Earlier today, PayPal president Scott Thompson presented at the eBay Analyst day (the first done by the company since 2006) and I will do my best to summarize his key points here in this post.

The primary message I heard was that PayPal intends to dominate e-commerce transactions worldwide. In addition, I’m including the PayPal-specific comments from eBay CEO John Donahoe’s introduction to the day.

JOHN DONAHOE, CEO eBay

PayPal was the darling of the eBay Analyst Day. In this opening remarks, CEO John Danahoe could barely contain his enthusiasm for PayPal. Just as there are leaders for each retail segment offline (e.g. Wal-Mart, Nordstrom), there are multiple winners online. Yet when it comes to Internet payments, he anticipates that there will be only one winner and that PayPal will dominate. PayPal aims to enable consumers to shop where they want, when they want, in whatever format they want. Safely, reliably, and conveniently.

PayPal will generate one-third of eBay’s 2009 revenue.

Donahoe stated that PayPal has enormous potential, yet is not very well understood. He summarized three key advantages:

Powering e-commerce globally – The online shopping experience is better than it was five years ago, but there are still challenges. Consumers have to jump between sites, login in, provide their personal information; the payment process and landscape is very fragmented. PayPal was originally developed to solve the payment challenge for buyers and sellers on eBay but now it addresses similar pain points across the entire e-commerce market, globally.

PayPal “rides on top of offline card and banking systems” bringing them online in a flexible and safe way. He described PayPal as a “hybrid financial institution and Internet company” that is very hard for either financial institutions or Internet companies to replicate.

Bigger than e-commerce – PayPal is the only global payment system (more on this in ST’s remarks below). The focus now will be to extend PayPal beyond eBay and e-commerce to government transactions, mobile, and the non-profit realm.

Donahoe observes that the “opportunity at PayPal is bigger than the opportunity at marketplace” and predicted that “PayPal will power e-commerce and become the leading online [global] payment network.” I think he used the world “exciting”to describe PayPal at least half a dozen times.

SCOTT THOMPSON, PayPal

Scott Thompson, president of PayPal, outlined a strategy to expand PayPal globally, strengthening its dominant position online and expanding beyond e-commerce.

Impressive growth: 70 million active users today (23% more than 2007). This marks a shift in emphasis from registered users to active users (once the count on registered users got over 150 million, there was no point in counting.)

Payment systems worldwide are local, do not connect to one another, and are not interoperable. Echoing the comments Donahoe made earlier, Thompson explained that PayPal bridges the worlds of traditional financial networks and the Internet. He said it sounds easy, but is hard to do: “You can’t just Internet your way into payments” (sounds like something one of my partners here at Glenbrook would say). PayPal makes traditional payment systems work better on the Internet, work better together, and is doing it around the world.

Thompson used the following analogy to describe PayPal: when you travel to the UK, you can’t just plug your laptop into a power outlet in London. You need an adapter. PayPal is that adapter for payments.

PayPal operates in 190 markets, 17 local languages, and transacts in 19 currencies. PayPal operates with 27 global financial networks and 15,000 local banks around the world. Thompson touted PayPal’s regulatory licenses to operate in most global markets and explained that it “takes years and significant investment” to obtain. He directly challenges his competitors global payment capabilities: “Google doesn’t have it. Amazon doesn’t. The banks don’t have it. Only PayPal.”

Thompson noted PayPal’s “closed loop” of direct relationships with both buyers and sellers in all transactions (although AmEx has a similar closed loop network) and explained that because PayPal knows what its customers are buying it can “connect to sellers” where they will want to buy more.

He also stressed that PayPal is better than its competitors at risk management and preventing fraud. He explained that the “learning curve in fraud management is very steep, and very expensive” and bragged that “PayPal has ten years battling fraudsters around the world” and can help drive down fraud while simultaneously driving up sales because “we are better at separating the good guys from the bad.”

Thompson outlined how the planned combination of PayPal and Bill Me Later will enable merchants of all sizes to sell more online. Plus, later this year, Bill Me Later will be fully integrated into the PayPal Wallet, enabling consumers to “either pay now or pay later” on each purchase.

