By Andrew R. Johnson
Discover Financial Services (DFS) is making headway in its
efforts to bring eBay Inc.'s (EBAY) online-payments service to
physical retailers, even as one of the country's largest merchant
processors has opted not to support the service.
The credit-card company said Tuesday it has deals with 50
merchant acquirers, which handle card transactions for retailers,
to equip eBay's PayPal service as a payment option at checkout
counters.
More than two million merchant locations should be live with the
service by year-end as a result of the contracts, up from 250,000
stores that have gone live since Discover and PayPal struck a
partnership last August.
But at least one merchant acquirer, First Data Corp., has
decided not to equip its retail clients with PayPal for the time
being.
The Atlanta-based company told some clients last week that it
hasn't signed on to offer its merchants PayPal in their physical
stores.
"For a variety of factors and after evaluation of the PayPal
product offering, First Data has decided not to implement support
for this new card product," the company said in an April 23 client
alert obtained by Dow Jones Newswires.
First Data, a unit of Kohlberg Kravis Roberts & Co., was
ranked as the second-largest merchant acquirer in the U.S. last
year based on $423.6 billion in Visa Inc. (V) and MasterCard Inc.
(MA) card transactions it handled for retailers, according to The
Nilson Report, a payments-industry newsletter. Including volume it
handles from joint ventures and other relationships, First Data is
the largest merchant acquirer, said David Robertson, publisher of
the Nilson Report.
First Data's customer base included 992,000 active merchant
outlets last year, according to the newsletter.
A spokesman for First Data confirmed Tuesday that the alert had
been sent to some clients but indicated the company's decision
could change in the future.
"We are in active negotiations" with Discover and PayPal, but
"we currently do not have a contract that allows us to process"
PayPal transactions in physical stores, the spokesman said.
While First Data's decision isn't likely to hamper PayPal's
overall efforts to get merchants on board, it underscores the
hurdles the online giant is likely to face as it morphs into a
direct competitor to dominant brands like Visa, MasterCard and
American Express Co. (AXP).
PayPal in December 2011 began testing its in-store payments
service with Home Depot Inc. (HD), and gradually expanded into the
home-improvement retailer's more than 2,000 U.S. stores in early
2012. It added additional merchants throughout last year, and in
August struck a deal with Discover, which is working to equip its
nearly eight million U.S. merchants to accept PayPal.
To do that, Discover is signing on merchant acquirers, which
have direct processing relationships with retailers. Discover so
far has deals with some of the largest merchant acquirers,
including Vantiv Inc. (VNTV), Global Payments Inc. (GPN), Heartland
Payment Systems Inc. (HPY) and Total System Services Inc. (TSS),
the Riverwoods, Ill.-based company said.
"We hope to get all of that activated by year-end and feel like
we're well on track to exceed that two million merchant goal,"
Roger Hochschild, president and chief operating officer of
Discover, said in an interview.
Consumers can make purchases using their PayPal accounts by
typing in their mobile phone number and a personal identification
number on a merchant's PIN pad or by swiping a special PayPal card
that is linked to their accounts. In both cases, the service allows
customers to fund purchases with existing balances in their PayPal
accounts as well as credit cards, debit cards and bank accounts
they've registered with PayPal.
Discover, which operates a payments network that competes
against Visa, MasterCard and American Express in addition to
issuing cards to consumers, is helping process the transactions
that PayPal customers make in physical stores.
First Data's current decision is not "hugely significant right
now," Mr. Hochschild said, adding that First Data has been "a great
partner of ours" in expanding Discover's own card acceptance into
additional retailers.
"My perspective is we'll be able to work through this with First
Data," he added.
First Data's client alert did not specify its reasons for its
decision. The company's spokesman declined to discuss specific
details.
"I would imagine First Data is trying to hold out on price,"
said James Friedman, an analyst with Susquehanna Financial Group
who follows Discover and eBay. "Merchant acquiring is one of the
most ... mercenary industries. You can get anything into a merchant
if you just pay the distributor enough."
The broader challenge for PayPal is convincing consumers to use
its service when checking out instead of pulling an existing credit
or debit card from their wallets.
"Merchant acceptance has largely been addressed and is the
easier bogie," Mr. Friedman said. "Now consumer acceptance is the
harder challenge. At the end of the day if you solve consumer
acceptance, merchant acceptance will follow. Merchants will do
whatever consumers require, and First Data will do whatever [its]
merchants require."
Write to Andrew R. Johnson at andrew.r.johnson@dowjones.com
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