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Tickers in this Article: ODP, GOOG, EBAY
In order to enhance its mobile payment platform, e-commerce service provider eBay Inc. (EBAY) has signed a deal with Discover Financial Services, thus extending PayPal's services to 7 million merchants next year. Following the news, eBay shares were up 2.51% to $47.00 by the end of day yesterday.

Discover is the fourth-largest U.S. credit card issuer after Visa Inc, MasterCard Inc and American Express Co.

Under the partnership, PayPal will utilize Discover's credit card network to enable PayPal users to make payments at retail stores starting from April 2013. Discover will integrate PayPal's payment system into its software, which will be uploaded to millions of point-of-sale (POS) terminals that support Discover Card payments.

PayPal users will now be able to pay by just swiping their new cards through existing check-out machines and entering a four-digit PIN. According to Don Kingsborough, a PayPal executive, merchants will not need to buy any new hardware or software to accept payments through PayPal.

PayPal, which accounts for almost half of eBay's annual revenue is expanding beyond its online payments service and finding new ways to get a foothold in the offline world. Last year, the company expanded its offline partnerships and announced that PayPal point of sale was gaining traction as 15 national retailers, including Home Depot Inc and Office Depot Inc (ODP) had agreed to accept PayPal as a payment mode.

We believe that this deal will greatly accelerate PayPal's in-store payment efforts. By using Discover's network, PayPal can increase its addressable market, without requiring any significant integration work by merchants. This puts PayPal in a better competitive position against rival mobile payment systems such as Google Wallet, Isis, Square and others.

Aided by growth in its PayPal business and mobile commerce, eBay recorded a strong quarter with both revenues of $3.40 billion and earnings of 51 cents exceeding expectations. eBay's PayPal remained the star performer, generating total payment volume (TPV) growth of 1.8% and 19.9%, respectively from the previous and year-ago quarters.

We believe that eBay is taking all the necessary measures for continued growth in mobile payment in the near future. Both Payments and Marketplaces are showing improving trends compared with the year-ago quarter, indicating its changing business profile.

Though eBay's payment business shows great promise, competition may be expected to pick up as banks and other companies announce their own payment systems and Google Inc's (GOOG) digital wallet gathers steam. Currently, eBay shares carry a Zacks #3 Rank, indicating a short-term Hold rating.

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