PayPal Takes a Hit After Announcing New Partnership with Visa

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PayPal corporate headquarters in San Jose, California. (Credit: PayPal)

PayPal and Visa announced an agreement that will end a standoff that dates back years. And so far investors are betting that the partnership favors the credit card giant.

The arrangement centers around a longstanding PayPal practice of discouraging customers to link their accounts to Visa cards. This has always been a source of contention between the two companies. And by ending this policy, PayPal will receive long-term fee certainty from Visa and greater access to brick-and-mortar stores. PayPal boasted about those gains in a press release, noting that it now can be used in “all physical retail locations where Visa contactless transactions are enabled.”

But much more importantly, the deal allows the online payment provider to sidestep the repurcussions of previous threats launched at it by Visa.

Earlier this year, Visa CEO Charlie Scharf pulled no punches. He essentially told the world that PayPal’s business model — namely cutting Visa out of transactions by steering customers to use bank accounts for their payments — was no longer acceptable. “Anyone that’s trying to take your customers and disintermediate you is not a friend,” said Scharf at JPMorgan Chase-hosted event in May, according to Recode.

PayPal benefitted from cheaper transaction fees when its customers used bank accounts. So it is now giving that up to appease Visa — and also giving up the larger profit margins.

That downside, more than PayPal’s brick-and-mortar benefits, is what investors are focusing on so far. PayPal shares were down as much as 9.2%, to $36.43, today, their biggest intraday fall since March, according to Bloomberg.

Autonomous Research analyst Craig Maurer summed up the market view in a note to clients, per MSNBC. “Yes, PayPal will get some form of incentives from Visa, but we believe the offset will be minimal while this drag will be material.”

So it seems that PayPal, one of the biggest digital disruptor’s to the traditional financial services industry, is now being strong-armed by the old guard. It is no doubt getting a big boost towards its long-elusive goal of being a larger player in the physical, in-store payment game. But it also appears to be bowing to the demands of Visa.

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