PayPal to Tokenize and Eliminate Steering

Looks like I was wrong… I’m now 80% confident that Paypal has struck deal with at least one network to tokenize. Congrats to the Paypal team for reducing risk and creating opportunity to compete at parity with Apple, Google, FB and others.

What to expect Thursday? Paypal will tokenize, commit to no steering and share transaction data.

PayPal Win

  • Elimination of the staged Digital wallet fee (or equiv circa MA 2012)
  • Ability to benefit from 3DS 2.0 (Shift liability, and Reduced Interchange)
  • Reduced risk and certainty in Network/Bank relationships

Paypal Loss

  • Transaction Economics/Take Rate as consumers will chose default payment option
  • Each issuer can decide to tokenize per VDEP/MDES. If no issuers take part there is not 3DS 2.0 benefit

Network Win

  • Consumer Choice in Payment (Increased Volume)
  • Reduced Risks from Cards on File
  • Standardization of Tokens

Network Loss

  • Competition to Network Wallets at Parity (Visa Checkout/Masterpass)

Issuer Win

  • Consumer Choice/Volume (Card vs ACH)
  • Control over tokenization/rate to Paypal
  • Ability to structure bilateral deals with PayPal (risk and rate)
  • Reduced ACH

Issuer Loss

  • Issuer branded wallets

Summary

My guess is that Paypal moved earnings call to articulate the take rate implications to steering elimination. Paypal must give up steering and transaction economics in the hope that Issuers will agree to tokenize. This puts Paypal at Parity with others like Google. Whereas Apple has been able to extract 15 bps from issuers to gain the privilege of being in ApplePay, Google continues to work to convince issuers such as Chase to be part of Android Pay. JPMC actually asked google for payment to tokenize.

Summary here is that issuers have a new control point in pricing with Paypal. My guess is that Paypal will come out with at least one major bank supporting them. Given JPMC is Paypal’s acquirer I would expect a deal here.

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