Visa's detente with PayPal pays off

Since Visa buried the hatchet with PayPal about a year ago, the collaboration between the two companies has opened up opportunities for the card brand to remove cash from the payments ecosystem, and that's helping financial performance.

"Consumers can use PayPal funds to pay anywhere Visa is accepted," said Alfred F. Kelly, Visa's CEO, during Thursday's earnings conference call. "That makes it easier to offer [more] checkout options to Visa account holders."

Visa in 2016 entered an agreement with PayPal, under which PayPal would make an exception to its policy of urging consumers to fund PayPal accounts via ACH. Visa promised economic incentives and allowed PayPal to join the Visa Digital Enablement program to extend PayPal's reach into brick and mortar stores. PayPal also entered into a similar agreement with Mastercard around the same time.

Andrew Harrer/Bloomberg

The new arrangement replaced what had been an extremely adversarial relationship prior. Visa has since expanded its partnership with PayPal to Europe to enable two-way acceptance in that market, in addition to similar partnerships in the U.S. and Asia. Under that deal, Visa provides PayPal with access to Visa Direct in Europe, easing the movement of funds.

Along with other collaborations, such as Visa's investment in Swedish payment technology company Klarna, the card brand is able to extend online and mobile payments to a greater range of merchants and consumers in more global regions, Kelly said.

The digital migration gets a boost from these partnerships, and that helps financial performance, according to Kelly. For the fiscal third quarter 2017 ending June 30, Visa reported a profit of $2.06 billion and net income of $0.86 per share, up from $417 million and $0.17. The average estimate of 15 analysts surveyed by Zacks Investment Research was for earnings of $0.80 per share. Revenue was $4.57 billion versus estimates of $4.36 billion. This year's revenue was about 26% higher than the third quarter 2016's $3.63 billion.

Payments volume increased 38% to $1.9 trillion, and Visa reaffirmed its financial outlook for the year. "There is strong momentum in our business, there is a significant opportunity to displace cash and checks," Kelly said.

Visa recently announced a plan to reward businesses for converting to digital payments and dropping cash, and noted strong growth in international markets such as India, which is in the midst of a digital payments boom that followed the government's 2016 decision to recall much of the country's cash.

"We've seen a real adoption of digital globally, and we're still in the early innings," Kelly said.

Visa has also applied for a license to handle domestic payments in China, according to Kelly. Visa, Mastercard and American Express are all reportedly trying to expedite their moves into China. While there's reportedly been some movement on guidance from Chinese regulators on how outside companies can set up payments operations, the process is expected to be lengthy.

"China is one of the fastest growing payments markets, and our commitment is long term," Kelly said. "We're stepping up our engagement with all ecosystem partners."