Friday, July 13 08:01:41
"Neither a borrower nor a lender be" is a well-known warning from Shakespeare's "Hamlet." PayPal, eBay Inc.'s online payment service, heeded that advice for much of its existence, charging fees for processing transactions rather than lending money that may not be repaid. But Bill Me Later, one of eBay's fastest-growing businesses, is changing that.
BML, as it's known, offers credit to online shoppers, letting them pay typically a few months after purchases. EBay bought the business for almost $1 billion in the midst of the 2008 financial crisis. Last year, BML accumulated $2.3 billion in loans, up 64 percent from the previous year. Wall Street will be looking for the unit to keep up its hot growth streak when eBay reports second-quarter results on July 18.
BML is a potentially juicy new source of profit growth for eBay. The business also helps other parts of the company - for example, it could make PayPal more profitable by reducing funding costs, analysts say. "This is one of the most prominent and fastest-growing businesses eBay has, and I think it becomes more prominent going forward," said Gil Luria, an analyst at Wedbush Securities. "BML is very important because it allows eBay to expand PayPal into a true financial product, as opposed to a purely transactional service," Luria added. "But PayPal will take on more credit risk as BML expands," Luria warned. If BML gets big enough and PayPal's growth slows, that could pressure eBay's valuation, he added.
For now, BML is helping eBay make new waves in the online payment business. BML was the third most popular alternative online payment service in 2011, ranking behind the leader PayPal and Amazon.com's payment option, according to Javelin Strategy & Research. Consumers used BML 14 percent of the time last year, up from just 1 percent in 2010, Javelin said in a recent research report. "PayPal and Bill Me Later are a potent payment combo that dominates online payment alternatives," Kerry Rice, an analyst at Needham & Co, wrote in a recent note to investors. "Growth in popularity of BML should benefit eBay's payments revenue growth."
Scott Devitt, an analyst at Morgan Stanley, expects BML revenue to top half a billion dollars by 2015 - up from less than $200 million last year. Operating income could be almost $70 million in 2012, and the business will likely get more profitable as it grows, Devitt added in a note to investors earlier this year.
One of BML's main benefits is that it gives eBay a lucrative way to use its $7 billion stash of overseas cash. This money has been sitting outside the United States earning paltry interest - and eBay cannot return it to investors in the form of dividends without getting hit with a big tax bill when the money comes back to the United States. Since September 2010, some of this overseas money has been used to fund BML's loan portfolio - and the standard annual interest rate that BML customers pay is close to 20 percent. As of the first quarter of this year, about half of this portfolio was funded with overseas cash.
"BML is a really productive use of the offshore cash. It earns a lot more than just 1 percent," said John Donahoe, chief executive of eBay, during an interview after the company's first-quarter results in April. Chief Financial Officer Bob Swan came up with the idea, Donahoe noted. "He is taking every opportunity to repatriate cash when we can," the CEO added. ( C) Reuters