A Sweeping Deal With Visa Allows PayPal To Make Another Run at the Physical POS

For years, PayPal Holdings Inc. has struggled to bring its popular online payment product to the physical point of sale, and now a deal announced Thursday with Visa Inc. may help the company finally realize that ambition.

The sweeping, multiyear agreement could also represent a thaw in what have often been frosty relations between Visa and its issuers, on one hand, and PayPal on the other, leading to greater visibility for Visa cards in PayPal wallets and more volume for Visa’s network, along with financial incentives for PayPal.

The deal “opens up a new chapter for PayPal,” said PayPal chief executive Dan Schulman during an earnings call late Thursday. “It’s a tremendous win.”

“We’ve tried to come up with something that works for everyone,” said Charles W. Scharf, Visa’s chief executive, during an earnings call held just before PayPal’s.

The agreement, which applies in the United States only, calls for PayPal to get access to the Visa Digital Enablement Program, which will allow the San Jose, Calif.-based processor to reach any contactless point-of-sale terminal, with tokenization provided by Visa. Estimates of how many of these devices have been deployed and activated in the wake of the EMV transition vary. Visa disclosed earlier that some 1.3 million merchants, or 28% of Visa-accepting locations, now have chip-enabled terminals. A substantial portion of these devices are likely to at least have the capability to perform contactless transactions.

The agreement also allows PayPal to sell its tokenized transactions to merchants at competitive rates, and offers volume incentives, fee certainty, and other breaks to PayPal. “So we can compete with anybody at the point of sale,” Schulman said. “We can go offline profitably now.”

How many Visa issuers will choose to participate in PayPal’s new in-store gambit is anybody’s guess. While PayPal users have funded their wallets for years with credit cards, PayPal has encouraged them to use the automated clearing house, which carries significantly lower transaction costs. That led to testy relations with Visa and its issuers and formed a large part of the rationale for the new agreement, which calls for PayPal to stop promoting the ACH. Now, PayPal will promote Visa cards exclusively for one year.

“We’ve been in discussions with issuers. They’re excited about the volume we can bring to them,” said Schulman. “This agreement removes many of the concerns issuers have about working with PayPal.” Added Scharf: “The partnership puts PayPal and Visa on a new, constructive path forward and provides a framework for our companies to work together collaboratively.”

Neither PayPal nor Visa will disclose how many Visa transactions PayPal accounts for currently, though during Visa’s earnings call Scharf estimated Visa’s share at about 25% of PayPal’s transaction count. The deal, however, is bound to raise PayPal’s transaction costs, a fact John Rainey, PayPal’s chief financial officer, acknowledged Thursday. “For the remainder of 2016, we don’t expect any impact,” he told analysts, adding an “impact” is expected next year. “But the deal has laid the foundation for revenue growth with more certainty in our cost structure,” he added.

This isn’t the first time PayPal has struck a deal with a major card network to get access to the physical point of sale. In 2012, Discover Financial Services agreed to run PayPal transactions across its network in a widely hailed agreement that could have potentially brought PayPal to 7 million U.S. stores. That arrangement was hobbled by a decision by First Data Corp. to block PayPal transactions, an obstacle PayPal only recently overcame with a new deal with the giant merchant processor.

Other parts of the Visa-PayPal deal call for PayPal to share transaction data on Visa-funded transactions with issuers and cardholders to avoid consumer confusion and allow issuers a clearer window for fraud control. Also, Visa cardholders will be able to use Visa Direct to make real-time transfers from a PayPal or Venmo account to their bank account. Visa Direct is a service that enables funds transfers using a Visa debit card.–With additional reporting by Jim Daly