Founded in Stockholm in 2010, iZettle started out selling credit and debit card readers that could be plugged into smart phones and tablets.
Since Paypal now does not have a strong offline presence in these markets, it will look to leverage on iZettle to penetrate into these markets.
Buying iZettle will expand PayPal's reach into shops in Brazil, Denmark, Finland, France, Germany, Italy, Mexico, the Netherlands, Norway, Spain and Sweden.
IZettle, which operates in 200 countries, has been preparing to launch an initial public offering on the Nasdaq Stockholm stock exchange.
"Combining our assets and expertise with a global industry leader like PayPal allows us to deliver even more value to small businesses to help them succeed in a world of giants", said iZettle CEO Jacob de Geer.
"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".
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. From 2015 to 2017, revenues at iZettle have grown at a CAGR of 60 percent. Upon closing, iZettle will become the European center of excellence for PayPal's in-store product and services offerings.
PayPal hopes the transaction will close in the third quarter, the company announced.