Yahoo's PayPal Hires Portend Heated Battle in Payments

Yahoo (YHOO) is on the cusp of reinventing itself, potentially as an important payments provider that could rival not only PayPal, but Visa (V) and MasterCard (MA).

According to reports, this week Scott Thompson, Yahoo's chief executive and the former president of PayPal, hired Sam Shrauger, PayPal's vice president of global product and experience, to head up Yahoo's commerce division.

Shrauger's reported hiring, in addition to Yahoo's planned layoff of 2,000 employees, suggests that the Sunnyvale, Calif., company wants to claw its way back to relevance through banking and payments, experts say. Chiefly, Yahoo has an opportunity to close the loop between e-commerce and payments.

"Yahoo has always had or been viewed as a traditional e-commerce player, and I think [Thompson] is trying to think beyond this; he wants to extend to offline solutions as well, which means mobile," says Beth Robertson, director of payments research at Javelin Strategy and Research.

A PayPal representative confirmed Shrauger's departure but would not provide further detail. Yahoo did not confirm Shrauger's hiring but said it plans an announcement about its commerce division soon.

In hiring experienced executives, Yahoo can overcome its rocky history with payments, which has largely depended on other companies.

Yahoo discontinued its own bill payment service, which used Fiserv's CheckFree on the backend, in 2007. Yahoo owns a roughly 40% stake in Alibaba Group, which spun off its Alipay unit in 2010, citing the requirements of Chinese regulators. In so doing, Alibaba distanced Yahoo from a significant payments platform, but left a small door open. Alipay, the largest third-party payments provider operating in China, has a larger transaction volume and a larger base of users than Paypal, experts say.

"Yahoo is gearing up to make a big play in the payments and e-commerce space, if they first hired Scott Thompson and then Sam Shrauger," says Andy Schmidt, research director for global payments at CEB TowerGroup. For Yahoo to experience a renaissance, it will "have to go beyond what Google (GOOG) and PayPal are doing in bringing advertisers, merchants and buyers together."

PayPal, a unit of eBay (EBAY), is testing a cloud-based version of electronic wallet at the point of sale. In February, it said it had outfitted point of sale terminals at 2,000 Home Depot stores to accept payments using its digital wallet.

Yahoo will also compete with Google, whose efforts to introduce a digital wallet have been slow and have met with problems that include a security hole that caused Google to temporarily shut down provisioning of its prepaid cards through the wallet in March.

Despite its setbacks, "Google … will probably be out in front in this process, cutting across physical and virtual world assets," says Paul Grill, partner at First Annapolis Consulting.

Thompson, in his new role at the head of Yahoo, "is going to position Yahoo as a company that can blend together e-commerce, mobile commerce and somehow brick and mortar commerce … it will be at the forefront of bridging the gap between these three channels," says Gwenn Bezard, a research director at Aite Group.

Shrauger, who joined PayPal in 2004, is credited with a variety of product and strategy roles, according to an internal memo from David Marcus, president of PayPal, sent to staff on Monday. His accomplishments include launching PayPal’s merchant services efforts, leading its integration of its Bill Me Later acquisition and launching PayPal's digital goods initiative, which enables consumers to buy and sell things like digital games and other virtual content.