Founded in Stockholm in 2010, iZettle started out selling credit and debit card readers that could be plugged into smart phones and tablets.
The iZettle platform for handling retail transactions is used by almost a half million merchants, according to PayPal. It has since expanded into financing services, with a presence in Brazil, Mexico and Europe.
PayPal president Dan Schulman said: "This combination brings together iZettle's in-store expertise, recognised brand and digital marketing strength with PayPal's global scale, mobile and online payments leadership, and trusted brand reputation".
PayPal was even cast aside by EBay earlier this year in favour of Dutch fintech startup Adyen, which is also thought to be plotting an IPO with a valuation of more than $1bn.
iZettle expects to earn revenue of roughly $165 million in 2018 and process about $6 billion worth of transactions on its platform, according to a press release from the two companies. The company has grown its revenues at a CAGR of approximately 60% from 2015 to 2017. iZettle expects to reach EBITDA profitability by 2020 on a standalone basis. Upon closing, iZettle will become the European center of excellence for PayPal's in-store product and services offerings. J.P. Morgan Securities plc is acting as sole financial adviser to iZettle, while Gernandt & Danielsson is acting as its legal adviser.