March 27, 2013 1:21 pm

PayPal’s ‘free ride’ on payments to end

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PayPal faces a turf war with traditional credit card companies as the race to establish a widely used digital wallet heats up and friendly partnerships take on a more competitive edge.

At PayPal parent eBay’s analyst day on Thursday, analysts are likely to seek more details about fees MasterCard, and possibly Visa, plan to charge the online payment company for using their networks to process mobile payments in physical stores.

“PayPal rides for free on the back of other business models,” said Chris McWilton, MasterCard’s president of US Markets at a conference this month. “I think they’ve got to be cautious that they don’t get too big and start making people wake up and say wait a minute, I’m actually losing business here because of your moving into the physical space.”

Ebay’s stock has fallen slightly in recent weeks over concerns about the fees, hitting a low of $50.11, after rallying steadily for the whole of last year.

PayPal formed several partnerships with physical retailers last year, including Home Depot and Toys R Us, who agreed to accept PayPal digital wallet payments at their in-store registers – shoppers wave their phones over the register and the purchase amount is deducted from their PayPal account. In a January earnings call, John Donahoe, chief executive of eBay, said the company would focus this year on consumer outreach.

Several other companies have been pushing to build their own digital wallet for consumers, and offer in-store point of sale systems for merchants to accept such payments. Google, Intuit and Square, a San Francisco start-up, have all been racing with PayPal to become the go-to product.

Four out of five large and national retailers indicated mobility as a top store system priority in 2013, with about 50 per cent planning to install some form of tablet or handheld system for sales associates by the end of the year, according to Barclay’s research.

Now that the technology is gaining traction, MasterCard said in a February regulatory filing that it would start to charge PayPal, and other digital wallet operators, a fee for using its networks.

Last week, Charlie Scharf, chief executive of Visa, suggested his company might follow suit.

“Some of the people we compete with started out as one thing and they morph into another thing,” he said at the Barclay’s Emerging Payments Forum. “And if they changed enough that we think it warrants us to change something with us, we will do that.”

Analysts are hoping PayPal will reveal at its analyst meeting more details about the size of the new fee MasterCard is charging and indicate how margins will be impacted by such fees, especially if other credit card companies implement them.

Analysts at Nowak Equity Research predict such fees will have minimal impact on eBay’s overall earnings per share, just about 1 per cent in 2014.

“The runway for growth in payments is long,” they said in a report. “Competition is likely to remain fierce, but we believe there’s room for PayPal to serve as the fifth network.”

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