Following the merger of Paypal Holdings Inc (NASDAQ:PYPL) with eBay in 2003, the company placed a self-imposed ban on the use of its services on online gambling platforms. One of the main reasons given at the time was the fact that online gambling is the only arena behind adult entertainment in terms of being a prospective target for fraudsters. PayPal saw online gambling platforms as an excessive financial risk.

The number of regulators questioning the legality of the company’s services on gambling platforms further strengthened the company’s resolve to stay clear of the Gambling industry. The enactment of the 2006 Unlawful Internet Gambling Enforcement Act was the seal for the 12 –year absence.

However, all of this has changed recently, as PayPal made a return to the online gambling world, albeit silently, early this month. This move came a few months after the $49 billion company split with parent company eBay. Presently, Caesars Entertainment, Derby Games, FanDuel and DraftKings are some of the websites that already accept PayPal.

The company was quick to say that this return is a trial run, but the decision has been heralded in many quarters. PayPal deposits are currently only available in places where online gambling is legal, and this means only Delaware, New Jersey and Nevada in the United States, as well, of course, as parts of the world, such as Europe.

What Prompted The Change?

The major reason behind this move is, as always, increased profit potential. PayPal generally keeps 2.9% of any amount transferred through its service, and also charges 30 cents for every transaction made on its platform. When these numbers are extrapolated to the betting sector, with the massive revenue posted by online gambling companies, it is only natural that PayPal has come back to the fold.

A quick look at the figures from New Jersey and Nevada, two new markets for PayPal, perfectly explains this. Over the past few months, New Jersey’s online gaming revenue stands at around $12m per month. This works out at around $150m each year from that state alone. Nevada has posted between $574,000 and $742,000 in monthly revenue over the last 6 months.

This means that PayPal is looking at the possibility of cashing in on 2.9% of a $150 million market in New Jersey alone!

Added to the fact that Morgan Stanley expects the annual revenue of the online gambling industry in the US to be over $5 billion by 2020, the reasoning behind PayPal’s return to the online gambling market is abundantly clear.

Is the move sustainable?

Although there is no guarantee that gamblers would ditch current means of transaction in these areas and embrace PayPal, the earning potential for PayPal with even a small slice of the gambling cake cannot be scoffed at. When you consider the fact that most people targeted in this new expansion already use PayPal in their daily online transactions the company could grab a sizeable chunk of this transactions market. The simplicity of transactions and the inherent desire for synchrony in virtually all online activities will see many people embrace PayPal-supporting online gambling platforms. Analysts believe that as the years roll by, online gambling will receive unifying legalisation across the world, thereby ensuring PayPal’s longevity in this lucrative marketplace.

What does it all mean for PayPal’s valuation?

The effect of this decision on the stock market value of the company for now is miniscule. It will take a number of years before the online gambling market starts to influence the company’s top and bottom line. Similarly, the company’s growth in this area hinges on legalisation across different geographic territories. Talks are yet to begin in some areas thereby placing a question mark on PayPal’s earning capability in the gambling sector.

Therefore, while PayPal’s re-entry into the online gambling market is a huge positive for end users, and can bring in decent income for the company, it would be speculative at this stage to go and buy PayPal stock off the back of this news.

Don’t be late to the party – Click Here to see what 4500 Wall Street Analysts say about your stocks.