PayPal Piggybacks Discover in Push to Stores From Online

EBay Inc. (EBAY)’s PayPal unit, an online payments processor with more than 50 million U.S. customers, will expand acceptance of its service to brick-and-mortar stores nationwide in an agreement with Discover Financial Services. (DFS)

PayPal customers will be able to use their accounts at more than 7 million merchant locations that already accept Discover starting in 2013, the companies said today in a statement. The arrangement eventually may expand to include international markets, they 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.”

EBay gained 2.2 percent to $46.88 at 8:54 a.m. in early trading in New York and Discover advanced less than 1 percent to $37.19. EBay climbed 51 percent this year through yesterday’s close, the fourth-best performance in the 71-company Standard & Poor’s 500 Information Technology Index. Discover has advanced 54 percent in 2012, the second-biggest gain among 81 firms in the S&P 500 Financials Index, after Regions Financial Corp. (RF)

‘Alternative’ Option

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)

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 the 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.

Cards, Smartphones

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.

“This really makes real all the technology and things that people have been working on and the changes in consumer behavior,” Don Kingsborough, vice president of retail services at PayPal, said in an interview. “This is the first time that you make it real for the consumer and for the retailers.”

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.

Jamba Juice

Discover, led by Chairman and Chief Executive Officer David Nelms, 51, will charge PayPal for access to the network, said Kingsborough, 65. 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.

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)

PayPal and Discover 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.

To contact the reporters on this story: Donal Griffin in New York at dgriffin10@bloomberg.net; Danielle Kucera in San Francisco at dkucera6@bloomberg.net

To contact the editors responsible for this story: David Scheer at dscheer@bloomberg.net; Tom Giles at tgiles5@bloomberg.net

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