PayPal’s Rumored Braintree Deal Is About More than Payments

PayPal’s reported plans to acquire Braintree would give it more than just a payment processor that moves $10 billion a year.  If this marriage takes place, it would signal a shift in how payments companies think about technology.

Braintree has a set of software development tools, called application programming interfaces (APIs), that power the transactions behind companies such as Uber and Airbnb. These software sets allow startups with money moving ambitions to do business sans the regulatory or technology burden of becoming payments companies.

You see, PayPal's traditional pitch — that it will handle payments for small merchants that don't know how to do it on their own — just isn't enough in the age of the modern startup. APIs give third-party developers and startups the chance to take the best pieces of an established payments player or a bank and build a service that caters to a specific niche.

The digital commerce arm of eBay is already on the right course.

David Marcus, who became PayPal's president last year, is a startup guy. Before he joined PayPal, Marcus founded and headed the mobile payments company Zong, which PayPal acquired in 2011. When Marcus took over, eBay CEO John Donahoe said he was poised to bring a “founder’s perspective” and create a startup mentality at PayPal.

Of course, PayPal has been releasing its own set of APIs over the years. Its X.com developer platform (which revives an older PayPal brand name), allows PayPal to tie into emerging payments systems such as Green Dot Corp.'s MoneyPak cards.

PayPal has also hosted "Battle Hack" tournaments to encourage developers to find new uses for PayPal's technology.

But PayPal isn't the only game in town. Other major payments companies such as MasterCard are hosting similar "hackathons," and companies like Braintree and Stripe are winning over merchants with their software tools.

All of these outfits are banking on the harsh reality that payments startups cannot go it alone in the U.S. Without a major partner, these newcomers could get crushed by the regulatory burden imposed throughout most of the country.

Last month, I wrote about how licensing rules — different in the 47 states that require a license, plus Washington D.C. — have grown exceedingly frustrating to newcomers.

Across the country, state money transmitter licensing requirements are potentially barring or at least slowing young businesses from entering the payments field. But the issue is especially salient in California, which is home to one of the country's biggest clusters of startups, in Silicon Valley, and has one of the toughest laws. Its requirements are opaque, outdated and inapplicable to emerging business models, the process expensive and time-consuming, critics argue.

PayPal, which was founded in 1998, has a deep history of fighting back at regulators that once sought to curtail the digital giant.

Once a startup itself, PayPal, now a unit of eBay (EBAY), argued for years with officials over whether it was, or wasn't, an  illegal banking operation … Louisiana regulators nearly banned PayPal from operating in the state, sending the company a warning that it might be operating there illegally.

PayPal was among one of the companies that lobbied to amend California’s onerous money transmitter licensing law. For PayPal, Braintree would continue its ethos around the democratization of payments. More importantly, buying Braintree would turn PayPal's potential competitors into customers.

That’s why PayPal would be smart to make this move. That’s why they probably are.