PayPal Boosts Its POS Prospects And Escapes Wallet Fee With New MasterCard Pact

By Jim Daly
@DTPaymentNews

Having made peace with Visa Inc. in July, PayPal Holdings Inc. announced a similar agreement Tuesday with MasterCard Inc. that further extends the online payments leader’s reach at the point of sale. But PayPal’s new accord has some differences from the one it reached with Visa, most notably MasterCard’s promise to drop its digital-wallet operator fee. PayPal feared the fee might hurt its financials when MasterCard instituted it in 2013.

Separately, San Jose, Calif.-based PayPal announced that its Braintree e-commerce merchant-acquiring subsidiary next year will offer its merchants Visa Checkout, an online and mobile service that enables fast purchases using linked Visa credit and debit cards. The sweeping MasterCard agreement announced today includes a similar provision in which Braintree will offer its merchants the Masterpass online and mobile service.

In parallel with the Visa agreement, the new MasterCard pact will have MasterCard presented as a “clear and equal payment option” within the PayPal wallet, and enable customers to select MasterCard as their default payment method, according to a joint news release from both companies. And as with the Visa agreement, under the MasterCard pact “PayPal will not encourage MasterCard cardholders to link to a bank account via the ACH.”

PayPal traditionally has preferred that customers fund their cards via the automated clearing house because ACH-funded transactions cost the processor much less than transactions funded by credit and debit cards, where they are subject to more fees, including interchange. But PayPal’s ACH preference has been a sore point with card issuers and the bank card networks for years, with the networks complaining that PayPal used their systems without paying the full freight.

In 2013, eBay Inc., PayPal’s parent company at the time, revealed that MasterCard was planning a new “Staged Digital-Wallet Operator Annual Network Access Fee” that would be assessed on MasterCard-funded PayPal transactions and could reduce PayPal’s operating margins. Under Tuesday’s agreement, that fee is gone, and there are other goodies for both sides.

“Under the expanded partnership, consumers and small businesses will be able to instantly cash out funds held in their PayPal accounts to a MasterCard debit card,” the release says. “PayPal will also be provided certain financial volume incentives and, as a result of the commitments made under this agreement, will no longer be subject to the digital wallet operator fee.”

PayPal will be able to expand its POS presence by using MasterCard’s tokenization service, which will enable PayPal wallet holders to make in-store purchases at the 5 million global merchant locations that can accept contactless payments, including about 1.25 million in the United States. Near-field communication (NFC) is rapidly becoming the dominant contactless technology because most of the new EMV chip card-reading POS terminals also have NFC capability.

Since the Visa and MasterCard U.S. merchant bases are virtually identical, the MasterCard accord alone will not increase PayPal’s potential POS base. But it will enable PayPal to tap a deep new transaction well because the undisclosed number of MasterCard’s 164 million U.S. credit card account holders and 185 million debit account holders who use PayPal will now have the option of funding PayPal POS purchases with their MasterCard cards. The accord requires that PayPal’s wallet include digital representations of the user’s registered MasterCard cards.

“With each partnership agreement that we sign, we further expand the ubiquity and value of the PayPal brand and improve our own economics,” PayPal chief executive Dan Schulman said in a statement. “MasterCard has been a trusted partner for many years. By collaborating and innovating together we will continue to help move digital payments forward and improve payment experiences for our mutual customers.”

PayPal has 188 million account holders worldwide, the majority of them believed to be in the U.S. “The important point is that PayPal is proving that neither network brand can afford not to work with one of the clear leaders of the digital-payment transformation,” says consultant Steve Mott of Stamford, Conn.-based BetterBuyDesign, via email.

In a statement, MasterCard president and chief executive Ajay Banga said “the expansion of the partnership with PayPal further reinforces our commitment to our billions of cardholders across the globe to provide them the choice to pay when, where, and how they want while delivering the simple and secure payment experience they’ve come to expect from MasterCard.”

The new accord, in tandem with the Visa deal, also signals that PayPal no longer is competing with bank cards, but is instead focusing on digital wallets and Internet-linked POS services, says independent payments consultant Aaron McPherson.

“I think this benefits PayPal more than MasterCard, which is not to say it’s a bad deal for MasterCard; it just is more strategically important to PayPal than it is to MasterCard, which has broader objectives,” McPherson says in an email message.

PayPal and MasterCard also announced a multiyear extension of their agreement to offer the PayPal Business Debit MasterCard, which is issued by The Bancorp Bank. Earlier, they extended the agreement under which they offer the PayPal Extras cobranded card, a credit card issued by Synchrony Bank.

–With additional reporting by John Stewart