PayPal’s partnership with Discover Financial Services officially kicks-off April 19th.Roll-out will include PayPal’s acceptance across Discover’s network of more than 2 million retail merchants. An early test with Home Depot, offering customers the option to pay with their PayPal account, did not show significant interest among customers.
While this will be the new frontier among the battle between the incumbents (VISA, MC,Amex) and new (PayPal, Google, Apple, Square etc…) payment platforms, I think it showed one of the flaws in the Paypal offline model. Until PayPal can offer credit, without users appending their own Visa or Mastercard to their PayPal account, PayPal will just be a middleman to consumers, not to mention merchants. Someone at PayPal will have to make it very clear to consumers why they should bother with a PayPal account for offline purchases if, ultimately, the consumer will have to append their Visa or MC card to their PayPal account anyways – especially if they want to earn points – an increasingly large part of each consumers method of payment decision.
Until PayPal decides to originate loans on its own processing rails, I think its offline payment strategy is doomed to marginal relevance. Furthermore, PayPal will find it nearly impossible to offer a product that much different than what’s already out there. PayPal will simply not be able to offer merchants significantly lower acceptance fees by issuing its own credit. How much lower will PayPal go than the 1.2%-2.5% interchange credit card issuers are currently commanding to operate their p&l’s. It might be able to go lower, but nothing near 10X change.
Hopefully, new models will emerge, but in the end, until a new lending paradigm is adopted, the old lending p&l and its required inputs will rule the day. As consumers revolve less, use points more, interchange is only become an ever more important input.