A Quick Look at the PayPal and Alliance Data Partnership

Navigator Edition: September 2013
By: John Grund and Aaron Mercurio

A few weeks ago, PayPal and Alliance Data (ADS) announced a partnership whereby ADS will become an issuer of Bill Me Later (BML) credit products while also collaborating on PayPal’s offline strategy where shared clients/customers would be able to add their branded private label card to PayPal as a preferred method of payment. Before the ink was dry on the ADS partnership, PayPal announced PayPal Beacon, the company’s in-store payment solution that enables customers to be identified, receive targeted mobile offers, and make seamless transactions all via Bluetooth Low Energy (BLE) technology. On the heels of that announcement, PayPal released its intent to acquire the e-commerce gateway BrainTree for $800M in an all-cash deal. Clearly, PayPal is making a lot of chess moves. Here is our quick take on the ADS announcements from the perspective of both parties.

The PayPal / Bill Me Later Perspective

The most immediate component of the partnership is the issuing relationship between Bill Me Later and Alliance Data. This arrangement is likely to involve Alliance Data (and specifically its bank, Comenity Bank), serving as an issuer of record for BML accounts. WebBank is the current issuer of BML credit products. In 2012, volume on BML accounts was in the $3.2 billion range and year-end receivables totaled $2.2 billion. The ADS/BML arrangement is structured in a manner in which Alliance Data will maintain a partial interest in the receivables generated. At a minimum, PayPal has secured a vital issuing relationship that is fundamental to its BML strategy.

Another compelling, but complex aspect of the arrangement is the possibility of PayPal gaining access to Alliance Data’s roster of retailers, most of which offer private label credit cards. For years, most private label issuers went to great lengths to protect their exclusivity and fend off the likes of Bill Me Later so this partnership has an element of irony to it coupled with the reality that the world is changing. ADS could provide momentum to PayPal in gaining more traction in the offline retail space and open up private label as a preferred method of payment.  Wrapping this partnership around the mobile wallet and other mobile functionality (e.g., Ebay and its affiliates such as RedLaser, Zong, GSI) has strategic appeal as the market evolves.

The Alliance Data Perspective

On the Alliance Data side of the ledger, it is important to peel the onion back to assess the PayPal partnership. On one hand, it would be easy to speculate that ADS is sleeping with the enemy. On the other, ADS could be executing a crafty hedging strategy to protect against any share shifts to PayPal while also having a meaningful seat at the table both with PayPal and its own retail clients who are evaluating alternative payments and mobile solutions.

The issuing relationship with Bill Me Later could have some appealing characteristics for ADS depending upon the volume at play and the economic structure of the relationship. ADS stated that it would hold a partial interest in the receivables giving an indication that this could be more of a volume than a receivables-based arrangement. In any case, it does not appear to be a capital-intensive relationship or one requiring many resources to launch and manage.

Over time, this particular partnership could go in a number of directions given the respective assets, reach, and relationships of each company. Strategically, ADS has the potential to control more of its own destiny in the area of alternative payments and mobile. For its own clients, ADS can play offense rather than defense at the appropriate time by bringing a new solution to the table. PayPal, with over 130 million active users and a growing base of retail relationships offers many compelling partnership opportunities. There is also a make versus buy logic to this arrangement as issuers evaluate the development of mobile wallets and other functionality to enhance the shopping experience. Moreover, the investment required to build awareness and customer adoption is another consideration. It is way too early to declare winners in the mobile space, but it is never too early to place strategic bets. It appears ADS and PayPal have done just that and both bring unique assets to the relationship.

For more information, please contact John Grund, Partner,; or Aaron Mercurio, Senior Consultant, Both specialize in Credit Card Issuing.

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