Recently eBay announced plans to buy VeriSigns payment processing business for $370 million and merge the processor with PayPals operations. PayPal is already the largest online payment company; however, VeriSigns processor would make for a profitable asset, by enabling PayPal to compete with credit card companies known for raising retailer fees. The merge will also help take PayPal beyond its core auction-based business to now tackle small and medium-sized businesses.

VeriSigns payment gateway software creates a direct connection between web businesses and payment processors. These processors are generally run by major banks, therefore cutting out the credit card business. The addition is expected to add $100 million to PayPals top line in 2006.

As part of the deal, eBay will also purchase up to 1 million VeriSign security tokens. Each token has constantly changing numbers that need to coincide with a synchronized central server. These tokens can be embedded in computers and other devices that along with a password, create a two-factor authentication system.

Security has always been a costly issue for PayPal as they require a large team to deal with fraud.

This merger is a huge step forward for PayPal. This shift will allow PayPal to process a greater number of transactions through banks rather than credit cards and work with more businesses than individual sellers. This in turn will lead to less credit card fees and potentially a lesser percentage of fraudulent sellers by working with registered business owners.