Why eBay abandoned PayPal for a smaller European competitor

Pieter van der Does, CEO of Dutch payments firm Ayden.

E-commerce giant eBay announced Wednesday that it will be replacing PayPal with Adyen as its primary payments provider.

PayPal posted better-than-expected results on Thursday, but this was enshrouded by the news of eBay looking to eventually replace it.

It sent shares of PayPal — a company with a market value of more than $100 billion — down sharply in U.S. extended trading Wednesday. PayPal's stock continued to plummet Thursday, while shares of eBay rose near a record high.

What is Adyen?

Adyen, a much smaller start-up based in the Netherlands, is an online payment company that provides businesses with backend payment services including credit card processing and point-of-sales (POS) systems.

It was last valued at $2.3 billion following an investment round led by Iconiq Capital, and has since been encircled by rumors of going public. While co-founder and CEO Pieter van der Does has not yet disclosed a date on an eventual initial public offering (IPO), Bloomberg has reported that an IPO could come as early as this year.

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PayPal may be one of the most established payment services providers around, but it has been faced with fierce competition from a multitude of big payment players such as Square, Stripe and iZettle.

And Adyen's business is profitable, but its size pales in comparison to U.S. giant PayPal.

So why did eBay choose to abandon PayPal for a smaller European competitor?

'Lower costs' for merchants

The company explained in a statement Thursday that its decision to integrate Adyen's payment processor would result in lower costs and more control of finances for its merchants.

The move is a part of eBay's strategy to 'transition to full payments intermediation,' the firm said.

EBay said its partnership with Adyen's technology would enable sellers to have a more central view of their data, and to manage and track all transactions and customer interactions via eBay.

Adyen processes the backend payment services for businesses using its technology, which means users do not necessarily interact with Adyen directly.

With PayPal, however, users must sign up for a PayPal account and interact with its interface before completing a transaction.

Adyen also boasts a huge clientele that includes the likes of Facebook, Arbnb, Spotify, Uber and Netflix.

'Integrated checkout experience'

EBay said that the integration of Adyen would also provide customers with 'greater choice' when checking out.

'We believe that we can offer a more seamless experience while giving buyers and sellers more choice for payment and payout options,' eBay Chief Executive Devin Wenig said on a conference call with analysts, according to the Wall Street Journal.

The firm added that it would be able to expand payment options into more regions around the world. Adyen lets consumers pay in 150 currencies.

It will also let buyers manage checkout within eBay, rather than being directed to PayPal before completing a purchase.

In an emailed statement to CNBC, Adyen CEO and co-founder Pieter van der Does said: 'We are thrilled that eBay, one of the most successful e-commerce companies of all time, has chosen Adyen as its new, global payments processing partner. Adyen is uniquely positioned to meet the needs of high volume global marketplaces like eBay. We look forward to powering transactions on eBay, starting in North America, and supporting their continued global growth.'

EBay will continue to let customers use PayPal as an option for checking out until July 2023, but most of eBay's payments will be processed by Adyen by 2021.

The firm said in its statement that PayPal would 'remain an important partner to eBay.'