By TELIS DEMOS and ROBIN SIDEL for WSJ
Two months ago, Visa Inc. Chief Executive Officer Charles Scharf told analysts that Visa and PayPal Holdings Inc. could go through one of two doors. One was a partnership. “The other door is where we go full steam and compete with them in ways that people have never seen.”
The companies chose door No. 1.
PayPal, the internet payments pioneer spun off from eBay Inc. last year, announced July 21 that it would end its long-running fight to steer some customers away from using Visa and other cards. In exchange, the credit-card company agreed it wouldn’t increase fees to PayPal and would provide it with a new way to accept payments in stores via smartphone taps.
The pact, though anticipated by many investors, sparked a selloff in PayPal shares that has put the fast-growing company and CEO Dan Schulman on the defensive. It also underscored that in the battle between Silicon Valley and entrenched financial firms, the newer players may eventually ally with firms they once hoped to compete against.
“When it first started, I saw PayPal as a disruptor, but now [it’s] more a part of the traditional ecosystem,” said Ned Elton, chief growth officer of PEX, a business payments startup. “Visa is ubiquitous, and it’s tough to overcome that.”
Following the deal’s announcement, PayPal shares have fallen 7%, and the consensus analyst forecast for 2017 earnings fell to its low. PayPal executives sought to quell concern on a previously scheduled private call with analysts after the release, telling analysts they were “disappointed” by the reaction, according to a person familiar with the call.
While the business of handling payments without cards has been lucrative for PayPal, company officials say it is already less of a focus, in part because of new rules that reduced debit-card fees. They argue that a detente with Visa promotes consumer choice and puts PayPal’s newer efforts, such as helping internet merchants accept all forms of payments, on more solid footing. It also opens new frontiers for PayPal in stores that accept Visa’s smartphone tools.
PayPal’s global head of product and engineering, William Ready, said in an interview that the bigger opportunity to disrupt is to seek to remove “friction from all payments.” He noted there is room for PayPal to grow in stores, which is still about 90% of the payments market.
The Visa deal “resets the way we work with the ecosystem,” he said. “It’s great for the core business [and] a pathway to the other 90% of the market.”
Still, the deal puts pressure on Mr. Schulman, a multiindustry veteran who came to PayPal after serving in senior roles at American Express Co., Priceline Group Inc.and Virgin Mobile USA. Specifically, PayPal will have to make up for some higher transaction costs by increasing volume faster and signing up more new customers and merchants.
“They are trying to be something different than they were historically,” said Elliot Turner of RGA Investment Advisors, which oversees about $25 million in assets. He said PayPal, despite competing in a crowded field, remains a top-three holding for his firm, because he likes Mr. Schulman’s vision and the Visa deal. He didn’t sell any stock after the announcement.
“The level of [customer] engagement will be far more deterministic to the company’s future worth” than transaction costs, Mr. Turner said.
For much of its almost 18-year history, PayPal—which counts Silicon Valley royalty such as Elon Musk, Peter Thiel and Max Levchin among its founders—had sought to make it more appealing for their customers to connect directly to their bank accounts, bypassing firms like Visa. That allowed customers the option of moving money into a PayPal account or making transactions without generating a fee paid by PayPal to the debit- and credit-card networks.
The tension between PayPal and Visa had been in place for years, especially as PayPal started directly pitching more merchants on adding services that competed with Visa. The rivalry intensified in 2005 when Scott Thompson, then a Visa technology executive, jumped ship to PayPal, according to people familiar with the matter.
First appeared at WSJ