The strategic partnership Visa and PayPal announced in July has generated an unusual amount of speculation, even for the payments world.
The topic dominated the Q&A portion of Visa’s quarterly earnings call the day of the announcement, and countless analysts have weighed in with their take—most focused on declaring who “won” in the agreement.
First, I’m struck by our obsession with winners and losers. This isn’t a reality show, people. Isn’t it possible that a deal could benefit multiple parties?
Besides, we’re in the early stages of a newly crafted and evolving relationship. Bear in mind that if you had snapped a photo a third of the way in, Usain Bolt was not leading the Olympic 100-meter dash. And the mobile payments “race” is a much longer slog.
Nonetheless, the market’s initial reaction was negative toward PayPal. Its stock fell nearly 10% in the days following the announcement, albeit from a three-month high.
Most press coverage has portrayed the terms as something of a capitulation by PayPal, which will now position Visa’s card channels on more or less equal footing with automated clearinghouse (ACH) as a payment option. There are other aspects to the agreement as well, but this one is by far the most visible.
PayPal has positioned its move as being “about consumer choice,” as it told the website Recode.
Such choice has undoubtedly been enhanced, as anyone who has used PayPal recently can attest to the increasing gauntlet they must run to make a payment via any instrument other than ACH—all in the name of reducing PayPal’s acceptance cost.
PayPal negotiated a preferred rate from Visa as part of this agreement, making it more palatable to process a greater share of its volume over card rails. There’s no way this rate is as preferable as ACH, however, so PayPal’s costs will inevitably increase.
The agreement’s talking points also included a veiled reference to PayPal having secured “cost certainty.”
Reading between the lines, I wonder whether PayPal risked being whacked by some broader Visa pricing action absent a deal.
In return, PayPal gets a more consumer-friendly experience. I know I didn’t appreciate being cajoled into how to make my payments.
PayPal is still in its relative infancy as a standalone public company, but it clearly has set its sights on being far more than a P2P point solution. The market continues to move toward consumer choice in that regard, and PayPal is now better equipped to offer it.
As a corollary I think we can safely say the consumer is a net winner in this deal as well—or at least is no worse off.
The benefits to Visa are obvious: Removal of a barrier to card use, higher volume, incremental revenue, and arguably the buying of some research and development runway, as discussed below.
PayPal’s executive suite is stacked with seasoned industry veterans, however, and it’s hard to imagine them getting hoodwinked in this deal.
What does all this mean for credit unions? I’d suggest it’s yet another reminder of the critical battle being waged for top-of-digital-wallet card placement.
The share of retail sales initiated through e-commerce and mobile commerce channels is heading in only one direction—up. It’s the trend that motivates players like PayPal and Visa (and Wal-Mart, and CU Wallet, and everyone else that’s launched a wallet app).
Credit unions need to take aggressive action now to ensure their credit union-issued cards are everywhere their members want to be, to borrow a certain network’s old slogan.
Going forward, that “everywhere” will increasingly be on handheld devices. Failing to be properly positioned in those devices translates directly into lost revenue.
That brings us to another nugget in the fine print of the Visa-PayPal agreement. Although it’s couched as “multi-year,” nearly all the terms and exclusivity expire after the first year.
This means the parties have essentially agreed to a 12-month play date during which they’ll decide how to work together longer term. (I’d love to see a count of multi-year “strategic partnerships” still technically in force despite zero substantive activity.)
Check back in a year to see if these kids still want to hang out together and under what rules. By then we should have a better sense of winners and losers.
And for those demanding a Machiavellian view, one could argue Visa bought a year’s time to mount a stronger challenge to PayPal’s wallet offerings once that exclusivity expires.
Visa/PayPal is but one brief armistice in the much broader, drawn-out wallet wars. This does not mean credit unions can afford to sit on the sidelines, however.
Once the battles inevitably heat up, it’s far better to fight from a position of strength than to be caught flat-footed.
GLEN SARVADY is managing principal at 154 Advisors and senior payments expert with Best Innovation Group, a CUNA consulting partner. Follow him on Twitter via @154Advisors. Learn more about the Visa/PayPal partnership in this podcast.