He described how parents can now setup and manage sub-accounts for their children. The PayPal Student Account can be associated with an debit card for use in the physical world. Funds can be easily transferred to the student account online and are then available for use (online or off) immediately.

PayPal intends to nearly DOUBLE payment volume over the next three years. (It was noteworthy that the global recession was not mentioned during the presentation.) Thompson noted that PayPal is growing significantly faster than e-commerce in general is growing. And that PayPal’s growth is double that of the major card networks.

Hr reviewed three prongs to the PayPal growth strategy:

1) Increase penetration on eBay

Projected growth on eBay is a function of seller coverage and consumer preference. A one-percent share increase within eBay results in $17 million in incremental revenue for PayPal. While market share in No America is 79%, it is only 41% Internationally so there is still plenty of room to grow on eBay. And new PayPal users on eBay (growing at a rate of 3 million new accounts per quarter) use PayPal across the Internet.

2) Grow share in merchant services

PayPal helps merchants to sell more online – those that enable PayPal Express Checkout experience up to a 14% increase in sales. Today, eBay has approximately a 5% share of global merchant services, as much as 9% if you include eBay volume. PayPal has specific strategies for each segment of the market: sole proprietors, small/medium business, and large merchants. Consumers are increasingly global, and increasingly security conscious. They prefer to use PayPal when they shop online.

Note the significant growth among SMEs and large businesses. Merchants have discovered the value of payment choice in encouraging incremental sales and higher transaction values, particularly via BillMeLater.

PayPal anticipates that it will achieve 14% merchant services market share in No America by 2011. International market share is estimated to be 5-6% by 2011, citing PayPal’s “unmatched facility for cross border transactions.” PayPal’s global e-commerce market share is projected to be 12-14% (on and off eBay) by 2011.

3) Adjacent Payment Markets:

The third element of PayPal’s growth strategy is expansion outside e-commerce. Thompson estimated the non-retail marketplace online as $1 Trillion. He specifically noted mobile, social networks, and non-profits (government opportunities were cited by Donahoe earlier). PayPal has demonstrated early leadership in mobile payments, experimenting with solutions in lots of mobile segments until there is industry consensus where consumers will go. Although non-profits were positioned as an adjacent opportunity, there are over 100,000 non-profits currently using PayPal. We’ve watched as PayPal has customized its services for non-profits with special on-boarding process, special features, and special pricing. Will this be the approach used for other verticals?

Not unlike Amazon, PayPal fosters a close relationship with developers that are creating applications for use online and on the go via mobile devices. The PayPal global Internet payments network can be used to exchange value not just on eBay and within e-commerce but beyond. Thompson acknowledged that opening up the developer network while maintaining a secure environment is challenging and that’s why none of the other payment platforms out there has done it [While Amazon has done this, and done it for payments, PayPal does not consider Amazon to be a global payments platform]. PayPal’s global reach, closed loop network, and risk management/anti-fraud capabilities uniquely position it to “accelerate innovation on the web” with “PayPal as the engine in the middle.”

Overall growth projections

Revenue projections

Thompson said he anticipates a modest drop in margin as BillMeLater is integrated this year, returning to healthy 18-20% margins in medium term and even higher margins in the longer term. As the Internet gets bigger, e-commerce is expected to increase from 5% of offline retail today to 10-15% of offline retail. PayPal intends to dominate a large segment of that growing pie, both here in the US as well as internationally.

You can listen to the eBay Analyst Day webcast here and download the presentations here (217 slides in PDF format).

Additional Coverage:

• Be sure to also check out the real-time commentary on Twitter – eBay’s own Richard Brewer-Hay covered the Analyst Day on Twitter using the ID ebayinkblog (a first for a major company?) and the all commentary is tagged #ebayink.
• Scot Wingo’s eBay Strategies blog
• WSJ.com: As Auctions Slow, eBay Targets PayPal for Growth
• Bloomberg: EBay Says PayPal Will Be Bigger Than Auction Business
• NYTimes Bits Blog: Chief Promises a ‘New EBay’ and Talks Up PayPal
• Ina Steiner’s AuctionBytes blog