Image source: PayPal Holdings.
What happened
Shares of PayPal Holdings Inc. (PYPL 1.96%) rose 10.3% in the month of September, according to data provided by S&P Global Market Intelligence, after the online payments specialist announced a significantly expanded partnership with MasterCard (MA 1.33%).
So what
On Sept. 6, 2016, PayPal revealed an expanded agreement under which it will make MasterCard "a clear payment option" within PayPal's own platform, enable Masterpass as a payment option for PayPal's Braintree merchants, and give PayPal increased presence at point-of-sale locations.
More specifically, PayPal will not encourage MasterCard cardholders to link to a bank account via automatic clearing house (ACH), MasterCard will be offered as a "clear and equal" payment option within PayPal Wallet, and customers will be able to select MasterCard as their default payment method. Meanwhile, PayPal will enjoy "certain financial volume incentives," will no longer be subject to the digital wallet operator fee, and will utilize tokenization services from MasterCard to expand its point-of-sale presence at over 5 million contactless-enabled merchant locations globally.
Now what
By the same token (no pun intended), the deal will almost certainly have a negative effect on PayPal's margins. But I agree with the general consensus that any margin contraction should be more than made up for through the resulting increased volume of transactions. And that's not to mention the harder-to-measure benefit of putting PayPal's brand in a more prominent position at millions of point-of-sale locations around the world.
We'll need to wait until PayPal's next quarterly report (slated for later this month) to get a better idea of its financial repercussions going forward, but I think investors are right to tentatively applaud PayPal's new deal with MasterCard.
