In a turn of events that demonstrates how rapidly the financial payments market is evolving, Visa and MasterCard have both entered into separate deals with PayPal. (ref 1 and 2 below)
It was puzzling. Didn’t PayPal already accept both Visa and MasterCard? Yes it did, but the growth of PayPal (and now Stripe), also posed a very real risk of dis-intermediation of the card networks we both love and hate (depending on if you’re a consumer or merchant). PayPal had been promoting the use of direct bank transfers (ACH) to users by encouraging them to enroll their bank accounts for payments. That meant that while it allowed free payment transfers to friends and family, it also saved on fees when the same source of funds was used to pay merchants.
This rising trend caused a problem for the networks. The solution they came up with was to:
- Get PayPal to not encourage users to use bank accounts as source of funds
- Allow PayPal access to their mobile payment wallets
PayPal may lose a little margin on its online transactions, but it now has a real chance at speeding up adoption of physical payments, an area where PayPal was clearly lagging behind.
Why did the consumers sign up for direct bank payments when they stand lose their credit card reward points? Its simple – PayPal charged almost a 2.9% fee for payments to friends and family. So it was beneficial to set up a bank account for the payment where PayPal would charge zero fees. With that major hurdle cleared, PayPal was obviously seeing the cheaper payment sources being used for goods and services as well.
PayPal, and now Stripe, Authorize.net and many others, have created a nice position for themselves in the online, small business payments world. It was a pain area that wasn’t addressed by banks and the card networks for a long time (and still isn’t). So it was just a matter of time that their intimacy with the customer had to threaten the underlying, commoditized service provider (the card networks). And if PayPal decides to become a bank (or ties up with a bank like Simple and Moven did), that’ll spell trouble for banks as well.
All said and done, I see this as an agreement born out of convenience, and with a focus on short terms gains and survival. We can expect big changes soon, at least from the networks. But with the rise of Dwolla, PayPal should be on its toes too.