The latest numbers from PayPal indicate a “holding steady” position of about 36% transaction volume coming from non-eBay transactions for Q4 ‘06. All in all I think that number is positive…

...but I’m sure there’s a little dissatisfaction at the lack of growth in that volume (Q3 was a very similar 37% “off eBay”). This has been a major initiative at eBay/PayPal for some time now, with some serious efforts and shifts in strategy to find the off eBay transaction volume.

Several things should help this growth—the virtual MasterCard debit card being one, which is not only accepted wherever MasterCard is accepted, but earns PayPal interchange…not a bad deal. But I see this as mainly cosmetic growth. First of all, it doesn’t enhance the PayPal brand as a side-by-side online payment brand with Visa and MasterCard (as the transactions will be perceived primarily as MasterCard transactions). This is certainly still the end goal (well…one of them—physical world transactions are a potential Holy Grail…more than an end goal…).

PayPal will never get to the levels of off-eBay volume that (I’m certain) it wants unless it provides some inherent value to all of the stakeholders—merchants and/or individual sellers, account holders, and everyone in between.

Think back (all the way to 1999 or 2000…) to the primary traction that PayPal got—online auctions (which was the second or third business model that PayPal tried, by the way). Everyone was happy. eBay sellers had a relatively safe and efficient way of getting paid, and weren’t forced to open a merchant account to accept Visa/MC/et. al. eBay buyers didn’t have to send money orders and then hope and pray they received what they paid for. Brilliant.

The off-eBay strategy has been an attempt to leverage this ON eBay traction—using account holder affinity for the brand to extend to other transaction types. It has worked to the tune of 36-37% of all transactions, but have we reached the ceiling?

The spin that PayPal puts on it to sell high profile merchants such as Dell and Overstock has been the “attempt to reach those without a credit card or those unwilling to pay online with a credit card.” Our research shows that those consumer numbers cap out pretty quickly, and the up tick that a large merchant gets from accepting PayPal—while it does exist—is minimal (and obviously that’s going to vary depending on the specific merchant).

PayPal needs to find another niche (be it transactional, consumer, regional, or otherwise) to prove its worth and further bump up off eBay volume.

[1/26 update: Hey! Somebody reads my blog! PayPal contacted me to ensure that I understood that the SIZE of the pie (eBay’s overall transaction volume) is increasing quarter over quarter. My assessment was focused on the SLICE of the pie that is off-eBay volume (vs. on-eBay). Point taken, clarification provided…]