Discover Financial Services' arrangement to facilitate in-store PayPal transactions across its network stands to serve as the biggest expansion of its ongoing strategy to serve as a multifaceted utility throughout the payments ecosystem.
Through its integration with the Discover Network, PayPal can potentially reach as many as 8 million U.S. merchants and more than 55 million U.S. PayPal accounts, while maintaining its own policies for moving funds from consumers' PayPal wallets to merchant accounts at acquiring banks.
"All the connectivity points and what you would define as rails are Discover Financial Services assets that the transaction will run on," says Joby Orlowsky, Discover's vice president of strategic initiatives. "But the governance of that transaction and the rules of that transaction will be determined by PayPal."
Even before the initiative to offer PayPal in stores went live on April 19, the eBay subsidiary was already one of the largest merchants on the Discover Network, Orlowsky says. Discover is the platform used for some of PayPal's Bill Me Later instant credit transactions, and the two companies previously developed a person-to-person money messenger service.
"Our view is that PayPal is going into the brick-and-mortar space and we need to be there to help them do so, and by keeping our partnership close, it allows us to reap benefits on the network side and on the issuing side," Orlowsky says.
"A lot of what were doing for PayPal is what weve done for Discover over the years. Were leveraging the preexisting processes, relationships and infrastructure to bring PayPal to point of sale," he adds.
Discover's partnerships go beyond its association with PayPal. The company actively develops relationships that connect its network with third-party emerging payments methods. In addition to PayPal, Discover works with both Google Wallet and the wireless carrier-owned Isis on mobile payments initiatives.
Discover gets a fee for every PayPal transaction that runs across its network and generates similar revenue from its other relationships. The partnerships not only expand the reach and functionality of Discover's infrastructure, but also help the company diversify its revenue streams even when that means its brand takes a backseat to other industry participants.
For example, the plastic PayPal card issued to consumers which serves as the only means to use the PayPal wallet at Discover merchants at the point of sale is issued on a portion of Discover's Issuer Identification Number, but contains no Discover-related branding. Similarly, customers of China's UnionPay can use their credit and debit cards at U.S. merchants that accept Discover cards, and the state-backed payment network recently launched its first prepaid card in the U.S., routing transactions over the Discover Network.
Earlier this year, Discover announced a deal to private-label its network and provide invoice settlement and payments capabilities to Ariba Network, a business-to-business procurement platform.
"With Ariba and PayPal, I wouldnt say were doing technically similar things, but theyre conceptually similar," Orlowsky says. "We are networked to endpoints and were leveraging all of those connectivity points for multiple strategic relationships. We are the connective tissue between all of these points where payments services organizations want transactions to flow."
From Discover's perspective, the relationship in many respects parallels the dynamic between utility companies that serve deregulated energy markets.
"You may get your electric service from one company, but its going across a certain set of wires that are not necessarily the wires of the electric company," says Orlowsky. "We are the rails and wires for the PayPal transactions."
In states with deregulated electricity, consumers and businesses can chose from a host of retail providers that generate and sell the gigawatts that bolt through the power grid, while the incumbent utility maintains the infrastructure used to deliver electricity from power plants to end users.
Of course, currency rather than current charges through the Discover Network. The PayPal wallet acts like a power plant, where consumers load various funding methods the same way that generators use fossil and nuclear fuels, renewable energies and other power sources to supply electricity to the power grid.
"Consumers are already doing this online with PayPal. They store all their funding sources with us and this is really giving them more opportunities to use the wallet and only have to carry around one card with them at all times," says Josh Goines, a senior director at PayPal. "That's a pretty big value prop right there; one source to do all their transactions with one relationship."
To access PayPal's digital wallet in the physical world, PayPal distributes a plastic card to consumers, who fund in-store PayPal transactions with the same methods they use to make online purchases. These include credit and debit cards, bank account withdrawals via Automated Clearing House transfers, or using a stored PayPal account balance or Bill Me Later.
PayPal has a default order that payment methods are used, but consumers can reorganize how their funding sources are ranked, like a circuit breaker to prevent overdrafts.
"The card works very similar to how a credit card functions at the point of sale today It's something that consumers are highly habituated to, so all of that experience is similar," Goines says. "The uniqueness in the wallet is the consumer can dictate how they fund the transaction. That's why it's basically a token to the wallet and a token to any funding source they put into the PayPal wallet."
In addition to working through Discover, PayPal creates direct connections with merchants like Dollar General, Jamba Juice and others. This process requires individual technology projects that can last as long as six months.
The established connection between PayPal and Discover eliminates the need for custom merchant integrations, like electric companies that can all deliver power across one centrally-maintained grid.
"For the merchant, there is no technology front-end or back-end work. It works within their current infrastructure today as long as they can effectively accept Discover at their locations," Goines says. "To get a merchant going, it's really simple as long as their acquirer has signed on to support PayPal."
Vantiv, WorldPay, Global Payments, First American Payments, Heartland Payment Systems and TSYS are among the approximately 50 acquirers and processors that will offer merchants in-store PayPal acceptance. The acquirers on the Discover Network are integral to connecting PayPal with retailers, much like the way service drops and meters help bring electricity to individual homes.
"There has to be a contractual agreement for the acquirers and merchants that we have a relationship with to take PayPal. We are not forcing this on any party," says Orlowsky. "They will have an election to, or to not, select PayPal independent of their choice to accept Discover or any other payment brand."
The swipe of a consumer's PayPal card at a merchant's point of sale terminal is like the flip of a light switch, instantly pulling power from the grid. Like the alternating positive and negative currents that run back and forth on the power grid, funds that are credited to merchant accounts are debited from the funding sources in consumers' PayPal walletswith related fees passing between merchant acquirers, Discover and PayPal the way a voltage drop decreases the amount of current delivered to an end user.
"What that does is make merchant acceptance of the PayPal in-store program almost seamless," says Orlowsky. "Weve tried to keep this as technically similar as possible to the way we do things now and the way the industry is used to dealing with payment services organizations."