PayPal Fires Back in Mobile Payments War (Update 1)

Updated from 10:17 a.m. EST to provide comments from company spokesman in the fourth paragraph and analyst comments in fifth paragraph.

NEW YORK ( TheStreet) -- The mobile payments war is white hot, with PayPal firing a shot at Square in the race for counter space.

PayPal, owned by eBay ( EBAY), announced a deal with Discover Financial Services ( DFS) to bring PayPal access to the 7 million merchants across the country who take Discover, starting in the second quarter of 2013. This comes just two weeks after Square announced a deal with Starbucks ( SBUX) to let customers pay with Square's app at the coffee behemoth's 7,000 U.S. locations.

Discover Payment Services President Diane Offereins noted that the PayPal deal will bring innovation to the space. "This initiative will result in real change and innovation for the industry by bringing new technologies to the point of sale that benefit merchants and PayPal customers," she said in a press release.

The Digital Wallet's Future Is Now

Consumers will be able to pay with PayPal's wide variety of services, including credit cards or PayPal's app. With more than 50 million users in the United States, PayPal has signaled it's not going down in the mobile payments war without a fight. Adding Discover's merchant network is another sign that mobile payments are coming, and they're coming soon. PayPal is giving out PayPal-branded credit cards to consumers to quickly drive adoption, explained a company spokesman, in an email to TheStreet. Over time, however, PayPal anticipates that people will move to the card-less model.

In a research note, Barclays Capital analyst Anthony DiClemente explained that the Discover deal will continue to drive PayPal's ubiquity on the more than 40 million payment terminals across the globe. He rates shares "equal-weight" with a $44 price target.

PayPal already has deals with well-known retailers, most notably Home Depot ( HD), Abercrombie & Fitch ( ANF) and a host of others, as the San Jose-based payments provider continues to drive adoption of its services. Signing a deal with Discover further proves this point.

The shift in payment methods from credit cards, debit cards and cash to smartphones, tablets and other mobile devices is imminent. Research firm Gartner believes the space could be worth as much as $600 billion by 2016, and PayPal is clearly willing to take on Square, Visa ( V), MasterCard ( MA) and anyone else in the space.

PayPal may receive a percentage of each transaction for the right to run over Discover's network. With Discover's 7 million retail locations, this could be as significant a deal as PayPal has ever signed.

Just a couple of weeks ago, it looked as if Square had one upped the industry, getting a retail giant like Starbucks to use its services in its stores. With this news, PayPal is saying not so fast.

Things are about to get a lot more interesting in the mobile payments war.

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-- Written by Chris Ciaccia in New York

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