PayPal and Visa, longtime frenemies, looked more like friends on Thursday afternoon after announcing a new partnership.
The deal calls for PayPal to start sharing data with Visa about transactions that are funded using Visa cards. The deal also tries to resolve Visa’s complaints that PayPal encouraged its users to tap their bank accounts rather than their credit cards as a way to avoid paying Visa’s credit card fees.
Visa has long been frustrated with PayPal because the payments giant encourages its 188 million users to use their bank accounts to fund their PayPal digital wallets through what is known as ACH. It saves PayPal on every transaction because Visa and MasterCard charge higher fees.
In turn, Visa has wanted to PayPal to stop encouraging its users to use bank accounts, and start pushing them to use credit cards, so it can collect fees.
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Visa’s CEO Charlie Scharf criticized PayPal for the practice in May, according to Recode:
I’ve been very, very clear on this one which is if you are a foe, you’re not a friend. And PayPal’s historic model, on the one hand, 50% of the volume is ACH, the other 50 percent is general purpose cards of which we’re half of it. So, they drive a lot of business our way. That’s supposedly the friend part of it.
The foe part is where they then use historically those transactions to do everything they can to get those to ACH where we and our clients get disintermediated from the transaction, the entire experience, and it causes tremendous customer service problems for the bank specifically.
The other bone Visa has to pick is that when Visa cardholders pay using their PayPal wallets, Visa doesn’t get any of the transaction data.
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With Thursday’s deal, PayPal said it would no longer encourage Visa cardholders to link their bank accounts instead of their credit cards. PayPal will also start sharing data about Visa-funded transactions with the credit card company, which the company says will be similar to the data collected when a Visa card is swiped at a store or used online. Additionally, PayPal will be able to be used as a payment option at any retail location that accepts contactless payments for Visa cardholders.
In turn, Visa promises to not increase fees for PayPal, and is offering undisclosed “economic incentives” for increased volume of payments through Visa cards. It doesn’t appear that PayPal has a similar relationship with MasterCard or American Express.
Meanwhile, PayPal continues to grow, after spinning out of eBay last year. In the second quarter, PayPal processed $86 billion in payments volume, up 29% from the same quarter in 2015. It also processed $24 billion in mobile payment volume, up 56% from the second quarter in 2015. And Venmo, a PayPal-owned payments app that is popular among Millennials, processed $3.9 billion of payments volume, up 141%.
