Sky News first reported that Paypal and iZettle are in "advanced" acquisition talks, which could scuttle one of Europe's most anticipated tech listings of this year.
With the agreement, PayPay gains access to almost 500,000 small businesses that use iZettle's technology to process customer transactions involving credit cards.
PayPal and iZettle were not immediately available for comment.
Schulman described the merging of iZettle and PayPal as a "strategic fit" combining shared values and culture with complementary product offerings and geographies.
After the deal closes, PayPal will gain a presence in stores located in 11 new markets: Brazil, Denmark, Finland, France, Germany, Italy, Mexico, Netherlands, Norway, Spain and Sweden.
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.
Announcing its IPO plan last Tueday, Jacob de Geer, the CEO and co-founder, said: "The IPO will provide us with improved access to capital markets to facilitate our continued growth and help us strengthen our profile with merchants, key business partners and in the fierce competition for talent". 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.
PayPal hopes the transaction will close in the third quarter, the company announced.