PayPal-Discover Pact Boosts Mobile Payments Momentum

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The mobile payments/digital wallet drama now unfolding is fascinating for three reasons: First, paying with your mobile phone is the most fundamental shift in retail commerce since the credit card was invented 60 years ago. Second, mobile payments are just starting to be adopted by consumers. Third, the field is wide-open. Leading companies from Silicon Valley to Wall Street, not to mention retail giants and telecom titans, are furiously jockeying for position.

Each major player brings a competitive advantage to this showdown, but so far not one has been able to strike more than a glancing blow. That changed Wednesday, with PayPal’s announcement of a partnership with financial services giant Discover to enable transactions at more than seven million retail locations nationwide. For online payments pioneer PayPal, this is an ambitious step to move offline into bricks-and-mortar transactions at the cash register.

“This is not technology for technology’s sake,” says PayPal spokesman Anuj Nayar. “This is about removing friction from the retail process and giving consumers more options.”

Word of the agreement sent shares of Discover and eBay (PayPal’s parent company) to 52-week-highs on Wednesday. PayPal’s pact follows a flurry of mobile payment moves. Last week news emerged that an imposing group of retailers including Walmart, Target and Best Buy plans to introduce a mobile payment option called Merchant Customer Exchange (MCX). The week before that, coffee giant Starbucks announced a deal with Twitter co-founder Jack Dorsey’s startup Square to enable mobile payments at 7,000 locations across the country.

Meanwhile, tech giant Google continues to ramp up its own digital wallet product, although adoption has been slow. Telecom giants AT&T, Verizon Wireless, and T-Mobile are working on their own mobile payments system, called Isis, which will begin local trials later this year in Salt Lake City and Austin, Texas.

MORE: Walmart, Target Challenge Google, Square as Mobile Payments Heat Up

The PayPal/Discover partnership, which will be rolled out next spring, is significant because it enables PayPal’s 50 million active users to make purchases anywhere Discover is accepted in the United States. Although Discover handles fewer transactions than credit-card industry leaders Visa, American Express, and MasterCard, the Discover penetration rate at retail merchants in the U.S. is 95%, according to the companies.

“We’re not talking about one retail chain,” says Nayar. “We’re talking about seven million retail locations nationwide.” Importantly, no additional hardware will be required of the consumer or the merchant. PayPal users will be able to make purchases using their cell-phone number (and a security pin code), which will access their cloud-based, digital wallet. PayPal will also issue its users a card connected to their account, which will keep track of things like loyalty points, coupons and promotions.

Wall Street greeted news of the tie-up with approval. Here’s a round-up of four tech analyst research notes.

  • “We view PayPal’s partnership with Discover as a meaningful driver of its offline [point-of-sale] product as it significantly broadens the company’s reach among physical retailers in the US,” wrote JPMorgan’s Doug Anmuth. “We continue to believe PayPal is well-positioned in offline payments and are incrementally more positive on shares as the deal accelerates PayPal’s offline acceptance faster than we had previously expected.”
  • “We think that virtually all catalysts associated with PayPal offline will be positive catalysts,” wrote Ben Schachter of Macquarie Securities. “As with today’s Discover announcement, there is only upside; if something doesn’t work, it will be chalked up to a learning experience.”
  • “This initiative further distances PayPal’s digital wallet ahead of other mobile payment platforms,” wrote R.W. Baird Equity Research analyst Colin Sebastian (via Reuters.) “PayPal continues to take measured and deliberate steps to extend its reach into the ‘bricks and mortar’ channel.”
  • “We view today’s announcement as an incremental positive for PayPal..[b]ut we are still unclear about this product’s core consumer use-case & incremental value proposition to merchants,” wrote Citigroup’s Mark Mahaney. “However, we think PayPal clearly has offline payments momentum here.”

Given how central retail transactions are to the U.S. economy, it’s easy to see why the concept of a cashless society has captured the imagination of so many titans of American industry. These commercial giants want to eliminate customer lines and reduce friction at the point of sale. More consumers in, faster, and then get out = higher sales.

Market analysis firm Juniper Research recently projected that mobile payments will increase four-fold to reach $1.3 trillion by 2017. But that will only account for 4% of total global retail sales, the group said, suggesting massive upside for cashless payments. Right now, the various players are circling one another, inking deals with partners, and conducting experimental trials. Wednesday’s announcement by PayPal should put the entire space on notice that the level of intensity is about to pick up.