Visa Inc. and PayPal Holdings Inc. have signed a deal that might be the perfect example of what Michael Corleone said in “The Godfather Part II”—“Keep your friends close but your enemies closer.”
One of the most important aspects of the deal Visa and PayPal announced Thursday along with their quarterly earnings is that it will now be easier for consumers to use a Visa credit or debit card when paying with PayPal PYPL, +0.20% which currently defaults to a user’s PayPal account or their bank account. Any PayPal user who has had a payment default to a checking account, as opposed to the credit card that they thought they were using, can understand a rant two months ago by the CEO of Visa V, -0.72% in which he went after PayPal.
“They drive a lot of business our way. That’s supposedly the friend part of it,” Visa Chief Executive Charles Scharf said in May at the J.P. Morgan Technology Conference. “The foe part is where ... we and our clients get disintermediated from the transaction, the entire experience, and it causes tremendous customer service problems for the bank specifically.”
He added that he would love to figure out a different model that put consumer choice first, but was willing to declare war on PayPal if needed.
“The other door is where we go full steam and compete with them in ways that people have never seen before,” he said.
Instead, PayPal appears to have reached out with an olive branch, though the former eBay Inc. EBAY, +10.89% subsidiary did mention “threats of a targeted pricing action” from Visa in a conference call Thursday. The two companies forged a deal that will make it easier for consumers to use their Visa cards for payment on PayPal. In addition, Visa debit card customers can move money instantly via PayPal and its fast-growing Venmo unit, a digital wallet service for smartphones. Previously, there has been a waiting time for funds to clear in those transactions. PayPal also joins the Visa mobile payments framework and will provide more data to credit card companies on transactions.
“It is a fantastic thing for both companies,” said Michael Moeser, director of payments at Javelin Strategy & Research in Pleasanton, Calif., adding that the recent escalation of their rivalry had an impact on PayPal’s stock in late May. “When (PayPal CEO) Dan (Schulman) responded, Wall Street didn’t buy it that it was water under the bridge.”
The effects may not all be positive, however. The deal is likely to have some impact on PayPal’s profit margins, even if it drives higher volumes with more transactions.
“We expect the agreement could drive higher payment volumes for PayPal, but with lower transaction margins (higher mix of credit-card transactions),” said Colin Sebastian, an analyst with Robert W. Baird & Co., in a note to clients.
On its call with investors, PayPal executives said there may be a short-term rise in its expenses, similar to an acquisition, but of long-term benefit. The company also said the deal also opens up the door to more “new partnerships.”
PayPal no longer has the specter of a full-frontal attack from a payments giant hanging over its head and could even see better headway in physical payments, because the deal also opens up access to Visa mobile-payment stations in stores. Meanwhile, Visa is likely to experience a boost in online transaction volume.
The deal does not make the two companies best buddies, however: Visa still has a competing option in Visa Checkout, and PayPal seems to be accepting this change to its longtime practices only after threat of a corporate assault. Neither company saw big boosts in late trading after the deal, showing investors consider the effects to be rather neutral.
The big winner, for once, is consumers, who will receive easier transactions using two things most already have: A Visa card and PayPal account.
“Consumer choice is an important point of the discussion in the press release,” Scharf said in a conference call with analysts on Thursday. “What we have done in this agreement, we have tried to work with PayPay to take away the things that discourage people from working together and take away the bad customer experience.”