PayPal deepens retail drive in Discover payments deal

23 Aug, 2012

EBay Inc's PayPal online payments service has gained access to millions of stores across the United States through an agreement with Discover Financial Services, extending its reach beyond the Web and into the physical world.

Under the deal unveiled on Wednesday, PayPal will issue payment cards to its more than 50 million active users in the United States next year, which they can use to buy from merchants that already use Discover Network, which links more than 7 million US retail locations.

Their tie-up is the latest alliance among technology and financial corporations intended to stake out a spot in new forms of retail payment - such as "digital wallets" proposed by the likes of Google Inc that employ smartphones.

PayPal - which accounts for almost half of eBay's annual revenue - is expanding beyond its popular Internet payments service in search of new opportunities. In the past year, it has persuaded more than 15 retailers, including Home Depot Inc Office Depot Inc, to accept PayPal payments in their stores.

For Discover - the fourth-largest US credit card issuer after Visa Inc, MasterCard Inc and American Express Co- PayPal's large user base could generate significant transaction volume for its payments network.

Shares of eBay were up 2.7 per cent at $47.08 at midday on Wednesday, after touching a multiyear high of $48.08 earlier in the session. Discover shares were up 4.2 per cent at $38.57.

"This initiative further distances PayPal's digital wallet ahead of other mobile payment platforms," R.W. Baird Equity Research analyst Colin Sebastian wrote on Wednesday. "PayPal continues to take measured and deliberate steps to extend its reach into the 'bricks and mortar' channel."

PayPal users will be able to pay at merchants on the Discover Network by swiping their new cards through existing check-out machines and entering a four-digit PIN.

Merchants will not need to buy new hardware or software to accept PayPal, according to Don Kingsborough, the PayPal executive leading the company's offline push.

"It's a big step for both companies," said Ken Paterson, a director at Mercator Advisory Group, a research firm that focuses on the consumer payments industry. "This would provide a ready-made route for PayPal to get into most card-accepting retail establishments in the U.S."

Closing the 'acceptance gap'

The new cards will have a Discover Issuer Identification Number, or IIN, a code that identifies the card holder. Discover has already set up the IINs for the PayPal cards on its network, the company noted.

PayPal will charge retailers a "small" fee when users pay with the new cards, and in turn will pay Discover for access to its network, on a per-transaction basis, the companies said. They declined to give details of these fees.

Discover processed some $46.7 billion in transactions in its payment services segment during the first quarter.

"We are going to process a significant amount of volume over time with PayPal," said Diane Offereins, president of Discover Payment Services.

Teaming up with PayPal also makes Discover Network more appealing to merchants, she said. Its payment service is not used by as many merchants as Visa's or MasterCard's. Offereins estimated about 95 per cent merchant coverage compared with other payment networks.

"We've been working on closing the acceptance gap," she said. "This will help us close that last lingering gap."

If the agreement goes well, PayPal and Discover said they may expand it outside the United States.

Kingsborough said that PayPal probably will not be striking similar deals with Visa and MasterCard.

"This agreement would be very difficult to duplicate," Kingsborough said. "Other players in the issuer network realm have a different view of the world and want to do these things on their own."