BrainTree Deal Would Make PayPal a Stronger Bank Rival — or Ally

PayPal's $800 million deal to buy the payment processor Braintree would turn it into a more formidable competitor, and a more attractive potential partner, for banks.

Braintree's crown jewel is a set of software development tools, called application programming interfaces. These allow companies to deeply integrate payments capabilities without the technological investment and compliance burdens that would otherwise be required. Currently, Braintree's APIs power transactions behind cutting-edge peer-to-peer commerce startups like Uber and Airbnb.

But such tools are increasingly relevant even for established merchants, which face more pressure to serve customers across online and mobile channels. Any merchant that sells items through a mobile app, for example, needs a way to seamlessly handle payments through that app. With Braintree's technology, PayPal would have a stronger pitch for those retailers' business.

"It affects the merchant acquiring arm of banks that offer e-commerce processing platforms," says Nick Holland, a senior payments analyst at Javelin Strategy & Research. "If I was a merchant using an existing payment platform offered by a processor, Braintree/PayPal … may now be a choice that looks far more like an industry grade solution."

By that same token, banks have another reason to work with PayPal, which argues that the purchase of Braintree tightens its partnerships with the card networks, improving its relations with banks.

Banks have to "recognize the elephant in the room and decide if there is a win-win opportunity through some form of partnership," says Jim Marous, a senior vice president of corporate development at digital direct marketing agency New Control. Banks need to decide "It's time to place additional bets on the payments roulette wheel. Not playing is not an option."

PayPal saw Braintree, founded in 2007, as a formidable force.

"When we looked in the market, Braintree was the most impressive company out there, to us," says PayPal President David Marcus.

Braintree had other suitors. As word leaked of the talks, Google and Square were also named as potential buyers. The deal with PayPal was officially announced Thursday and is expected to close late in the year.

"We've always had a lot of people that knocked on our door, but we weren't interested in selling or cash or things like that," says Braintree CEO Bill Ready. "But when there was this opportunity with David and the PayPal team… what we wanted is to go build. PayPal is able to let us do this better and faster."

PayPal has long struggled to get banks to view it as a partner instead of a rival. One of its biggest efforts to do so — the 2009 launch of the X.com developers network — integrated PayPal with prominent bank vendors such as S1 Corp. (now a part of ACI Worldwide).

Braintree's strengths play to this strategy. Once the acquisition closes, Braintree will build PayPal into its platform, and Braintree's management team and employees are expected to stay in place, says Marcus. PayPal plans to eventually offer its branded services to Braintree customers.

"We want to make PayPal an entrepreneurial place," he says. "It's really funny, because Bill is going to join my team, and half of my existing team are entrepreneurs. I don't know of any company our size that has so many entrepreneurs on board and I think that goes a long way. "

Marcus fits into that category himself. He founded and headed the mobile payments company Zong, which PayPal acquired in 2011. The following year, PayPal elevated Marcus to the role of president.

PayPal's move to buy Braintree is, for some, an indication that the merchant processing game is coming to a head.

"It's a sign to me that we are entering the late innings in terms of the revolution in merchant processing," says Matthew Harris, managing director at Bain Capital Ventures. "Don't be surprised if you see other innovators look for larger dance partners."