There’s no doubt that the announcement of the Visa/PayPal partnership shook the payments world more than a little bit last Thursday.
Over the last year, PayPal CEO Dan Schulman made a point, every chance he could, to let everyone know that he was the chief of a decidedly different PayPal, post its eBay independence. That PayPal, he said, was one that embraced partnerships and consumer choice. The network that started life steering consumers to ACH, he emphasized, was now indifferent to tender type. The consumer ruled.
Over that same year, Visa CEO Charlie Scharf made it perfectly clear that players in the payments sphere fell into two distinct camps: they were either with Visa or against it. Frenemy, schenemy he as much said – this co-opetition stuff doesn’t reflect the reality of how the payments ecosystem and the issuer-centric network model that’s been the cornerstone of the payments industry for more than 50 years operates. And since PayPal’s ACH model was still alive and well — with a chunk of accounts transacting that way — Scharf made it clear that PayPal’s business model was a concern.
So, what generated the collective industry gasp last Thursday was the public affirmation that those two players had buried that hatchet.
But, like most any big announcement in payments — and this really juicy one — it has led to many different interpretations.
Some immediately remarked that the partnership will give in-store NFC payments a real boost. Analysts have expressed concerns that it will totally crater PayPal’s business model (an opinion that saw its stock take more than a 9 percent hit on Friday – it ended the day down 6.75 percent). And some of the more sinister soothsayers suggest that Visa now has the benefit of having PayPal under its watchful eye as it simultaneously scales its own digital competitor, Checkout.
All things that make for nice headlines and clicks, but they are observations that are also somewhat off base.
They all miss the potential that both Visa and PayPal have to use the next 12 months of exclusivity of their multi-year relationship to change the dynamics of the payments landscape in the U.S., and the actions of every single player in it.
If they can execute.
So, here’s my take on what this partnership is — and isn’t.
IT’S NOT ABOUT NFC
One thing’s for certain: when NFC is the hammer, every in-store payments announcement is a nail.
Yes, the deal with Visa and its access to Visa’s token services, VDEP, is big. At the jump, it gives PayPal an easy and immediate onramp as a token requestor to enable contactless in-store payments where Visa contactless payments are accepted and Visa methods of payments are used.
As a refresher, VDEP eliminates the bi-lateral contractual rigmarole that makes it hard for other contactless payments schemes that require those individual contractual negotiations to achieve commercial scale. It also sets out parameters for how token requestors and issuers will play together, including rules that forbid token requestors from imposing fees. This partnership gives issuers the chance to opt-in to becoming a digitized, tokenized credential in a consumer’s PayPal account for use in-store under that program. And opt-in is a whole lot easier and faster than negotiating commercial terms.
Instead of getting bogged down in negotiating the T’s and C’s of a commercial agreement, the work between the issuers and PayPal is about enabling accountholders to use their Visa cards in the PayPal account. Things like who owns what data (the data for any PayPal/Visa transaction will be shared exactly as if a Visa card was presented and swiped), how Visa accounts will be positioned at signup (equal positioning with ACH options) and when transacting (visible and digitized card credentials in the transaction flow) has already been negotiated. Merchants will also probably get favorable pricing as part of this deal, too, because PayPal gets negotiated economic incentives which will pass along in part – more on that later.
And, yes, while VDEP surely does give PayPal the ability to check the in-store payments box and allows its app and Visa issuers who opt-in to have parity with the other in-store “Pays” at those places that accept NFC payments, there are a couple of big “buts” that offer some big clues into where in-store may be headed with this partnership.
“But” No. 1 is that VDEP, at the moment, only extends to PayPal apps running on Android phones. So that limits the in-store capability to the unknown number of Visa credentialed PayPal accountholders who own Android phones capable of making an NFC payment who also walk into merchant locations with NFC. And while that number may be unknown, it’s probably small and maybe even too small to get people all fired up about.
Which brings me to “but”No. 2.
Of the 2 million merchant locations that are NFC-enabled, 400k or so are vending machines. According to Visa’s latest EMV stats, there are still 72 percent of merchants without EMV terminals – and that means that there are still 72 percent of merchants that aren’t equipped to enable NFC anytime soon. There’s also no guarantee that 100 percent of the 1.2 million EMV terminals are also NFC enabled and at the places that consumers shop regularly enough to develop a digital in-store mobile payments habit.
