It’s no secret that eBay, the owner of online payment service PayPal, wants to take on the credit card industry. The company recently announced a new partnership with retailers such as Home Depot and Starbucks to allow customers to pay for their purchases with their PayPal account.
In what may have been the biggest move in credit cards and payment processing this year, PayPal reached a deal with Discover to use its network to expand into millions of new merchants.
Under the terms of the deal, merchants will pay PayPal a processing fee when a customer uses his or her PayPal account to make a purchase. Some of the cash will be split with Discover, the company that provides the network to process the payments. PayPal will keep the remainder.
In effect, PayPal will soon begin to issue its own debit cards that are Discover branded. The debit cards will be accepted anywhere that a Discover card can be used as a form of payment. The move challenges the traditional business of payment processing. In the past, payment processors have been wary of extending their networks to other financiers, banks, and credit card issuers.
What is unique about the new program is that a PayPal account is often connected to a user’s bank account. In the event a customer’s PayPal account is underfunded, funds can be transferred automatically from an attached bank account to fund the PayPal purchase. This gives PayPal an edge in providing what may soon become a new rewards debit card. Under a new change to the debit card space, debit card processing fees are capped. However, PayPal’s plan may allow for higher fees for merchants, which opens the possibility for PayPal to extend a rewards program to its most loyal users.
The move comes one year after Square, a startup backed by one of the many founders of Twitter, agreed to partner with Visa to process payments. A relationship between PayPal and Discover is just one of the many ways eBay intends to make a business out of quasi-credit transactions.