PayPal Inc.'s deal to receive point of sale payments over Discover Financial Services' network may not be as beneficial for Discover's offerings, particularly its Pulse PIN-debit network, as it is for PayPal's. But it's still a good deal for Discover.
PayPal and Discover intend to work together to expand PayPal's PIN capabilities in the future, but the second phase of their project may not take effect until October of 2013, says Joby Orlowsky, vice president of strategic initiatives for Discover Financial Services.
Even then, Pulse's role in the partnership is unclear.
"It will not be a full PIN rollout during that second phase, but it will be part of it," Orlowsky says. "Whether it ultimately is a Pulse system or a signature network has not been decided yet."
Some experts wonder if Discover, in a roundabout way, is injuring its Pulse network by actively supporting PayPal, which in turn promotes a funding option through Automated Clearing House transfers.
"PayPal works very hard to make ACH the default payment account," says Richard Crone, chief executive of San Carlos, Calif.-based payments consulting firm Crone Consulting LLC.
Stakeholders should carefully consider the impact this will have on Discover's relationship with financial institutions and, most importantly, with retailers, Crone says.
But Discover's future success does not hinge on the success of its Pulse network, says Andrew Jeffrey, chartered financial analyst for Atlanta-based SunTrust Robinson Humphrey.
"If the Pulse network is a casualty or is cannibalized by the PayPal deal, it is still a win for Discover," Jeffrey says.
Discover will route the extra PayPal transactions over the Discover network no matter what, a tradeoff Discover "would make any day" because of the sheer volume of anticipated PayPal transactions, Jeffrey adds.
The companies did not make public the financial arrangements behind the deal, but it is safe to assume PayPal will keep any transaction fees collected from merchants, Jeffrey says. PayPal would pay a network fee to Discover, he says.
Discover's Orlowsky says use of an established network sends a message to the industry as a whole.
"Scale is a critical element to making this work and determining who eventually will win in this payments space," Orlowsky says. "Discover brings 135 acquirers and 7 million-plus merchants, while PayPal has 50 million accountholders, and that brings immediate scale to the partnership."
In Discover's view, those numbers represent only "the tip of the iceberg," Orlowsky says.
Discover may have predicted that even without its involvement, "PayPal was going to get to the merchant eventually," Crone says. "So they secure the wholesale transaction processing business now with this deal."
The deal also emphasizes that Discover is quickly spreading its wings by getting involved with all of the key players in mobile payment development, including Google and Isis.
That type of play will benefit Discover down the road, Jeffrey says.
"Google Wallet has a really interesting approach in using the cloud for its 'plumbing' – card acceptance, authorization and transaction clearance – and merging that with Near Field Communication at the point of sale," Jeffrey says.
For Orlowsky, the PayPal deal is one that allows Discover to concentrate on a key future goal.
"We're looking to blow this up way past domestic borders and go into international markets," Orlowsky says. "That would be exposure to more than 20 million merchants."