PayPal is to be spun off from online auction site eBay, to become a separate publicly traded company.
The spin-off is to take place in the second half of 2015.
Pre-market shares in eBay surged by 11% on news of the announcement on Tuesday.
The board of eBay said a decision had been made to separate as a strategic move to help maximise growth and shareholder value for both the payment and retail entities.
"Ebay and PayPal are two great businesses with leading global positions in commerce and payments," eBay president and CEO John Donahoe said.
"For more than a decade eBay and PayPal have mutually benefited from being part of one company, creating substantial shareholder value.
"However, a thorough strategic review with our board shows that keeping eBay and PayPal together beyond 2015 clearly becomes less advantageous to each business strategically and competitively.
"The industry landscape is changing, and each business faces different competitive opportunities and challenges."
Mr Donahoe will not have a management role in either company, but will oversee the separation.
The move comes nine months after investor activist Carl Icahn demanded a split of the two divisions.
Mobile payment technology is becoming an ultra-competitive sector and Apple recently announced an entry into the domain.
PayPal is currently available in 203 markets worldwide and expects to process one billion mobile payments this year.
Meanwhile, eBay relaunched itself some 18 months ago in an attempt to move away from being an online auction site for private sellers.
It has sought a rebranding as a global market place primarily for businesses using the 'Buy It Now' function.
But some UK users have complained of search results being swamped, with many items from foreign sellers with higher postage charges.
In May, a newly appointed senior executive at PayPal left the company after a late-night Twitter rant at his colleagues.
And in April, Sky News revealed that PayPal was changing its terms and conditions for UK users.
The new clause, which came into effect in June, said registered users must agree not to share their computers, smartphones and tablets with anyone else - even family members.
The move was seen as a way to try and stop children using their parents' accounts to buy goods or services online without authorisation.
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