Why Apple Inc. Excluded eBay's PayPal From Apple Pay

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Apple Pay. Source: Apple.

Launching later this month, Apple's new Apple Pay mobile payment service looks rather promising. Perhaps the most significant reason why Apple Pay has so much potential is because the Mac maker put the effort into inking a comprehensive set of partnerships with card issuers and payment processing networks.

Getting them on board will be critical to the service's success. Yet one prominent payment processor is notably absent from the list: eBay's PayPal division.

The friend of my enemy is my enemy
Considering PayPal's prominent position in the payment world, it wasn't merely an oversight. Indeed, Apple approached PayPal to discuss inclusion in Apple Pay, according to a new report from Bank Innovation. The two companies were in the midst of negotiations, but PayPal was also working on a possible partnership with Samsung to get integration with the Galaxy S5's fingerprint sensor.

PayPal and Samsung announced their partnership in February, releasing a specialized payment app for the Galaxy S5 in April.

eBay CEO John Donahoe reportedly pushed to make the deal happen, despite strong opposition from then-PayPal President David Marcus (who has since left for Facebook). Marcus realized that partnering with Samsung could threaten the relationship with Apple, but Donahoe got his way.

Threaten the relationship with Apple it did, and the company was supposedly so angry with PayPal that it "kicked [PayPal] out of the door." The episode also contributed to Marcus' decision to leave PayPal.

Was it worth it?
The Galaxy S5's fingerprint scanner has gotten its fair share of unfavorable reviews. For example, here's The Verge's take:

One of the S5's flagship features is its fingerprint sensor, which lets you unlock your phone and even pay for things with one swipe of your finger. It does work, as long as you hold the phone in two hands and oh-so-carefully swipe your finger down the exact center of the home button, at the perfect angle and speed. If you get it wrong, it falls back on a pointlessly complex alphanumeric password. It's impossible to do in one hand, and I could type the world's longest, most secure password in less time than it typically took me to get the sensor to work. 

On top of that, Samsung is only including its unreliable sensor on the Galaxy S5 and Tab S. The South Korean conglomerate said it sold 11 million units in the first month after launch, while Apple sold nearly that many iPhone 6 and 6 Plus devices in three days. The iPhone 6 and 6 Plus volume will inevitably far outpace Galaxy S5 units, so PayPal might have bet on the wrong horse.

This was a key strategic mistake by Donahoe, and could have even played a role in eBay's recent decision to spin off PayPal. The timing was certainly a bit peculiar. After publicly duking it out with activist investor Carl Icahn and eventually striking a deal that did not involve a PayPal spinoff, eBay had a sudden change of heart less than a month after Apple Pay was unveiled.

Publicly, PayPal maintains that it will also benefit from Apple Pay to the extent that the Mac maker can catalyze widespread adoption of mobile payments. Still, Donahoe is probably kicking himself behind the scenes for costing the company the Apple deal.

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The article Why Apple Inc. Excluded eBay's PayPal From Apple Pay originally appeared on Fool.com.

Evan Niu, CFA owns shares of Apple and Facebook. Evan Niu, CFA has the following options: short January 2015 $60 puts on Facebook and long January 2015 $35 puts on Facebook. The Motley Fool recommends Apple, eBay, and Facebook. The Motley Fool owns shares of Apple, eBay, and Facebook. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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