PayPal and Visa have entered a strategic partnership and recently outlined a number of anticipated benefits from the collaboration. While industry observers suggest the move will expand PayPal’s acceptance at point-of-sale locations and drive more Visa transactions across PayPal’s digital payments platform, the ensuing analysis has primarily focused on the key implications for the payments industry and how the partnership is likely to impact consumers and merchants.
According to the terms of the agreement reported on Bloomberg.com, PayPal has agreed to position Visa as “a clear and equal payment option during enrollment and subsequent payments” rather than encouraging users to link a bank account via Automated Clearing House (ACH), which typically has lower transaction fees. In return, a press release issued by both organizations noted that Visa has offered PayPal “certain economic incentives” and will provide tokenization services that allow PayPal’s digital wallet to be accepted at retail locations equipped for Visa contactless transactions.
This development has shaken up the payments industry, and there has been much speculation as to its potential impacts. While Visa stands to profit from the fees it will collect from the rise in transaction volume, PayPal may incur higher transaction costs – with the undisclosed ‘economic incentives’ and increased brick-and-mortar transactions to help offset them. Ultimately, the deal is considered a win for the payments industry since it should drive both eCommerce and brick-and-mortar transaction volume while offering merchants and consumers more payment options.
PayPal and Visa assert that issuing institutions will benefit from:
- A better customer experience,
- More spending volume on their credit and debit cards,
- Lower operational costs and improved security and
- The ability to choose whether or not they want to include their cards in PayPal’s digital wallet.
Merchant advantages are noted to include improved customer experience, efficiency and security, in addition to the expectation that their fees would remain consistent with other contactless transactions they currently accept.
The new partnership behooves consumers because it provides a greater choice of payment methods across all commerce channels. Consumers with Visa debit accounts will now have instant access to funds that are transferred via PayPal or its Venmo peer-to-peer (P2P) payment app. Additionally, we predict that cardholders will be offered incentives to link their Visa credit and debit cards to PayPal and begin using them for both online and contactless in-store purchases, while merchants will likely also receive enticements to accept and promote PayPal/Visa payments.
However, industry leaders urge merchants to be aware of a potential caveat—the projected rise in credit card transactions may also lead to increased chargebacks. If consumers respond favorably to incentives to use Visa-linked PayPal accounts, those who currently pay with cash, checks or ACH deductions from their bank accounts may start charging more purchases … which can open the door to friendly fraud. Consumers enticed to over-spend out of convenience are more likely to file chargebacks. With the majority of these claims unfounded (i.e., friendly fraud), the merchant faces increasing costs and liabilities.
To minimize these risks, I advise merchants to employ a dynamic risk management solution that identifies the true source of each chargeback, whether merchant error, criminal fraud or friendly fraud. Additionally, they should maintain detailed records of all transactions so they can effectively challenge unjustified disputes.
Monica Eaton-Cardone is the founder and COO of Chargebacks911.