A change in-store? With iZettle buy, PayPal extends its reach in retail payments

PayPal is in the midst of making the largest acquisition in its history, having recently inked an agreement to purchase iZettle, commonly referred to as "The European Square," for $2.2 billion.

Stockholm-based iZettle, which prior to the agreement had been prepping for an initial public offering, will now become instrumental in PayPal's effort to get more more small businesses involved in the digital economy.

"We think this fits with our global reach and how we want to service small businesses," PayPal COO Bill Ready told CNBC in an interview. "What we think the iZettle team has done has been quite distinctive. They've managed to do [payments acceptance] not just in-store in a single country, or in a couple of countries. They are doing that in 12 markets around the world."

For PayPal, the acquisition marks another chapter in the history of an enterprise that has significantly increased its purchasing power since the company split from eBay in 2014.

At the time, many industry observers believed the move would allow the digital payments provider to become more nimble in the market and achieve true powerhouse status alongside traditional card networks and payments processors.

The iZettle acquisition helps to advance that goal — and PayPal's standing in the industry — particularly in the physical retail space, an area where it has previously tried to gain a foothold.

"This is not the first time PayPal has attempted to push into physical retail," Michelle Evans, head of digital consumer research at Euromonitor, said in an e-mailed statement. "Having a presence in physical retail is important, even in the digital era. Despite all the headlines about the rise of e-commerce and the shrinkage of store footprints, it is important to note that the physical channel remains the dominant one for transactions."

PayPal does have a competitor to Square and iZettle in PayPal Here, a program that the company pushed heavily in late 2014 and into 2015. Here still exists, and there's no word yet on what will happen to it in light of the iZettle acquisition. 

While the mainstream media has framed PayPal's bid to buy iZettle as a way for the company to compete with Square, the reality of the situation is that the companies were already competing in areas such as payment processing and ancillary services for merchants, particularly small businesses. The aforementioned Here product put PayPal and Square into closer competition.

With its purchase of iZettle, though, PayPal will now have the capacity to go toe-to-toe and hand-to-hand in combat with Square, Adyen and others that provide small and midsize businesses with payment solutions for transactions online and in-store. 

Historically, smaller retailers have lacked either access to or interest in digital solutions, relying instead on trusted and fee-free cash transactions. Now, it's looking like folding money will have one more serious e-challenger in this channel, as well.

"This is really about small businesses and small businesses using mobile devices to blur the lines between online commerce and physical commerce," Ready told CNBC. "We see a global phenomenon of small business coming into the digital economy in many ways."

Having agreed to the PayPal offer, plans obviously are off for an iZettle IPO.

iZettle  founder and CEO Jacob de Geer told CNBC that preparations for an IPO — which the company deemed essential to its ambitions to achieve global scale — have been ongoing for the past year.

"We've been struggling all along to get to the vision we're aiming for in terms of helping small businesses and competing with the giants, and PayPal has in the area of 20 million merchants whereas iZettle has 500,000," he said.