As Amex and Discover get friendlier with PayPal, who comes out ahead?

PayPal broke through some major acceptance barriers a few years ago by separately negotiating with Visa and Mastercard for network inclusion and interoperability, but that alone wasn't enough to make PayPal a power at the point of sale.

PayPal took another step toward this goal last year when it announced plans to integrate with both Amex and Discover, and the details of how PayPal will work with these card-issuing networks are starting to take shape.

Amex in October rolled out a program enabling its credit card customers to use Membership Rewards points to pay at PayPal merchants, expanding the utility of Amex loyalty points and exposing PayPal to new audiences.

Scott Eells/Bloomberg

In a further step, Amex recently added the option for its credit card customers to ping friends through the Amex mobile app via PayPal or Venmo to request repayment in an exact amount. Users also can direct the app to divide repayments for purchases evenly among a group.

Discover on Nov. 25 echoed Amex’s move by enabling Discover credit card rewards for purchases at merchants that accept PayPal. When Discover tested the waters with PayPal last summer by adding PayPal as a temporary 5%-cash-back categories, customer response was positive, Discover said in a recent press release.

The advantage for PayPal is clear — the San Jose, Calif.-based payment company is working its way toward ubiquity as a checkout option through partnerships.

For Amex and Discover, the benefits of working with PayPal are twofold. Expanding the locations where customers can redeem loyalty points can accelerate user engagement in the fight to be top-of-wallet. It’s also important for Amex and Discover to stay relevant to PayPal as its reach expands, said Brian Riley, credit card director at Mercator Advisory Group.

“PayPal has multiple relations with Visa, particularly around the wallet with Visa Digital Enablement Program; and PayPal also has a solid Mastercard issuance cobranded card with Synchrony," Riley said. "Amex and Discover want to make sure their customers can transact through PayPal."

The question is whether cozying up to PayPal carries any risks for Amex and Discover, at a time when PayPal is becoming aggressive in directly courting consumers through deals and incentives. This strategy is underscored by PayPal’s $4 billion plan to purchase Honey, a provider of digital discounts.

PayPal also has a partnership with Uber, as well as alliances with merchants such as Abercrombie & Fitch to accept PayPal at the point of sale.

Riley sees no downside for Amex and Discover building closer connections to PayPal even as competition for customer loyalty intensifies.

“PayPal services every card brand, and the card brands each want to maximize their respective transaction volume, so these partnerships between PayPal and all the card networks are a win all the way around,” Riley said.

PayPal absorbing Honey also should pose no threat to card networks or banks, according to Riley.

“Ultimately PayPal needs to connect to financial institutions and because PayPal already has solid connections to Visa and Mastercard, they also want good relationships with Discover and Amex to provide a full complement of card services,” Riley said.