It is therefore unlikely that either party perceives the Visa/PayPal VDEP capability as the in-store NFC payments’ silver bullet even though it was a nice bullet in the presser. For digital payments to play at scale and ignite, the solution must be cloud-based, cross platform/cross OS and cross-channel. I think just about everyone knows this now – or at least I hope so.
More likely, VDEP is the tip of very big digital payments iceberg that could transform in-store payments in a material way. When I chatted with Visa’s Global EVP and Head of Innovation last year, Jim McCarthy, at the launch of VDEP, he mentioned that VDEP was technology agnostic. In fact, he said that Visa’s token service “gives the merchant the ability to choose whether at the point of sale the consumer presents a QR code or an NFC radio signal or a BLE beacon-enabled transaction, because VDEP is agnostic in that respect.”
Now that’s interesting.
PayPal owns Paydiant, which has its own portfolio of in-store payments technologies. And Braintree, which has put in market what Schulman described as the most “rapidly adopted product in PayPal history” – One Touch. VDEP’s technology-agnostic, efficient issuer integration platform would seem to give the folks at PayPal and Visa the opportunity to fine tune a slick, in-store customer experience that goes well beyond subbing a tap for a swipe to unlocking new value for merchants and consumers.
That’s where I’m placing my bets.
IT’S ABOUT THE TRANSACTION VOLUME
Investors did not like it when PayPal CFO John Rainey suggested that 2017 would deliver increased transaction expenses as a result of changes to its funding mix. PayPal’s stock price ended Friday (July 22) down more than 6 percent, recovering a bit from being down more than 9 percent earlier in the day.
I, though, focused on three other comments that I believe round out the story: the tail end of Rainey’s comments on transaction costs, a very pointed phrase that Schulman emphasized several times in his own remarks and Scharf’s own description of the deal terms.
Rainey spoke of gaining “certainty over cost control,” Schulman said the deal with Visa eliminated the “threat of any targeted pricing actions” and Scharf remarked that the deal affords PayPal “greater longer term fee certainty.”
Taken together, this suggests that absent a deal, PayPal might have been facing onerous cost-side increases of another kind that could have had a material impact on the business. Eliminating that uncertainty via this partnership means that everyone can get on with the business of business – growing the digital payments footprint for consumers, issuers and merchants.
Which is all about increasing transaction volume.
Although details are scant, as one might expect, both Schulman and Scharf acknowledged during the earnings call that economic incentives are being extended to PayPal in exchange for increased volume.
There are a few ways that the partnership is designed to drive transaction volume.
There is a 12-month exclusivity period for Visa issuers to promote their own, branded digital credentials within the PayPal account. I would imagine that issuers would jump at that chance to ride the “top of digital wallet” with the largest digital payments player in the market, worldwide. I can also imagine that such efforts might be accompanied by some creative marketing initiatives to drive account enrollment and usage – with maybe Visa even kicking in a few bucks of its own. And since PayPal is accepted at more than 14 million merchants, all of these consumer incentives actually give consumers the opportunity to use those digital account credentials at the places they like to shop around the digital ecosystem. And giving PayPal the chance to drive usage from 29 transactions to something that’s more like once a day.
Those marketing activities will also be linked to a few things also stipulated as part of the agreement: PayPal agreeing to position Visa equally with ACH account options at signup, incorporating digital images of Visa cards into the payments flow so they are prominently featured as the top of wallet option, and working with issuers to help convert PayPal’s Visa ACH customers to Visa debit customers should the consumer wish to make the switch.
It’s that last part that has everyone worried, but maybe it shouldn’t.
We don’t really know – and PayPal does not disclose – how much of their volume in the U.S. is ACH-driven. PayPal suggests that it’s not as straightforward a calculation, given the mix of P2P volume inside of their numbers. So, we don’t really know how much of the PayPal volume is really a target for the switching – but it’s obviously enough to have Visa concerned.
