Discover Financial Services (DFS), the second-best performer among 81 U.S. financial firms this year, climbed 3.9 percent to a record high and EBay (EBAY) Inc. shares also advanced after announcing a payment-processing deal.
Customers of EBay’s PayPal unit can use their accounts at more than 7 million merchant locations that accept Discover starting in the second quarter of 2013, Don Kingsborough, PayPal’s vice president of retail services, said in a conference call after today’s announcement. The arrangement eventually may expand to include international markets, the companies said.
The partnership gives PayPal, which seeks to transfer its online success to the physical world, access to a network that reaches about the same number of U.S. merchants as Visa Inc. (V) and MasterCard Inc. (MA) Online purchases accounted for less than 8 percent of U.S. retail spending last year and PayPal now can target consumers where they do most of their shopping, said Beth Robertson, a payments analyst at Javelin Strategy & Research.
“That’s the significant piece of the pie that now they’re going to have access to,” said Robertson, who was briefed on the agreement in advance. “For PayPal, it’s a move out of their traditional online arena.”
Discover rose $1.43 to close at $38.43 in New York, the highest since its 2007 spinoff from Morgan Stanley. Shares of the Riverwoods, Illinois-based lender climbed 60 percent this year, making it the No. 2 gainer in the Standard & Poor’s 500 Financial Services Index, after Regions Financial Corp. (RF) EBay advanced 2.5 percent to $47, second-most today of 71 firms in the S&P 500 Information Technology Index, after Autodesk Inc.
The tie-up also will drive more transactions to Discover’s network, the fourth-biggest in the U.S. by that measure after Visa, MasterCard and American Express Co. (AXP) It could boost annual earnings per share at Discover by 6 cents to as much as 23 cents if spending “grows rapidly,” Donald Fandetti, a Citigroup Inc. analyst, said today in a research note.
The deal “will help shape the emerging payments landscape by bringing together an established direct-banking and payments company with a leading commerce enabler to create an alternative payments option for consumers at the point of sale,” Diane Offereins, president of payment services at Riverwoods, Illinois-based Discover, said in a statement.
EBay, the world’s largest Internet marketplace, generated 40 percent of second-quarter revenue from PayPal, which had 113.2 million active accounts as of June 30, the San Jose, California-based company said last month. The total value of processed transactions climbed 20 percent to $34.5 billion in the period from a year earlier, the firm said. Worldwide volume on Discover’s network rose 9.4 percent to $78.4 billion in its fiscal quarter ended May 31, data compiled by Bloomberg show.
PayPal customers will be able to use plastic payment cards or smartphones linked to their accounts to make purchases in stores, Joby Orlowsky, Discover’s vice president of strategic initiatives, said yesterday in an interview.
The service will begin with 1,500 “large” merchants and Discover will charge a network fee, Kingsborough said on the call. PayPal will have access to merchants’ sales data and use it to improve service, he said.
“The first phase will be issuing a card,” said Kingsborough, 65. The card will become less important as technologies evolve, he said. “To integrate into the life of the consumer, you have to be wherever the consumer wants to shop.”
There’s no guarantee that PayPal’s customers will readily embrace the ability to use their accounts at stores, said Citigroup’s Fandetti.
“Until mobile reaches high penetration, which is years out, there is a question about how many PayPal users would use the plastic card,” he wrote. “Their volume is very small in the big picture of payments volumes through the major networks.”
PayPal was founded in 1998 by Peter Thiel, Elon Musk and Max Levchin and sold to EBay four years later for about $1.18 billion. The unit charges merchants a percentage of the purchase price, typically 1.9 percent to 2.9 percent plus a fixed 30 cents. It’s a partner of the traditional payment networks, whose cards are used to fund customer accounts, and also a rival when consumers choose to transfer money directly from bank accounts.
Discover, led by Chairman and Chief Executive Officer David Nelms, 51, will charge PayPal for access to the network, Kingsborough said. He declined to disclose the terms or whether PayPal previously discussed a potential deal with competitors including San Francisco-based Visa and MasterCard, based in Purchase, New York.
The deal could “raise modest concerns” in the long-term among investors that it will erode the major networks’ market share, according to Fandetti.
PayPal ventured into brick-and-mortar payments earlier this year in a partnership with Home Depot Inc. (HD), part of a push to wrest market share from Visa, MasterCard and New York-based American Express. PayPal subsequently added 15 more merchants, including Jamba Juice Co., J.C. Penney Co. and Office Depot Inc. (ODP)
Discover and PayPal collaborated previously on Money Messenger, a tool that lets customers send funds on the Internet or a smartphone using only a recipient’s e-mail address or mobile phone number.