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Tuesday, July 26, 2016

Visa gets chummy with PayPal

After years of intense competition, Visa Inc. and PayPal Inc., are burying the hatchet. The two companies disclosed they are on "a new path," the upshot of which is that Visa cards gain parity with the automated clearing house (ACH) system in terms of PayPal payment options.

Founded as Confinity in 1998, the company launched PayPal, its money transfer service, in 1999. Confinity merged with online banking company X.com in 2000, was subsequently renamed PayPal and went public in 2002. Soon thereafter, PayPal was acquired by eBay Inc., where it charted phenomenal growth as a low-cost, ACH alternative to credit and debit card acceptance by online merchants. PayPal was spun off from eBay and became a publicly traded company in 2015.

PayPal claims 184 million accountholders. During the first quarter of 2016, PayPal reported handling $81.8 billion in transactions, a 31 percent increase over the same period in 2015. As PayPal's business has exploded, however, it has come under increasing fire from Mastercard and Visa because of its practice of steering customers to ACH payments.

According to published reports, Visa Chief Executive Officer Charlie Scharf stated during a recent meeting with analysts that roughly 50 percent of payments PayPal handles today clear as ACH items; the remaining 50 percent use credit, debit and prepaid cards. And at least some of those cards are issued as PayPal Mastercards.

"I've been very clear on this one, which is if you are a foe, you're not a friend," Scharf said about PayPal during a May tech conference sponsored by JPMorgan Chase & Co. "The foe part" is that they "do everything in their power" to encourage customers to use the ACH which disintermediates Visa. "We'd love to figure out a different model with them where it's consumer choice first whether or not disintermediating," Scharf said.

A 'new path'

Apparently, the two companies have come to an agreement on that model. "The partnership puts PayPal and Visa on a new path, with the companies working more collaboratively to accelerate the adoption of safe, reliable and convenient digital payments for consumers and merchants," Visa said in a July 21 statement about the partnership.

The arrangement with PayPal includes "economic incentives," like locking in Visa-assessed fees. Acquirers, issuers and financial institutions will benefit too, from more spending, better customer service, lower operational costs and improved security, the two companies said.

"Giving consumers choice in how and where they pay is essential to our goal of being a customer champion, and we welcome the opportunity to work with more partners like Visa who share our vision," said PayPal CEO Dan Schulman. Schulman has made several public statements in recent months about his desire to take the company beyond just moving payments. Scharf said Visa is "excited to begin a new chapter with PayPal."

Investor reactions to the news were mixed. PayPal's stock slid 7 percent on July 21. "Our initial take is that this deal exploits the leverage Visa has over PayPal," wrote James Cakmak, of the investment research firm Monness, Crespi, Hardt & Co. "Although this removes an ongoing investor concern, we note that there is a risk to margins and profitability with higher credit funding mix without meaningful incremental volume," wrote Colin Sebastian of the investment banking firm Robert W. Baird & Co.

But in the days following, other analysts gave the arrangement a thumbs up, issuing buy ratings for PayPal stock. "We believe this deal could turn an often-acrimonious relationship between PayPal and Visa/card issuers into a beneficial one for all, as it opens opportunities for [PayPal] at the point-of-sale, yields volume-based economic incentives and provides long-term Visa fee certainty," wrote Youssef Squali, an analyst with the investment banking firm Cantor Fitzgerald.

Here is a summary of key provisions of the partnership agreement, as detailed in Visa and PayPal statements:

  • Visa cards will be presented clearly as a payment option during the PayPal enrollment process.
  • PayPal will make accommodations for accepting digital Visa card payments
  • PayPal will work with issuers to accommodate consumers who choose to migrate their payment transactions from ACH to card payments.
  • Consumers will get instant access to funds when moving money from PayPal accounts (or accounts with Venmo, PayPal's mobile P2P network) to bank accounts and bank-issued debit cards using a "push payment" solution dubbed Visa Direct.
  • PayPal will rectify data fraud and transaction formatting issues to ensure all payments PayPal processes through Visa are formatted the same as Visa card payments. And it will participate in the Visa Digital Enhancement Program, which provides entre for PayPal digital wallets wherever Visa cards are accepted.
end of article

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