The deal may boost PayPal’s presence in physical stores.

PayPal Holdings Inc. and Visa Inc. have partnered  to form a deal that extends PayPal’s reach offline, and one that some analysts say can benefit retailers in the long run.

The new deal, which both companies announced separately during their second-quarter earnings results on July 21, is twofold. First, PayPal will no longer steer its users away from linking their accounts to Visa credit cards, as it currently does.

Secondly, PayPal customers will be able to use Visa’s contactless mobile checkout technology, Visa Digital Enablement Program (VDEP), to pay in retail stores with their smartphones  This means that after PayPal integrates VDEP technology its payment options, customers will be able to use PayPal on their smartphones to make purchases in stores.  The deal only pertains to the United States and does not include either company’s international businesses or assets.

The deal gives PayPal more fuel to expand its footprint into physical stores through the VDEP platform, helping PayPal extend its online payments dominance to physical stores. PayPal has made several efforts to get into the physical payments space over the past several years, says Jared Drieling, business intelligence manager with electronics payments consultancy The Strawhecker Group. “This partnership may help PayPal get into the physical store in a more meaningful way through the mobile device,” Drieling says.

For Visa, the deal is designed to help it reach more consumers. Before PayPal struck a deal with Visa, the payments processing company would encourage its users to deduct payment transactions from their bank accounts (as opposed to credit cards) through the Automated Clearing House system (ACH), which connects financial institutions outside of payment card networks. Fees on ACH transactions are only a few pennies, making them a less expensive transaction for PayPal to process than a credit card transaction, for example. Now, PayPal place equal weight to ACH and checking account options for its users.

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Before the deal, a PayPal user would be prompted to enter their bank account information versus their card information, so the transactions would run through ACH, Drieling says. In this way, there were no additional steps for a PayPal user to enter in card information, but PayPal would “steer” the user to use ACH, he says.

“Since PayPal has been steering users to ACH, Visa was cut out from some of the transaction volume through PayPal,” Drieling says. “Visa will see a benefit from the new model with more transactions, but that doesn’t necessarily mean PayPal will see an increase in transaction volume.”

The deal will also likely benefit PayPal users by providing them with more payment options in stores and by making it easier to pay with PayPal using Visa online, experts say. Additionally, Visa card issuers will be able to provide more detail for PayPal transactions on customer statements.. This means a transaction that used to be labeled as “PayPal” on a card statement will now list the merchant’s name. This will likely decrease the number of customer service emails and calls to PayPal and retailers, says Michael Moeser, director of the payments practice, retail and small business, at Javelin Strategy & Research. PayPal will also have access to the Visa Direct network, which allows consumers to more quickly transfer money between Visa debit and credit cards and  their PayPal and Venmo accounts. Venmo is PayPal’s mobile peer-to-peer payment app.

“Customers can easily fund their PayPal accounts [from their Visa-branded payment cards] without concern about reload times,” Moeser says. “What took days to reload a PayPal account with a checking account is now turned into minutes or less with Visa Direct,” he says.

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The agreement also makes accepting PayPal One Touch an obvious option for e-retailers,  since customers can now more more easily reload their PayPal accounts with Visa Direct, Moeser says. One Touch is a mobile payments feature that allows a consumer with a PayPal account linked to her mobile device to complete a purchase on that device with one click. More than 25 million customers have opted into PayPal One Touch and more than 2 million merchants accept the mobile payment option as of June 30, PayPal said in its earnings release.

In the second quarter ended June 30, PayPal’s active customer accounts grew 11.2% to 188 million from 169 million in the same period a year ago.

PayPal has 14.5 million merchant accounts as of the end of the second quarter. New retailers added in the quarter include Ikea (No. 212 in the Internet Retailer Top 500 Guide) in several countries and The Talbots Inc. (No. 137). Among the  Top 1000 web retailers in North America, 133 use PayPal as their payment processor and 461 accept PayPal payments at checkout, according to Top500Guide.com. 459 online merchants accept Visa payments at checkout.

For the second quarter ended June 30, PayPal also reports:

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