal to give our customers more choice in payment services and grow our merchant services business even more quickly,” he added.

Analysts said the acquisition would help eBay build a more secure PayPal. While that may help soothe eBay buyers and sellers increasingly concerned about identity theft and other online security issues, it may also finally help propel PayPal into more of an all-purpose online payment solution that reaches well beyond the massive eBay community.

Two Better Than One?

Two-factor security will begin to be rolled out in 2006, eBay said.

Security is a major concern to PayPal and eBay users, who have been repeated targets of phishing attacks, which use e-mails meant to look like official correspondence from the companies to trick users into turning over their personal and financial information to third party sites.

EBay said the purchase will be worth an additional $100 million to the top line at PayPal in 2006. The $370 million purchase price will be paid in either cash, stock or a combination, the companies said.

EBay may also be eager to beef up its payment technology, and expand its merchant and consumer customer base, before Google’s planned Google Wallet is released. Google executives have said the wallet service will not be a direct competitor to PayPal, but many analysts say it makes sense for Google to aim for the same payment middle-man spot where eBay has long held high ground.

“A Google payment system may not compete directly with PayPal, but it could limit PayPal’s expansion beyond eBay,” said Piper Jaffray analyst Safa Rashtchy. “Anything that Google or Yahoo might do in this area could be a threat to eBay’s ability to expand PayPal outside of eBay. “

Being first to market with two-factor security will likely go a long way with merchants and others worried about online fraud. But some security experts have already predicted that hackers and others bent on stealing personal information will stay a step ahead of the changing technology.

A report released this summer by a UK researcher said the fact that ATM cards — a form of two-factor security with both a PIN and the card needed to conduct a transaction — are often stolen and compromised is proof that criminals will find a way to defeat even the most sophisticated security technology.

Shopping Spree

The latest acquisition comes as many tech world observers are still scratching their heads over eBay’s most recent buy — the $2.6 billion takeover of peer-to-peer voice calling company Skype.

Many see little synergeies in that deal, while the effort to beef up PayPal is seen as a winner, not only because PayPal is widely seen as being in the best position to become the Web standard for micro-payments or credit-card alternative, but also because the deal helps service eBay’s core auction and fixed-price commerce platform.

“The Skype deal spooked some people, but there is a case to be made for it and eBay has been actively making that case,” said Forrester Research analyst Charlene Li. Because the VeriSign deal is much closer to its core business, the new buy likely won’t require the same level of hand-holding, she added.