But whatever that number is, now, thanks to Durbin (and it’s rare that we ever say “thanks to Durbin”) that revenue hit won’t be as huge as it once might have been. There’s a gap between ACH and debit, of course, but it isn’t as wide as the days before Durbin. The size of that gap depends on those negotiated incentives that PayPal and Visa have worked out and what PayPal pays for ACH today.
But what I take away from the “economic incentives” narrative is that both sides will work together to do something that should have been baked into every preceding mobile payments ignition scheme: giving issuers – and by default consumers – incentives to activate digital accounts and use them. TPV – total payments volume – after all, is the name of the game.
A volume game, played by meeting and serving consumers across every channel and every payments use case they encounter.
IT’S ABOUT DEBIT
One aspect of the announcement that I think got lost in the in-store and no more tender-steering news is the additional value-add that this relationship brings to PayPal’s P2P users and Visa’s debit business.
And the pretty big hole that it blew in the set of initiatives that banks are – and have been – undertaking to make P2P a ubiquitous reality via its own schemes.
Venmo users, who sent $4 billion between people in Q2, can now get instant access to that money if they use a Visa debit product. This instant accessibility of funds is also available to PayPal P2P users.
This does a few things for Visa and PayPal/Venmo.
First, it provides a huge incentive for PayPal/Venmo users to attach their Visa cards to their accounts.
Second, it provides Visa issuers with a new opportunity to market real-time availability of funds via this P2P capability and use it as a way to acquire and retain debit card users. Since millennials are Venmo’s prime demographic, this could become crucial to competing for the millennial demographic that issuers so covet – adding even more deposit accounts to the mix for issuers and P2P volume for PayPal/Venmo.
Third, it eliminates the friction and uncertainty issuers have with their current bank-driven P2P initiatives. Ubiquity is what’s needed to really put teeth into P2P and make it a friction-free experience. That doesn’t exist today with any of the schemes. Visa debit rails + Venmo and PayPal can get pretty darn close.
That means that, fourth, this capability also opens up a potentially whole new series of use cases for real-time payments between people and between businesses and people — from paying insurance claims, to paying contract or gig workers, to disbursing royalties using those rails.
Those same use cases that the faster payments folks have been advocating that banks invest in expensive new sets of rails to support.
IT COULD BE ABOUT A NEW WHOLE DIGITAL PAYMENTS PARADIGM
The one unanswered question for most payments peeps is where Visa Checkout now sits in the midst of this announcement. Visa Checkout was launched just about two years ago – in July of 2014 – as the replacement for V.me. Checkout shifted Visa’s focus from a wallet that aggregated a variety of digital payments artifacts to just making checkout online simple and fast.
When asked about Checkout on the earnings call, Scharf said that Visa Checkout is chugging right along, although he declined to offer stats on users and merchants. The last time Visa reported Checkout numbers – March 2016 – it stood at 11 million users across 16 countries and more than 250k merchants. Scharf spoke instead to the enhancements to Checkout – a streamlined user experience and new ways for issuers to be branded inside the app.
There’s a short-term and a long-term way of looking at Checkout’s future vis-a-vis the Visa/PayPal partnership.
If I’m a Visa issuer and what I really want is volume on my cards and sticky digitally transacting customers, I’m going to want to be present in a variety of digital checkout scenarios as long as I don’t have to do much to get there.
But what I’m going to probably spend the next 12 months of exclusivity with PayPal doing though is blasting out a series of incentives that get consumers using cards with the digital network that’s already accepted widely online and in-app and very likely cooking up a cool cloud-based in-store experience. If volume is what I want online and use of my own branded digital credentials in that channel, this is probably one of my best shots at achieving that.
And if I’m Visa, I’m also going to use those next 12 months to maybe even fast-track getting digital Visa credentials in as many places as PayPal and Braintree and Venmo and Xoom can get them.
Using all of those next 12 months to mobilize a digital payments plan that puts some distance between Visa, its issuers and what everyone else is pursuing.
So that, long term, Visa and PayPal could be well-positioned to rewire the digital payments ecosystem.
Maybe that’s by using the combined assets of the Visa cardholder base and 188 million PayPal accountholders to help merchants capitalize on the digital payments experience in ways that have not been explored before.
Maybe that’s by tapping the Braintree payments veins deeply including the clever application of capabilities like Braintree Auth, which allows permission-based sharing of tokens across eCommerce endpoints, to expand acceptance and usage.
