Why Banks Are Pissed @ PayPal

The contentious relationship between PayPal and banks is a difficult one to describe.

On the one hand, banks benefit from the interchange (the percentage issuers charge merchants to accept cards) they make on the money that electronically moves from their customers’ accounts to PayPal; But, on the other, PayPal steps in between those banks and their customers.

This answer submitted to Q&A website Quora is one of the best I’ve seen.

The guy providing the info here is Dana Stalder. He says he’s a former executive at PayPal and the company’s parent, eBay.

1)  Does a bank prefer to have money pulled out of it via debit/credit card or directly via ACH transfer on PayPal?

The short answer is that banks strongly prefer that PayPal payments are funded through bank cards and not through ACH.  PayPal has the opposite preference, thus the natural tension between PayPal and card issuing banks.  When a PayPal transaction is funded through a bank card, interchange fees are charged to PayPal on the transactions and those fees go back to the issuing bank (and Association and payment processor).  The bank also has a greater probability of the transaction revolving on a  credit line, whereby they can charge interest and fees to the consumer.  When a PayPal transaction is funded via ACH, the transaction fees to PayPal are < $0.01, the banks earn no transaction fees and there is no chance of the transaction revolving on a credit line.

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PayPal ‘Discovers’ It’s Mobile Wallet

From @AmerBanker:

PayPal (EBAY) will soon extend its reach through Discover’s (DFS) network — enabling direct acceptance of its mobile wallet at more than seven million American merchants.

Up until now, the ecommerce unit of eBay has been inking individual deals with big box retailers, such as Home Depot, as well as terminal makers and middleware providers. This latest deal places PayPal in the same league as the issuing banks in terms of its ability to issue a card that’s accepted over an open-loop network.

The partnership, which was due to be announced Wednesday morning, will change the way PayPal handles those transactions as well. Once the system is live (in spring 2013, the companies say), Discover will be the network over which those payments ride, and PayPal will continue to process the transactions. Previously, PayPal did both jobs.

When Your Chinese Employees Sell to Syria

NCR‘s stock took a dive last week when allegations surfaced that the ATM maker is potentially violating U.S. trade sanctions and doing business with Syria.

The Wall Street Journal reported:

Documents shown by the tipster to The Wall Street Journal indicate that NCR has operated a directly controlled subsidiary in Syria in potential violation of sanctions handed down by the Obama administration last summer. The tipster also alleged and presented documents indicating that an NCR unit has conducted business with two Syrian banks the U.S. has blacklisted for allegedly supporting Syrian President Bashar al-Assad’s regime and the proliferation of weapons of mass destruction.

Analysts responded.

In particular, Wedbush senior analyst Gil B. Luria downgraded the stock from Outperform to Neutral.

In a note to investors, he said:

We believe NCR could grow [Earnings Per Share] at a 15% [Compound Annual Growth Rate] over the next three years if it is able to avoid the impact of potential Foreign Corrupt Practices Act (FCPA) issues… immediate implications could be multi-quarter investigation and potential fines with overall price tag in the single millions to tens of millions.

He added that if the allegations are true and the Chinese business is hurt, between $200-and-300 million of revenue in China could be “at risk”.

Furthermore, a “broader investigation could put overall emerging market growth at risk as well.”

And — solely for patriotic reasons, I’m sure — investors got skittish and the stock fell:

The business-technology company’s shares sank 10 percent in Tuesday trading.

NCR responded in an 8-K:

NCR has received anonymous allegations from a purported whistleblower regarding certain aspects of the Company’s business practices in China, the Middle East and Africa, including allegations which, if true, might constitute violations of the Foreign Corrupt Practices Act. NCR has certain concerns about the motivation of the purported whistleblower and the accuracy of the allegations it received, some of which appear to be untrue. NCR takes all allegations of this sort seriously and promptly retained experienced outside counsel and began an internal investigation that is ongoing. NCR does not comment on ongoing internal investigations.
Certain of the allegations relate to NCR’s business in Syria. NCR has ceased operations in Syria, which were commercially insignificant, notified the U.S. Treasury Department, Office of Foreign Assets Control (OFAC) of potential apparent violations and is taking other measures consistent with OFAC guidelines.

Still, NCR isn’t the first ATM maker to fall prey to the exact same international regulatory issues.

Diebold (DBD), NCR’s archival in the ATM business, went through the same problems in the second quarter or 2010, and is only now settling with the DOJ.

From Diebold’s latest 10-Q:

During the second quarter of 2010, while conducting due diligence in connection with a potential acquisition in Russia, the Company identified certain transactions and payments by its subsidiary in Russia (primarily during 2005 to 2008) that potentially implicate the Foreign Corrupt Practices Act (FCPA), particularly the books and records provisions of the FCPA. As a result, the Company conducted a global internal review and collected information related to its global FCPA compliance. In the fourth quarter of 2010, the Company identified certain transactions within its Asia Pacific operation that occurred over the past several years that may also potentially implicate the FCPA. The Company continues to monitor its ongoing compliance with the FCPA.

That raises the question: Is this just the cost of doing business internationally?

Wal-Mart’s Wrath

After more than a decade of feuding with the card networks, issuing banks, and the like, Wal-Mart has finally started on its path to vengence.

From @AmerBanker:

In a play to develop a mobile wallet of their own, a joint venture of retailers is working with banks to provide a merchant-friendly alternative to Isis, PayPal and Google Wallet.

The Merchant Customer Exchange — which includes 7-Eleven, Best Buy, CVS, Lowe’s, Sears, Shell, Target and Wal-Mart — has already begun building its own mobile payment applications.

Remember, Wal-Mart is opposing that multi-billion dollar swipe-fee settlement that the payment networks proposed in July

The pay-out is planned to fork over roughly $6 billion in restitution to merchants, while also allowing retailers and others to add a surcharge to credit-card transactions.

The National Association of Convenience Stores, a trade group that represents more than 3,700 merchants,immediately voiced its objections to these terms.

The announcement is proof that technology has so leveled the playing field that it’s only a matter of time before merchants come together and do what issuing banks did with Visa.

Can you imagine? A group of merchants creating a network that exists for their benefit, not the banks.

Could Swipe Fee Settlement ‘Open The Door’ For PayPal?


Visa and MasterCard, along with several issuing banks, settled a longstanding lawsuit with merchants over interchange on Friday.

From @AmerBanker:

The settlement is in line with analysts’ previous estimates, which pegged a potential agreement at between $5 billion and $15 billion.

In addition to the fund, the networks have agreed to temporarily reduce for eight months the level of interchange fees by 10 basis points, a benefit estimated by plaintiffs’ attorneys to be worth $1.2 billion.

Visa and MasterCard will also drop so-called “no surcharge” rules, which previously prohibited retailers from tacking on additional fees to the consumer for using a credit card.

But could these concessions open the door for alternative payment technology companies?

In a note to investors, Wedbush analyst Gil B Luria wrote:

We expect EBAY to outperform as it transforms into a payments-driven company and garners V/MA-like multiples. We believe eBay will realize significant value over the next few years as it extends its support of retailers from the online realm onto their entire footprint.

That means that the ecommerce unit of eBay could swoop in and steal business from the card associations.

Says Luria:

Retailer surcharging flexibility could open [the] door for PayPal promotions by retailers.
Collective bargaining may improve PayPal’s negotiating power, as one of the largest payers of interchange.
EBAY multiple should expand as closest comparables V and MA get multiple upgrades.