PayPal Shares Slide on Visa Deal
23 July 2016 - 4:10AM
Dow Jones News
Investors in PayPal Holdings Inc. gave an early thumbs down to
the company's deal with Visa Inc. on Friday.
Shares of the online-payments provider slid as much as 9% after
releasing earnings late Thursday and outlining its deal to work
more closely with Foster City, Calif.-based Visa. Since splitting
from eBay Inc. a year ago, PayPal's biggest drop for a full day of
trading had been a 5.7% drop Feb. 5. Shortly after noon Eastern
time, shares had recovered a bit, but were still down 7%.
The Visa deal could help PayPal by making it an option when
people pay in stores with their smartphones. But analysts worry the
tie-up gives Visa the better economics of the deal. While the
agreement gives PayPal access to Visa's digital network in exchange
for promoting its cards, Royal Bank of Canada cut its 2017 earnings
estimates on PayPal in the wake of Thursday's news.
The bank's analysts on PayPal said they were concerned that as
the company moves from pushing cheap bank transfers to fee-based
Visa transfers, PayPal margins will be pressured.
Craig Maurer, analyst at Autonomous Research, wrote in reaction
to the deal that the fee discounts won't offset the higher expense
of using Visa's network more.
"Investors will likely react positively to the announcement
initially," he wrote. "But once they pore over the details, we
believe they will come to the conclusion that Visa came out far
ahead in this deal." Indeed, shares popped after-hours Thursday
before giving back gains in Friday trading.
PayPal, based in San Jose, Calif., acknowledges higher costs,
but points to greater revenue opportunities. With the deal, it will
now be possible for users of PayPal's popular mobile apps,
including Venmo, to instantly withdraw money they get through the
peer-to-peer payments service if they link it to their Visa debit
cards.
The agreement between the two companies ends a year of tense
negotiations between the firms and removes uncertainty for PayPal
about the fees it pays Visa.
It also helps PayPal move beyond what helped it first
revolutionize internet payments in the 1990s—providing an online
alternative to cash and credit cards—to what it hopes is a bigger
role in the system, serving people and businesses that use Visa or
any other payment tool everyday.
"This is a new PayPal, one that is actively partnering across
the digital payments landscape," Chief Executive Dan Schulman told
analysts.
In an interview, he added: "We want customers to pay any way
they want, and the deal with Visa allows us to move more
aggressively into the store."
The shift, which Mr. Schulman called "fundamental to long-term
growth," is investors' strongest indication of PayPal's direction
as an independent company. It was split off from eBay, where it
focused on helping buyers pay sellers in the online marketplace, as
part of a plan to unlock more value. Before Friday's slide,
PayPal's shares were up 11% in the year to date.
PayPal has recently expanded its range of moneymaking services,
such as one-touch online checkout, business and personal loans,
customer-loyalty tools and cross-border remittances.
The instant Visa linkage also gives PayPal another tool with
which to fend off the growing focus of banks on their own instant
mobile-app payments aimed at competing with Venmo. Venmo
transactions more than doubled in the second quarter to $3.9
billion, PayPal said Thursday.
As part of the deal, PayPal agreed to stop steering customers to
link directly to bank accounts, which allows it to avoid paying
fees to card networks such as Visa or MasterCard Inc.
Write to Telis Demos at telis.demos@wsj.com
(END) Dow Jones Newswires
July 22, 2016 13:55 ET (17:55 GMT)
Copyright (c) 2016 Dow Jones & Company, Inc.
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