COMMENTARY: What’s Really Happening in the PayPal Deals with Visa and MasterCard

By Rick Oglesby

Visa Inc. chief executive officer Charlie Scharf and MasterCard Inc. CEO Ajay Banga must be all smiles these days. PayPal Holdings Inc. CEO Dan Schulman was clearly motivated to make peace with Visa and MasterCard, so he partnered with Scharf and Banga to negotiate treaties. In so doing, PayPal extracted itself from competing with Visa and MasterCard as a payment network.

The deals contain several foundational components that make it very clear that PayPal will no longer walk the line between being a wallet and a network, rather it will focus exclusively on being a wallet. Specifically:

1. PayPal will not encourage Visa or MasterCard holders to link a bank account via the automated clearing house network.

2. PayPal customers that hold Visa or MasterCard debit card credentials in their PayPal wallets will be able to instantly transfer funds to and from their bank accounts via the appropriate payment network.

3. PayPal will partner with issuers to promote a migration from ACH toward Visa or MasterCard debit accounts.

4. PayPal will enable in-store payments utilizing Visa and MasterCard’s tokenization programs, abandoning its past attempts to establish a point-of-sale payment brand and instead leveraging the Visa and MasterCard network infrastructure.

5. PayPal will provide enhanced data to card issuers when Visa or MasterCard accounts are used to fund PayPal transactions.

Collectively, these items indicate that PayPal will aggressively extract itself from performing the network-like functions of moving money directly to and from banks, and establishing a separate payment brand for point-of-sale transactions. It will replace those functions with services provided by Visa and MasterCard. Additionally, it will abide by network rules, supplying all data requested by the networks.

At the same time, PayPal has adopted a neutral stance with regard to the networks that operate within its wallet. While it has historically sought to push consumers towards lower-cost payment types, these new deals include provisions that are intended to enable Visa, MasterCard, and their issuing partners to compete fairly with each other within the PayPal Wallet. Specifically, PayPal agrees not to bias the competition by steering transactions to any particular payment instrument:

1. Visa and MasterCard will be presented as a clear and equal payment option in the PayPal Wallet.

2. Visa and MasterCard digital card images will be incorporated into PayPal payment flows, so that consumers emotionally connect with their card issuer at the point of purchase.

These deal provisions ensure that issuers can compete within the PayPal wallet, without PayPal influencing the competition. They also ensure that consumer payment experiences highlight the payment brand being used to fund the transaction, maintaining the relevance of the underlying payment network and subordinating PayPal’s brand at the point of transaction.

PayPal also agreed that merchant services provider and PayPal subsidiary Braintree will enable PayPal competitors Visa Checkout and MasterCard MasterPass for use by its digital merchants.

The only concession announced by the networks is that PayPal will receive financial incentives for increasing Visa and MasterCard volume and will not be subject to punitive fees from the networks, such as the MasterCard Digital Wallet fee. If you’re keeping score, that’s eight concessions from PayPal, and one from Visa and MasterCard. So PayPal has now fallen in line with the likes of Apple, Google, and Samsung. There will be no new payment network to reinvigorate competition in the U.S., rather PayPal will take on a more focused role as an e-commerce wallet only.

—Rick Oglesby is principal at AZ Payments Group LLC, Mesa, Ariz., and a partner at Double Diamond Group. Reach him at Rick@AZPaymentsGroup.com.