EBay to lend buyers a hand

NEW YORK (Fortune) -- EBay took a big plunge into the consumer credit market Monday with the acquisition of Bill Me Later, the No. 2 online payment service.

With its Internet auction business in decline, eBay (EBAY, Fortune 500) says it will pay $945 million for Bill Me Later. The purchase adds Bill Me Later to eBay's PayPal service and brings it to a broader line-up of online retail sites including Wal-Mart (WAL), Apple (AAPL, Fortune 500) and Amazon (AMZN, Fortune 500).

The move comes as the credit crunch pinches consumer spending and threatens to tip the economy into a recession. These aren't the most stable times for ventures into consumer lending, but EBay CEO John Donahoe says that is why the company saw an opportunity. "In times like this, stronger companies get stronger," Donahoe said on a call with analysts Monday.

This is "almost a once-in-a-lifetime opportunity to extend PayPal's lead," says Donahoe, who also said that the company has been looking at Bill Me Later for two years.

Strength may be a tenuous definition for eBay these days. The leading auction Web site has seen its market share slip steadily in the past three years. That vulnerability was cited by analysts Thursday who weighed in with downgrades predicting that unfavorable consumer trends would drag down eBay's business even further.

On Monday eBay also said it will cut 10% of its workforce or about 1,550 jobs. The company also updated its third-quarter forecast calling for slightly higher-than-projected adjusted profit on sales at the low end of its guidance range. Analysts were looking for adjusted earnings of 41 cents a share on sales of $2.16 billion for the quarter ended last month. EBay is expected to report its third-quarter numbers on Oct. 15.

Bill Me Later, it turns out, won't contribute to profits until later. EBay says the ongoing costs of Bill Me Later will dilute its bottom line until 2011.

But some analysts say the deal could pay off in other ways.

The deal "makes strategic sense," writes JPMorgan analyst Imran Khan, in a note Monday. "The business will present a cross-selling opportunity for PayPal, and could help PayPal gain additional momentum," Khan continues.

PayPal acts as a go-between service, transferring money from the buyer's account to the seller's. Bill Me Later is more like a credit card. It runs a credit check to gauge the credit-worthiness of the customer, then uses CIT (CIT, Fortune 500) bank to finance online consumer purchases. Then Bill Me Later buys the loan from CIT and charges the customer 20% interest on the balance of the loan.

In other words, if your credit card is a bit tapped out, you still have some purchasing options.

"We have the opportunity to selectively extend credit where it makes sense, in a tough environment where consumers will have trouble getting credit," says Donahoe on the conference call.

With the new lending business and a looming recession, the move opens eBay to the added risk that some Bill Me Later customers may be deadbeats. So who is on the hook for the nonpayments? Bill Me Later, and soon eBay.