PayPal and Visa Bury the Hatchet: How to Profit From Their Truce

After a 17-year feud, the payment processing companies have agreed to work together. Here is how investors stand to profit.
By Kat McKerrow ,

The Hatfields and the McCoys may still be nursing a grudge after more than 100 years, but one of the biggest feuds in the payment processing sector has apparently ended.

After more than a decade, e-payment prince PayPal (PYPL) - Get Report and credit card czar Visa said that they have buried the hatchet and are teaming up. 

PayPal will cease discouraging its users from linking Visa cards to accounts in return for Visa holding its fees stable, according to the companies' agreement.

The deal also involves the companies sharing more data.

In addition, Visa has agreed to help PayPal expand into brick-and-mortar stores, where Alphabet- and Apple-owned payments systems have found success, but which PayPal has found to be a tough nut to crack.

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Since PayPal's founding 17 years ago as a subsidiary of eBay, Visa has bristled at the e-payment platform's practice of processing payments through the Automated Clearing House Network, which is owned by banks and thereby yields no fee revenue for the credit card company. Until recently, ACH transactions were noticeably cheaper than those run through Visa.

However, PayPal Chief Executive Daniel H. Schulman said in the spring that the pricing gap had narrowed, and he conceded that ACH bank transactions were indeed riskier than Visa purchases.

"This agreement opens new avenues for PayPal to collaborate with Visa, financial institutions and others in the payments ecosystem to deliver greater value, more choice and new experiences for our joint customers wherever they transact -- online, in-app or in-store," he said Wednesday.

The agreement will prove especially valuable for PayPal, as it can expand its reach into anywhere that Visa cards are accepted, as well as lessening the threat of higher Visa-imposed fees on payments. In addition, this points the way to potential agreements with other credit cards companies such as MasterCard.

Also on Thursday, PayPal posted strong second-quarter results, with its net profit rising to $436 million from $408 million a year earlier and net sales rising 15%, proving that the company has much to offer to investors. In the year that it has been fully spun off from eBay, the company has proven that it can be a major player in its own right.

Agreements such as the one with Visa continue to demonstrate the company's ability to expand beyond its humble origins as a platform for online auction payments. PayPal, along with other e-payments companies, is ready to become one of the world's most trusted and most used forms of payment.

Investors will continue to collect profits along the way.

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This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned.

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