On Tuesday, September 6, online payments processor PayPal Holdings Inc (NASDAQ:PYPL) struck a deal with MasterCard Inc (NYSE:MA), a move that the firm hopes will help expand the company’s physical presence in stores around the country. The MasterCard deal came just months after a similar agreement was made with Visa Inc (NYSE:V), suggesting that PayPal is aggressively looking to spread its wings beyond just the digital payments space.
Before PayPal was working with the two largest credit card companies, the online payments firm was fighting against them.
PYPL had become a thorn in both Visa and MasterCard’s sides because the firm encouraged people to link their bank accounts to their PayPal accounts in order to make online purchases safer and more convenient. Doing so discouraged the use of credit cards for online shopping, and hurt companies like MA and V.
PYPL: Turning Over A New Leaf
However, PayPal’s decision to embrace the card companies means the site will shift toward encouraging users to link up their credit cards rather than their bank accounts, thus sending all of the site’s payments through credit cards.
The deal certainly looks good from the standpoint of MA and V, as it takes away a major obstacle for them, but markets have been skeptical about whether partnering with Visa, and now MasterCard, was a good idea for PYPL.
It’s important to note that PYPL will suffer some short-term consequences for joining forces with credit card companies. Most notably, PayPal’s margins are likely to decline as the firm will be processing more and more payments through the credit card companies, which charge a higher fee than banks do for each transaction. This could be a negative for PYPL stock come earnings season, because the figures may add fuel to the argument that the credit card deals are eating away at PYPL’s per-transaction profits.
Still, there’s a lot to like about PayPal’s MasterCard and Visa deals. One of PayPal’s most important products is Braintree, an online payment processing system used by large merchants. The MasterCard deal means that merchants using Braintree will be able to include MasterCard’s one-click checkout tool Masterpass. This, on top of Visa’s one-click offering Visa Checkout, makes Braintree a very enticing tool for merchants as one-click checkout offerings are more likely to convert online browsing into purchases.
The credit card deals will also put PayPal’s name into physical stores as the firm’s digital wallet can be accepted at stores where contactless payments for MasterCard or Visa are enabled. This is a huge step and will put PayPal in a good position to compete with the likes of Apple Inc. (NASDAQ:AAPL), whose Apple Pay system has gained a lot of momentum over the last year.
The Long-Term Game for PayPal
While there has been some negative chatter regarding PYPL’s decision to cosy up to the credit card companies, this is an excellent strategy if you’re looking further into the future.
The online payments space is becoming increasingly crowded and the fintech world is evolving rapidly. The smartest thing a payments processor like PayPal can do as a first step is grab market share and team up with some of its biggest competitors. While PYPL could suffer in the near-term as the business adjusts to the changes, the company will benefit by expanding its network, improving its offerings and reeling in customers that wouldn’t have used the service otherwise.
As of this writing, Laura Hoy did not hold a position in any of the aforementioned securities.
