PayPal Eases Concern on Credit Card Deals With Better Outlook

(Bloomberg) -- PayPal Holdings Inc. said it will make more money in coming years than previously expected, easing concern that recent deals with credit card companies would suppress earnings.

PayPal’s latest three-year forecast sees annual revenue growth of between 16 and 17 percent, up from 15 percent previously, with similar profit margins. Analysts had worried about agreements the company struck with Visa Inc. in July and Mastercard Inc. in September to gain a better foothold in physical stores. The new prediction calmed nerves.

"Stable to improving margins over the next three years with increasing revenue is very encouraging," said Josh Olson, analyst at Edward Jones & Co. "This serves as validation of their presence in the payments space as a legitimate long-term player."

Shares of the San Jose, California-based company rose 4.6 percent to $41.95 in extended trading Thursday.

PayPal agreed to stop discouraging customers from linking their accounts to credit cards, in exchange for long-term fee agreements and better access to physical stores from Visa and Mastercard. PayPal pays fewer fees on transactions linked to bank accounts, so the agreements stoked fears that costs would rise if more transactions shifted to credit cards. When the Visa agreement was announced in July, PayPal stock slumped.

PayPal Chief Executive Officer Dan Schulman said Thursday those higher expenses would be offset by growth in profitable cross-border transactions enabled through a deeper partnership with Chinese e-commerce giant Alibaba Group Holding Ltd. More use of a "One Touch" feature that lets shoppers skip log-ins with 4 million merchants, should also help, he added.

The company is also saving money by fielding fewer customer service calls from confused PayPal users. That’s because the company has stopped funding payments from their bank accounts by default. Instead customers now choose whether PayPal uses their credit card or bank account, and the company just follows their lead, avoiding confusion, Schulman said.