PayPal Shares Fall on Concern Visa Deal Will Hit Profit Margins

PayPal Holdings Inc. shares dropped the most in four months on concern about the cost implications of a new agreement between the digital payments company and Visa Inc.

The companies announced an agreement Thursday in which PayPal will stop discouraging customers from linking accounts to Visa cards and share more data with the card network in exchange for "long-term Visa fee certainty" and help with in-store payments.

Analysts pushed PayPal executives late Thursday for clarity on the costs associated with pushing more payments through Visa’s card network. That’s a more expensive way to process payments for PayPal, versus linking customers’ digital wallets to bank accounts. PayPal didn’t offer much clarity.

"Management failed to quantify the expense and investors are assuming the worst," said Josh Olson, analyst at Edward Jones. "This is an overdone sell-off."

The deal ended years of acrimony between the companies that escalated as PayPal’s transactions volume soared and Visa expanded into PayPal’s turf of online payments and digital wallets. PayPal’s strategy of steering customers to link their digital wallets with a bank account drew ire from Visa executives as it allowed PayPal to process payments via the cheaper, bank-owned ACH network, cutting Visa out of transactions.

Analysts liked the easing of tension between the companies, but expressed concern about the potential hit to PayPal’s profitability.

"We expect greater long-term margin pressures as a result of increased transaction expenses," Eric Sheridan, an analyst at UBS, wrote in a note to investors Friday. He said PayPal executives expect higher costs will start kicking in next year.

PayPal shares dropped as much as 9.2 percent to $36.43 earlier Friday. The stock was down 6.9 percent at $37.35 in afternoon trading in New York. That’s the biggest intra-day decline since March 24.

In return for funneling more transactions through Visa’s network, PayPal will get help expanding its reach into physical stores, an area it has been struggling with for several years.

Prior to Thursday’s agreement, PayPal had limited access to retail locations. In 2014, the company said it had the ability to transact in two million stores. The Visa pact means PayPal users will be able to pay by tapping smartphones everywhere Visa supports contactless payments. That means "millions" more locations, PayPal said Thursday.

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