After reaching an agreement with Visa (V) last month largely ending their competitive jabs, PayPal (PYPL) announced a similar pact with Mastercard (MA) this morning, potentially reviving discussion of whether long-term benefits from the deals outweigh short-term margin erosion as more PayPal transactions are routed through card networks.
BACKGROUND: On July 21, PayPal and Visa announced a strategic partnership under which the digital payments company agreed to make Visa cards "a clear and equal payment option" on its platforms and refrain from urging Visa holders to link their bank accounts, among other concessions. In exchange, the company joined Visa's point of sale program to expand PayPal acceptance in physical stores. The company also noted "certain economic incentives, including Visa incentives for increased volume, and greater long-term Visa fee certainty." Weighing in on the deal, several Wall Street analysts forecast an increase in PayPal expenses as more transactions shifted from the low-cost Automated Clearing House network to Visa cards, though other research firms highlighted the long-term positives of the detente.
PAYPAL INKS MASTERCARD DEAL: Tuesday morning, PayPal and Mastercard announced an expanded partnership that largely mirrors the Visa agreement. Mastercard will become a "clear payment option" within PayPal, while PayPal gains an expanded point of sale presence as well as " certain financial volume incentives" and exclusion from a digital wallet operator fee.
BAIRD SEES LONG-TERM BENEFITS: Commenting on today's news, Baird analyst Colin Sebastian says he believes the Mastercard deal and any other card network partnerships "are a long-term positive for PayPal as they can reduce friction with consumers and merchants, despite the likely negative near-term funding-mix impact on margins." Sebastian added that the agreement "was largely expected" and shouldn't impact full-year 2016 guidance assumptions, and though 2017 margins "remain in flux," PayPal's digital wallet should ultimately see greater success in collaboration with the major card issuers. Key to offsetting near-term margin impact, says the analyst, is PayPal gaining more certainty over fees, seeing fewer ACH charge backs, and boosting transaction volume by reducing friction for users. The deal could also bring other potential benefits, "including MasterCard proactively facilitating more PayPal volume, possibly less ambitious roll out of MasterPass, and PayPal utilizing Mastercard's token services to compete more directly against Apple (AAPL)/Android Pay," Sebastian argues.
PRICE ACTION: After briefly topping $37.60 in early trading, PayPal closed Tuesday up 0.3% to $37.18, in line with the broader market.
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