Commentary

Fifth Network…First Wallet

The payments industry barely had time to catch its breath from the Square/Starbucks news last week when the other payments shoe dropped yesterday morning: PayPal and Discover have joined forces to ignite the fifth payments network and something more important: the first, and certainly the biggest, omni-channel wallet.

The coverage of this announcement has so far focused on the nuts and bolts of the partnership: PayPal gets distribution and acceptance at about seven million card-accepting merchants via the Discover network, and Discover gets more transaction volume over its network. Merchants, I hear, are excited about the potential for incremental customers. Win-Win-Win.

But here’s what makes this a whole lot more than just an acceptance play for PayPal and a platform play for Discover — and therefore much more interesting (and if you are any other wallet contender in the marketplace, potentially far more disruptive).

PayPal is a wallet. And, it’s a pretty big one. There are 50 million active account holders in the US right now. It has taken it 12 years to get that base built. It’s a great base – about twice what Discover had when it launched as the 4th network more than a quarter century ago.

But, as Discover, the network, knows well, acceptance is a big part of how and why networks scale. But, man, oh man, it takes time. Discover knows this story well. PayPal does too. It recognized that to scale and grow its accountholder numbers, it needed to have more consumers be able to use it at more places.

There was only so much that PayPal could do to persuade consumers to go to the trouble of opening a PayPal account if (a) they didn’t already have one and/or (b) didn’t shop on eBay and/or (c) didn’t see PayPal offered at their favorite merchants and/or (d) didn’t need one to shop at their favorite merchants online. Acceptance at seven million merchants sort of changes that conversation now.

And, now, instead of trying to solve the simultaneous equation of new form factor adoption and acceptance — which is what every other (mobile) wallet scheme is trying to do today — PayPal went back to the payments future with the one form factor and technology standard that is accepted everywhere — the mag stripe. In making the decision to issue mag stripe cards, PayPal has not only become an issuer that has near ubiquitous acceptance now, it has brought decoupled debit back in vogue.

So, beginning in early 2013, PayPal customers will get a mag stripe card that they will be able to use at the merchants that account for almost all spend volume in the US (and if things go well, the world). This mag stripe card isn’t just any other card though; it is a wallet that can be used online and offline. This means that PayPal has become not just as the fifth network, but the first wallet that can be used online and offline. And, at a lot of places, from the get go, in both the virtual and physical worlds. Oh, and one other thing. Consumers are able to get used to this new wallet – and PayPal in the physical world – using a technology that they understand how to use and feel secure doing so.

So, that’s the big deal of it all. Discover — the payments enabler — made a decision to make its platform available to PayPal — the wallet provider — so that they can together take the shopping and buying experience to another level. It overnight (or over the next few months) will crack the one problem that no other network has been able to — deliver a wallet that can used everywhere that a consumer shops — online, offline and everywhere in between. I suspect that it wont be long before the Discover network will power PayPal’s other commerce assets, such as Red Laser, Milo, WHERE, for the benefits of merchants and consumers. Not to mention targeted credit options thru Bill me Later, too, delivered, in all likelihood in whole new ways at the physical point of sale.

Once there are 50, 60, 70 million PayPal consumer wallets running around in the US, that are accepted at seven million merchants, it isn’t a big stretch to imagine how these wallets might flip from physical card to something else at checkout — like mobile — and for that to be enough of a critical mass of wallet users and merchants to even drive (or influence) the mobile standard — something all merchants seem to really want. It seems that with Discover’s network available to leverage, PayPal and Discover might also be able to enable mobile commerce in new and different ways. Say, empty hands as the standard at checkout where mobile is not used as a form factor but for authentication.

For the immediate future, this probably isn’t a big threat to MasterCard and Visa. PayPal wallets include those network branded cards and today drive a lot of volume their way. But, that could change. There’s probably nothing stopping PayPal from offering incentives for its customers to link Discover cards to its wallets and to use them instead. And, absolutely nothing at all from flipping those customers to ACH — as the switch, Discover gets paid no matter. And, maybe (and perhaps way, way out there) nothing stopping them at some point from doing something that flips all Discover cards to PayPal cards or vice versa.

So, as they say, what a difference a day makes. Discover’s white label network strategy just hit a grand slam home run. PayPal just took one really gigantic step toward igniting its omni-channel strategy. And PayPal has put a lot of country miles between it and every wallet wannabee.

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New PYMNTS Report: Preventing Financial Crimes Playbook – July 2020 

Call it the great tug-of-war. Fraudsters are teaming up to form elaborate rings that work in sync to launch account takeovers. Chris Tremont, EVP at Radius Bank, tells PYMNTS that financial institutions (FIs) can beat such highly organized fraudsters at their own game. In the July 2020 Preventing Financial Crimes Playbook, Tremont lays out how.

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