Or by using the economic incentives that both sides have spoken about to extend favorable terms to merchants and incentives to cardholders to select and use Visa accounts on PayPal’s digital network.
Or really thinking deeply about how to improve the shopping experience by banking intelligence into the consumer’s digital accounts in order to further drive adoption, usage and preference across all channels, platforms and devices.
Maybe even positioning PayPal as a digital layer that connects digitized issuer-branded credentials with any platform, any shopping channel and any device enabled at those various endpoints.
WHO’S CHOMPING AT THE BIT AND SHAKING IN THEIR SHOES?
Your reaction, of course, depends entirely on where you play and what assets you bring to the digital payments party.
Three days is a relatively short amount of time to absorb this news and 12 months a relatively short amount of time to execute, although as both sides point out, it is a “multi-year” partnership agreement.
If you’re one of the “Pay” players, it remains in Visa’s and PayPal’s interest to make their products attractive to everyone so that consumer choice can really be delivered. But, both of them have also made a decision to allocate their own resources – time, people and money – to making sure that the partnership lives up to the terms of the deal and maximizes the 12-month exclusivity for Visa issuers.
Those who could hurt the most beside the many smaller “Pay” players who will struggle to get any merchant attention now? Apple Pay and Samsung Pay.
Apple Pay, since issuers will be given an incentive to put their muscle behind a scheme that’s more widely accepted and used across a variety of shopping channels. And Samsung Pay given its very narrow user potential (just Android, then just Samsung, then just new Samsung devices) despite having a pretty slick technology. Like Apple Pay, they are device and OS dependent but unlike Apple Pay, they have a much smaller and seemingly less attractive user base to offer merchants.
Google, on the other hand, could make for a very interesting partner if they take off their Android Pay hat and put on their Google Commerce hats. I can imagine lots of clever scenarios in which a Visa/PayPal and Google mash-up could drive volume to Google’s various commerce platforms, including YouTube, Maps and Search.
Chase will be an interesting one to watch. As one of Visa’s largest issuers, they should be thrilled and very motivated to provide top of digital wallet status to their PayPal users. As Chase Pay, the new mobile wallet “Pay” to be launched later, they might face some new and unanticipated competition from the newly combined PayPal/Visa capabilities in-store and online – depending on how each partner takes that part of their offer to market.
American Express and Discover – well, they’ve been pretty invisible in the digital world so far and this partnership has the potential to make that invisibility even more so. It also puts tremendous pressure on both of them to make a move, which could even include an acquisition of some kind or to put themselves in play to be acquired, depending.
Mastercard, of course, made an announcement of its own last week when it acquired U.K. payments system VocaLink.
The once bank-owned system that’s a dominant player in the U.K. payments market and enables real-time/faster payments in multiple countries, including a contract to do the same here in the U.S. with The Clearing House, is a way for Mastercard to extend consumer choice via its own payments network through direct debit access. While many have suggested that Mastercard and VocaLink is simply a way for Mastercard to beef up its base in the U.K. where Visa is already quite strong, I think there may be more to it than that.
When put alongside its newly enhanced MasterPass cross-channel, cross-platform, and cross-device strategy unveiled two weeks ago, I think that it’s a signal that Mastercard is looking to operate a global set of real-time rails that move money between people and businesses using any payment tender across any connected endpoint. The now have assembled network assets – they now need merchants and consumers to hop on board.
And that’s what’s so interesting to me about Visa and PayPal. They each bring network assets and consumers to the party. Visa, as the largest card network in the world, brings 14k FIs and the consumers they have in tow. PayPal, as the largest digital payments network in the world, brings 188 million active users who’ve developed a habit of using PayPal – and are increasing that usage. PayPal also brings lots more “dormant” PayPal accounts that this partnership could “wake up” with new incentives for accountholders to use them. It also has digital merchant acceptance and an engine that can enable a lot of new technology deployments on top of a powerful Visa and its network assets.
But as I said earlier, everything always looks good on paper. The hard part now is execution. That is what will decide whether this is the sizzle that it appears to be or another great announcement whose best days were behind it the day the press release dropped.