Late last week, Visa and PayPal announced a new partnership, granting the former eBay subsidiary easier account funding options and a foothold into retail payments. The alliance ends the long-standing fight between PayPal and Visa, curtailing PayPal’s previous tactic of discouraging customers from funding their accounts with a credit card.
PayPal had a habit of pushing users to fund accounts via bank accounts, known as ACH, instead of credit cards, in an effort to avoid higher transaction fees that come with credit card processing. Visa hasn’t appreciated PayPal pushing customers away from credit cards. At JP Morgans’s Technology, Media, and Telecom Conference in May, Visa CEO Charlie Scharf called PayPal a “foe”, challenging PayPal to change tactics, or face the consequences.
“We’d love to figure out a different model with them where it’s consumer choice first where they are not disintermediating,” said Scharf. “If we can figure that out with them great we’ll think of them more as a partner they need to do things differently in order to do that. The other door is where we go full steam and compete with them in ways that people have never seen before because you’ve never seen us go target PayPal in the marketplace in any meaningful way.”
The partnership with Visa introduces new mobile payments capabilities for PayPal. Customers with Visa debit cards can now deposit and withdraw funds between their accounts. Previously, it took around a business day to transfer funds in and out of Venmo and PayPal, but with the new agreement, users with Visa debit cards will have instant money transfers.
The deal also paves the way for PayPal’s entry into the Visa Digital Enablement Program. By entering into VDEP, PayPal can use the Visa Token service, making it a viable payment option at all retailers using the Visa contactless payment.
“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 Dan Schulman, PayPal president and chief executive officer in a recent press release.
The mobile payment war for a share of the retail payments market is being waged between Apple, Google, and Samsung, but with its new partnership with Visa, PayPal becomes another formidable mobile payment competitor. A more seamless Venmo integration also sets PayPal up nicely in mobile payments.
“The value proposition for brick and mortar merchants is pretty exciting, since customers will now have the ability to pay with via PayPal seamlessly.” said David Datny, fintech consultant and former product and growth manager at Fundbox. “Customers who had once used PayPal simply as a payment option once in a while when they transacted on online sites which offered PayPal will be able to pay with PayPal daily almost anywhere where Visa is accepted.”
It remains to be seen, though, if users will chose PayPal over other payment options. “Time will tell if customers will want to use their PayPal or Venmo accounts to pay for goods and services in the offline world, but if they do, it will surely be a big win for PayPal,” he concluded.
The partnership also benefits Visa in a few ways. First, it may encourage more users to use Visa debit cards to take advantage of the integration. Second, PayPal will no longer encourage Visa cardholders to use ACH over Visa credit and debit cards. Finally, the integration should bring more credit card transaction volume to Visa and help Visa gain market share.
Analysts have come out on both sides as to who benefits most from the deal, as well as the short and long term financial implications of the partnership. Patricia Hewitt, CEO of PG Research & Advisory Services, feels that while the short term benefits may swing Visa’s way, PayPal may be the long term winner. “While on the face of it, Visa has tipped the scales to increase market share of net new transactions and financial institutions have the opportunity to shift transactions from the expense-side (ACH) to the income-side (debit), the long-term benefit may be for PayPal,” Hewitt said.
PayPal’s intention is to build out a financial hub and will have to make more deals like this one to stabilize its financial services platform. “That’s not possible without network transactions in the mix, solving for real-time clearing, smoothing out their POS experience, and overcoming barriers to depository accounts in other countries,” explained Hewitt. “This deal, and perhaps those to follow with other networks, is one of the critical channels to make this strategy a reality.”