Why PayPal and iZettle need each other to fight Square

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PayPal has agreed to acquire iZettle—often called the Square of Europe—for $2.2 billion in a move that could blunt Square’s prospects in key markets.

Stockholm-based iZettle, launched in 2010, has broad reach in Europe and Latin America and a large base of small and midsize businesses that use its mobile card readers and associated software. Recently iZettle added an e-commerce platform, streamlining that path for small merchants to online and omnichannel commerce.

PayPal hasn't been absent from this space — it launched its own Square-like device, called PayPal Here, in 2012 with an eye on international markets — but the company has a long history of buying successful rivals whenever its homegrown offering falls short.

A deal to buy iZettle is especially vital at a time when Square is looking to expand globally, offering merchants a menu of services that includes mobile, online and in-store acceptance through a single platform. Square in April paid $365 million to acquire Weebly, a San Francisco-based web design company, underscoring its desire to expand its services.

PayPal could add muscle and geographic reach to accelerate iZettle’s growth, making iZettle a more formidable opponent for Square, analysts say.

“PayPal can definitely level the playing field a bit, by providing greater capital access and marketing prowess for iZettle,” said Rick Oglesby, president of AZ Payments Group.

At the same time, Square is in an advantageous position in Europe, with a set of products and proprietary hardware that’s considered superior to iZettle’s in many respects, he suggested.

Square’s tools "could be a real difference maker in Europe, particularly when considering the higher cost of PIN-enabled EMV acceptance hardware. If Square can innovate unique solutions for PIN acceptance, they can reduce barriers to merchants’ entry and grow rapidly,” Oglesby said.

The iZettle deal also gives PayPal a boost in competing with other payments providers that support broader services including omnichannel solutions, said Thad Peterson, a senior analyst with Aite Group.

“PayPal’s biggest challenge over the past several years has been getting a toehold in bricks-and-mortar POS, and iZettle gets them there with a proven, tech-forward platform,” Peterson said.

iZettle CEO Jacob de Geer will continue to lead the company after the acquisition, reporting to PayPal COO Bill Ready, the companies announced late Thursday.

The deal will give PayPal in-store acceptance capabilities 11 new markets including Brazil, Denmark, Finland, France, Germany, Italy, Mexico, the Netherlands, Norway, Spain and Sweden, PayPal said in a press release. (PayPal, of San Jose, Calif., already has in-store acceptance in the U.K., the only market where iZettle and Square overlap.)

Analysts noted the price PayPal is paying double the estimated valuation of an IPO iZettle had planned for later this year on the Nasdaq exchange in Stockholm. That plan is now off the table.

“We think the potential acquisition of iZettle makes strategic sense for PayPal, as it would broaden the company’s reach to SMB retailers internationally, support its omnichannel strategy and help accelerate its digital wallet acceptance initiatives at retailers,” said Sanjay Sakhrani, an analyst at New York-based KBW, in a note to investors.

One area of uncertainty in the prospective deal is the track record of PayPal Here, Sakhrani said.

But PayPal’s lack of success with PayPal Here could be another reason PayPal needs iZettle. “iZettle seems to be more penetrated in the market relative to other competing products,” Sakhrani said.

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Mobile point-of-sale Online payments M&A PayPal iZettle U.S. Sweden