PayPal has recently announced a partnership with Visa and MasterCard that will potentially allow the company to gain entrance into physical retail transactions. While PayPal has become the go-to method for online payments, both Visa and MasterCard remain firmly entrenched in physical stores.
Rather than trying to compete with the well-established credit card companies, PayPal has instead decided to take an alternate route and become allies in an effort to advance digital payments. According to a company spokesperson, the partnership is part of an overall strategy to position PayPal as a universally accepted payment method.
Why It Makes Sense for PayPal
The move certainly seems to make a lot of sense, just one year since PayPal split from eBay. In the last few years, smartphones have significantly blurred the line between shopping in physical stores and shopping online. More and more, commerce has simply become commerce rather than being segmented into offline commerce and ecommerce.
While the move offers many potential advantages, some naysayers argue that the deals could put profitability in the short term at risk. For instance, because of the partnership, PayPal will also be moving away from the promotion of free bank transfers for funding customer transactions, something that has proven to be a major incentive, toward the use of networks, which will involve a fee. The company believes that while transaction costs will increase, the use from new customers will also increase, more than making up for increased fees in the long term.
PayPal’s Relationship With Mastercard and Visa
In the past, PayPal has had somewhat of a tenuous relationship with both MasterCard and Visa. The leader in digital payment processing and the two credit card companies have remained competitors as well as partners. Substantial processing fees typically result from payment transactions involving credit cards. As a result, PayPal has traditionally urged customers to link their accounts to their bank accounts directly using ACH instead of credit cards as a way to avoid paying hefty fees.
Moving forward, this will no longer be the case. Although the final details of the new partnership between the credit card companies and PayPal have yet to be released, PayPal has made assurances that customers will be able to choose either their credit card accounts or bank accounts in a seamless manner. Credit card companies will be able to benefit from higher processing fees, but PayPal will also benefit from being more accessible in mobile wallets based on MasterCard or Visa networks.
PayPal and Additional Partnerships
In recent months, PayPal has also strengthened its partnership with Facebook by making it easier for customers to link Facebook and Messenger to their PayPal accounts. At the same time, Facebook introduced PayPal as a payment option, including the ability to use PayPal as a method for paying for items purchased from online merchants when interacting with chatbots. Last year, PayPal formed a partnership with both Uber and Facebook that gave users the option to pay for trips made with Uber via Messenger.
Mixed signals were received when news broke regarding the new partnership between Facebook and PayPal. The digital payment processor’s stock declined by 2 percent, in large part due to assumptions that the partnership would result in smaller profit margins for transactions taking place via Messenger and Facebook.
Yet, it could not be denied that the partnership between PayPal and Facebook presented a myriad of growth opportunities for the firm. With nearly 2 billion monthly active users, Facebook offered an area of growth that would have been difficult for PayPal to achieve on its own. That same growth potential is also present with the most recent alliances PayPal has formed with MasterCard and Visa. By partnering with incredibly powerful brands, PayPal is taking advantage of the opportunity for tremendous revenue growth, even if it means sacrificing reduced profits on each transaction in the short term.
Despite the smaller profit margins on each transaction, PayPal could very well be doing the smart thing. Smaller profit margins in the short term do not necessarily indicate that overall profits will decline in the future. Compared to sales, the company’s operating costs remain relatively fixed. Additionally, PayPal is reducing its competitive risk by partnering with such companies as MasterCard, Visa, and Facebook. Over the coming years, the company is also positioning itself for incredible expansion.
While the partnership with MasterCard and Visa might seem like a dramatic departure for the digital payments processor, it’s hardly the first time that PayPal has formed an alliance with a credit card company. In 2012, PayPal partnered with Discover in a very similar strategy to deliver its in-store payments platform to more consumers. The company had been steadily expanding its new platform to specific retailers, including JC Penny, Abercrombie & Fitch, Home Depot, Jamba Juice, and many others. By partnering with Discover, PayPal was able to expand its payment experience to some 7 million merchant locations around the country.
Because of the partnership, anyone using Discover’s network and accepting Discover credit cards was able to turn on an in-store integration for PayPal in order to provide customers with an option to pay using their PayPal account. In order to make that option available, merchants were not required to install a new system or upgrade their existing point of sale system.
Customers could either enter a PIN code via their phones or swipe a special PayPal credit card, which would deduct the amount of the transaction from their PayPal accounts. Since the move did not require a significant investment in new technology, such as installing a new solution or replacing a POS system, the move was appealing to retailers. For PayPal, such partnerships proved to be beneficial in terms of expansion, reach, marketing, branding, and more, including the expansion to millions of new merchants.
Author: Jeff Gitlen
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