Mastercard and Visa Deals Prove Inertia's a Bigger Enemy than PayPal

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Mastercard and Visa have now each entered a détente with PayPal, agreeing that a highly competitive stance is not of much use if it makes it too hard for consumers to pay for things.

"The network deals are an acknowledgement that an open approach to commerce will be necessary to win in digital," said Jordan McKee, a senior analyst on the 451 Research Mobility Team.

Mastercard has agreed to collaborate with PayPal along lines similar to a deal PayPal entered with Visa in July. Under the deal announced Sept. 6, PayPal will make Mastercard a "clear" payment option within its app.

"I don't think that all competition is gone but this deal paves the way for a much more collaborative experience for the benefit of the consumer and merchant," said Sherri Haymond, executive vice president of digital partnerships in North America at Mastercard. "We see a lot of opportunity in the ecosystem that can benefit the consumer and merchant experience through partnerships."

Much of the interoperability between Mastercard and PayPal already existed, though the experience of linking the two was time consuming and clunky, due in part to the companies' status as competitors. This summer's collaboration between the networks and PayPal makes their interoperability more transparent and fast. For example, consumers and small businesses will be able to instantly cash out funds held in PayPal accounts to a Mastercard debit card. This quick access to funds is a substantial improvement over the longstanding system in which the funds posted in a couple of days via ACH, Haymond said.  

PayPal will also receive certain financial volume incentives and will no longer be subject to the digital wallet operator fee, often called a staged wallet fee, which the networks levy on companies that use the their payment rails but do not adhere to the networks' data sharing protocols.

The deals remove obstacles to accelerating mobile payments by enabling ubiquity for in-store environments.

"From a network perspective ... it adds an option that, while there, wasn't too easy to get to, with PayPal emphasizing ACH," said Thad Peterson, a senior analyst at Aite Group. "And with PayPal actively embracing the networks, the 'coopetition' model appears to be diminishing as all parties recognize that making it easier for customers to pay for stuff when, where and how they want is all that really matters."

There's also a security benefit to the new arrangement. PayPal will use Mastercard's tokenization service, allowing consumers to use a tokenized Mastercard account in their PayPal wallet for in-store purchases at more than 5 million contactless-enabled locations globally. PayPal agreed not to encourage Mastercard cardholders to link to a bank account via ACH and will collaborate with the card network to improve data quality and transparency. Additionally, Mastercard and PayPal extended the PayPal Business Debit Mastercard program in the U.S.

PayPal will additionally enable Masterpass as an option for merchant clients of Braintree (a PayPal unit) and expand PayPal's presence at the point of sale. Visa on Sept. 6 also announced Visa Checkout will soon be available through Braintree's software development kit by early 2017.

"Braintree is an important e-commerce gateway and PayPal will be taking a big step by integrating Masterpass into Braintree and making it easy for all Braintree customers to use Masterpass," Haymond said.

"PayPal’s implementation of customer choice is about doing the right thing for our customers, increasing user engagement and driving more transactions in-store, online and in-app," said Chris Morse, a PayPal spokesperson, in an email. "The partnership with Mastercard [and other Networks] gives us tools, access to products and financial support to move forward more effectively with that strategy."

Visa's earlier deal with PayPal followed a period in which Visa CEO Charlie Scharf took an adversarial tone toward PayPal, being particularly critical of the "frenemies" concept. Mastercard's public relationship with PayPal appeared better on the surface, with Mastercard CEO Ajay Banga taking a more conciliatory tone, stressing existing collaboration such as the Extras card while hinting at discussions on broader cooperation and suggesting an easy end to staged wallet fees.

"[The deals] are an acknowledgement that the staged digital wallet fees implemented by Visa and Mastercard in 2013 were becoming increasingly onerous," McKee said.

PayPal's large customer base and the networks' substantial merchant acceptance network also get a potential edge on technology companies that wish to disrupt the payments space through mobile payment apps, as Apple, Samsung and Android.  

"The agreements with Visa and Mastercard should make it easier [for PayPal] to break through into the offline point of sale world," said Zil Bareisis, a senior analyst at Celent. "The fact that the Mastercard PayPal deal follows a similar move by Visa is not surprising at all. When it comes to major strategic decisions, the two network have tended to be more or less in-synch over the years."

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