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PayPal Teams with Discover to Expand Offline Presence

August 23, 2012Written by Tom Ryan

PayPal is expanding its brick-and-mortar payment services to more than 7 million stores across the U.S. in a partnership with Discover Financial Services.

Under the deal announced on Wednesday, PayPal will issue cards next year to its more than 50 million active users in the U.S. Users will be able to pay at retailers in the Discover Network by swiping their cards through existing checkout machines and entering a four-digit personal identification number. Later, consumers will also have the option of paying by entering their mobile phone number and PIN at the terminal.

The arrangement provides PayPal access to a network that reaches about the same number of U.S. merchants as Visa Inc. and MasterCard Inc. 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 Discover, said in the statement.

PayPal, which is owned by eBay, said the arrangement, starting in the second quarter of 2013, is an extension of its strategy that is already deployed at nearly 2,000 Home Depot stores and 15 other retailers.

"We'll get consumers used to using PayPal everywhere they want to shop," added Don Kingsborough, vice president of retail for PayPal, in a conference call on Wednesday. Mr. Kingsborough didn't offer details on how much PayPal will charge merchants for the transactions, although Home Depot has said the relationship with PayPal lowers the "abusive" bank fees it pays for traditional credit-card transactions.

Scott Tilghman, an analyst at Caris & Co., said one of the key features of the partnership is giving consumers control over how they pay.

"Customers will retain the ability to fully manage their digital wallets, which means they will be able to determine the source of funding for their purchases," Mr. Tilghman wrote in a research note.

Some questioned whether consumers trust PayPal enough to be the brand they use for everyday purchases. Some also felt that PayPal still faces an uphill battle against the established credit card giants.

"Although the deal improves PayPal's acceptance, PayPal still faces challenges in convincing its online customers to use PayPal offline in our view, especially given a lack of marginal benefit beyond convenience," wrote Bryan Keane, at Deutsche Bank Securities Inc., in a research note.

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