Visa and PayPal have been at war for as long as PayPal has existed, and their recent cease-fire could allow both companies to overcome the barriers they have spent years building between the worlds of digital and in-store payments.
The deal stays true to the all-or-nothing stance that Visa CEO Charles Scharf has vocalized in recent months. Blasting the concept of "frenemies," Scharf refused to see PayPal as anything other than a rival as long as PayPal kept in place practices that steered its customers away from Visa cards.
Under terms of the alliance, which the companies announced shortly before both reported quarterly earnings on Thursday, PayPal is making an exception to its policy of urging consumers to fund their PayPal accounts via ACH, and giving Visa issuers equal visibility as funding options. In return, Visa is providing economic incentives and has allowed PayPal to join the Visa Digital Enablement Program, which could extend PayPal's reach into brick-and-mortar stores that support Visa contactless payments.
It's this last point where Visa and PayPal's interests are most aligned, as it gives both companies a much-needed advantage against the tech companies that have encroached on the point of sale in recent years.
"Apple Pay is interesting and Samsung Pay is interesting, but PayPal has 184 million active users and they could turn tokenization on to benefit the whole ecosystem," said Richard Crone, a payments consultant. "It would also change their business model because they could then more freely provide payment choice across the spectrum."
Visa benefits greatly because it would instantly have a new major distribution channel for its tokenization services with a massive user base, Crone added.
The Visa Digital Enablement Program provides a framework to adopt Visa's tokenization services — a key part of securing digital payments. The companies predict this will expand PayPal's reach into brick-and-mortar stores that support Visa contactless payments. There are also "economic" incentives as part of the collaboration around increased volume and greater long-term Visa Fee certainty.
"This will significantly improve payment experience," Scharf said during brief comments about the collaboration during his company's earnings call.
Under questioning from investors, Scharf said Visa has had extensive conversations over a long period of time with PayPal, issuers and other members of the payments community. "What we've tried to do here is come up with something that really does work for everyone," he said, adding consumers can use products that they "want to use, where they get all of the benefits of what those products are."
The Visa-PayPal agreement also allows consumers to move money from PayPal and Venmo accounts to their bank account via their Visa debit cards via Visa Direct. The companies additionally agreed to ensure data provided to issuers and cardholders for Visa funded transactions will be consistent with the information that is received with Visa card transactions.
Also, Visa cards will be presented as a "clear and equal" payment option during enrollment and subsequent use. Visa images will be incorporated into payment flows and PayPal will not encourage Visa cardholders to link to a bank account via ACH. PayPal will also support and work with issuers to identify consumers who choose to migrate the existing ACH payment flows to their Visa cards.
Visa issuers will also have a one-year period of exclusivity to promote their cards in the PayPal digital wallet.
"This will reduce cardholder confusion and improve rewards," Scharf said. "The merchants will also get a better experience which should increase sales."
PayPal would also avoid potential digital wallet fees from the card network, and benefits from the upgraded 3D Secure system that shifts liability for e-commerce merchants and reduces interchange costs, Crone said.
"The key issue here for PayPal is to benefit from the lower pricing for tokenization offered through the card network association," Crone said. "It is a benefit to all parties if they are allowed to utilize the tokenization services because they could lower their costs."
For the longest time, PayPal and Visa have endured an uneasy relationship, considering so many Visa transactions come from PayPal, said Michael Moeser, director of payment at Javelin Strategy & Research.
"At the end of the day, though, PayPal always positioned itself as the merchant's friend, saying there things they could do that Visa could not, and it was a big challenge for Visa," Moeser said.
And of course, PayPal's policy of shifting consumers to ACH instead of card payments worked very much against Visa's interests.
The new agreement is unique in the industry, and one that other networks are sure to follow, Moeser said. But it also represents a new era for Visa under CEO Scharf, who has a greater desire to "operate under a new environment," Moeser added. "What we have seen with Charlie is that Visa has to partner with more competitors and customers. We have seen Chase Pay come out since he has been at Visa." (Chase Pay is being built on ChaseNet, a closed-loop payments network created through a 2013 pact between Visa and JPMorgan Chase.)
The card network is being forced to make deals with companies it never would have before, Moeser said. Visa's ongoing battle with Walmart is an indication that Visa is being challenged with "the message that it can't operate in the same manner it used to," he said.
The value proposition that the card networks bring to the table is under pressure from not only PayPal but from the merchants that now have a greater range of alternative payment options to choose from in their stores, Moeser said.
But Visa has not been stuck in the past, Moeser noted. "You look at Visa's digital commerce app it released recently," he said. "That is a roll-up of a lot of different services, card controls and payment options for the banks."
For the quarter that ended June 30, net income at Visa fell 76% to $412 million, or 17 cents a share, from $1.7 billion, or 69 cents, a year earlier, the San Francisco company said Thursday. Profit excluding one-time items, including costs tied to its purchase of Visa Europe, was 69 cents a share, beating the 67-cent average estimate of 33 analysts surveyed by Bloomberg.
Visa noted the prior year's earnings benefited from a $280 million tax benefit, and its performance was in line with expectations. Cross-border commerce is challenged by the strong U.S. dollar, but domestic consumer spending across the globe is "strong and resilient," Scharf said.