Updated from July 28 to include comments from Visa.
NEW YORK (TheStreet) -- PayPal (PYPL) - Get Report may be the biggest player in the digital payments space, but a new partnership in the industry shows it is certainly not the favorite of the big credit card networks.
Digital payments startup Stripe announced on Tuesday that it had raised a new round of funding from investors such as Visa (V) - Get Report and American Express (AXP) - Get Report valuing the company at $5 billion. On top of that funding, Stripe said it will be partnering with Visa to further improve payments.
The announcement is a huge win for Stripe, but also signals a change to the ecosystem that could be worrisome for PayPal, which was spun off from its parent company, eBay (EBAY) - Get Report , this month. Both Stripe and PayPal offer services that help merchants digitize payments seamlessly, but unlike Stripe, PayPal disrupts the card networks in a way that alienates companies like Visa and MasterCard.
"Stripe is not competing with the card networks," Michael Moritz, a Stripe board member and partner at Sequoia Capital, told The New York Times. "The fact that Visa has chosen to invest in Stripe, not in PayPal, is of absolutely huge significance."
In the company's third-quarter earnings call last week, Visa CEO Charlie Scharf acknowledged that a significant portion of PayPal transactions on eBay use Visa. "But they also have a very big business that they then use our transactions to mine from, to disintermediate our clients' relationship with us," he said. "And so that's something which has to evolve, and is not something that we think is sustainable for the long term."
Nonetheless, Visa is open to all sorts of partnerships, be it with PayPal or Stripe or Square, says Jim McCarthy, Visa's EVP of strategic partnerships and innovation. McCarthy views partnerships with Stripe and Square as he does partnerships with banks. Visa works with all sorts of competing banks in order to expand acceptance of its cards.
"We're never really trying to pick winners persay," he said. "It's not a zero sum game."
While Visa may not openly admit it, it's likely the card networks view PayPal as more of a threat than the other digital payment providers, says Jordan McKee, a mobile payments analyst at 451 Research. Partnering with Stripe, which they see more as a team player, can help them combat PayPal with their own branded solutions such as Amex Express Checkout and Visa Checkout. Plus Stripe hands over its data to the card networks and is "bank friendly," McCarthy said.
"PayPal's strategy involves guiding users' hands away from using payment cards and toward leveraging [PayPal's] checking accounts, which increases PayPal's margins significantly," McKee said. "Stripe, on the other hand, is seen as more of a partner because it does not subscribe to this approach."
To be sure, PayPal may not be that worried about losing the support of card networks since it seems to be doing pretty well with its current model. The company processed more than $250 billion in online transactions last year, and eBay's most recent quarter (which included PayPal) showed a 28% increase in payment volume from the first quarter on a 19% increase in revenue, plus 11% growth in PayPal active user accounts over the first quarter, bringing its total user base to 169 million active accounts.
Not only that, but the services that directly compete with Stripe only comprise one facet of PayPal's business, namely its Braintree offerings, which enable businesses to process credit card payments through back-end technology as opposed to front-facing buttons like "Pay with PayPal." "Braintree is small for PayPal, so it might matter more over the long-term," said R.W. Baird analyst Colin Sebastian.
Nonetheless, as action in the payments space heats up, with PayPal's recent spinoff from eBay and reports of payments startup Square going public, PayPal ought to keep a close eye on these sorts of moves from Stripe.
"Stripe is poised to become a global provider if in-app and online payments and they're in a great position with brands like Facebook and Alibaba in their stable," said Thad Peterson, a senior analyst at Aite Group. "Traditional payment processors and providers need to see the disruption that Stripe is creating and respond quickly."