It's been five months since PayPal began disseminating its point of sale payment system to all Discover merchants, but First Data, a massive Atlanta-based payment processor, isn't in any rush to support the initiative.

"We are still negotiating with First Data and believe we can come to a mutually beneficial resolution," says Joby Orlowsky, vice president of strategic initiatives at Discover, in an e-mail. "As you know, some of the biggest names in merchant acquiring and processing have already joined us."

Those others include Vantiv, WorldPay, Global Payments, First American Payments and Heartland Payment Systems. And TSYS, another significant processor, agreed last month that it would handle PayPal payments at the point of sale.

PayPal's new technology allows consumers to make PayPal payments in stores by typing a phone number and PIN or by swiping a plastic card. PayPal negotiated several relationships with merchants on its own, and through its relationship with Discover, PayPal began rolling out its system to all Discover merchants in April.

Discover said it had recruited 50 merchant acquirers to accept PayPal payments, with the goal of getting PayPal accepted at more than 2 million physical merchant locations by the end of the year.

PayPal spokesman Anuj Nayar says, "There is no news at this time and there is nothing to say at this point" regarding an arrangement with First Data. But in an e-mailed statement, PayPal says it supports Discover's position of desiring such a deal.

First Data, which serves 6.2 merchant locations, would support PayPal if it determines that doing so is in the best interest of its customers, First Data said in an emailed statement. "We haven't reached that conclusion yet," the statement said.

First Data is setting a very high bar, says Richard Oglesby, senior analyst and mobile pay expert with Boston-based Aite Group.

"First Data is a huge and very complex business and this is a very complicated deal," Oglesby says. "They have concerns on the acquiring and issuing sides, as well as various other alliances and this decision will affect a lot of companies."

Discover and PayPal need First Data more than First Data needs them, Oglesby says. Consumer adoption of PayPal at the point of sale will take time, so First Data doesn't need to rush to a decision, he adds.

"Frankly, First Data should hold out and make sure everyone is on board with what they decide," Oglesby says. "They are the slowest one [to agree to accept PayPal in-store], but the biggest fish is always the slowest."

First Data's foundation as a service provider for issuing banks puts the company in a different position than some of the other processor/acquirers, says Richard Crone, chief executive of San Carlos, Calif.-based payments consulting firm Crone Consulting LLC.

"If First Data thought accepting PayPal would bring in new value, they would be all over it like white on rice," Crone says. "But they have to be very sensitive to their position in the value chain."

Many issuers see PayPal as a "fierce competitor trying to inject themselves between the consumer and the payment brand," Crone adds.

Whereas PayPal's point of sale system is largely software-based, First Data has hung its hat on mobile wallets such as Google Wallet and Isis, which rely on Near Field Communication hardware, Crone says.

"To suddenly support PayPal may signal they intend to abandon the hardware approach," Crone says.

Mobile payments would be a huge boon for First Data if NFC becomes the dominant approach, Crone says. But NFC tech may be losing some momentum.

Indeed, Google just this week began offering an NFC-free version of Google Wallet to Android phones that run on carriers that have blocked its NFC-based app.

And even PayPal's software-based approach isn't a sure thing, since the eBay unit has yet to sway another major holdout: Walmart.

Walmart, a First Data client, has stated that it would not allow PayPal payments at its registers.

Even if First Data agrees to support PayPal, "Walmart could just shut off PayPal themselves," Oglesby says. "But First Data has a lot of larger merchant clients, and could craft a deal where large merchants could opt in or opt out."

Crone says the prolonged negotiations, if the sides are indeed continuing to talk, are an indication that First Data has "a serious case of innovator dilemma" because of its card-based view of payment processing.

Ultimately, a good old-fashioned business deal may result in common ground for First Data, Discover and PayPal.

"I doubt there is a silver bullet that will get the deal done, but also doubt one major factor is holding it all up," Oglesby says.

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