SAN FRANCISCO (Reuters) - Online payments provider PayPal will gain access to millions of physical stores in the United States under an agreement with Discover Financial Services.
Under the deal, unveiled on Wednesday, PayPal will issue payment cards to its more than 50 million active users in the United States next year.
The cards will let PayPal users buy from merchants that already use Discover Network, a payment network with more than 7 million U.S. retail locations.
PayPal, a unit of eBay Inc, is expanding into the physical world, in search of new opportunities. In the past year, the company has signed up more than 15 retailers, including Home Depot and Office Depot, to accept PayPal payments in their stores.
Adding PayPal to Discover's network is a big boost for the initiative, according to Ken Paterson, a director at Mercator Advisory Group, a research firm that focuses on the consumer payments industry.
"It's a big step for both companies," Paterson said. "This would provide a ready-made route for PayPal to get into most card-accepting retail establishments in the U.S."
For Discover, PayPal's large user base could become a significant source of extra transaction volume for its payment network, he added.
PayPal users will be able to pay at merchants on the Discover Network by swiping their new cards through existing check-out machines and entering a four-digit PIN, the companies said.
Merchants will not need to buy new hardware or software to accept PayPal, according to Don Kingsborough, the PayPal executive leading the company's offline push.
The new cards will have a Discover Issuer Identification Number, or IIN, a code that identifies the card holder. Discover has already set up the IINs for the PayPal cards on its network, the company noted.
PayPal will charge retailers a "small" fee when users pay with the new cards, and, in turn, will pay Discover for access to its network, on a per-transaction basis, the companies said. They declined to give details of these fees.
"We are going to process a significant amount of volume over time with PayPal," said Diane Offereins, president of Discover Payment Services.
Teaming up with PayPal also makes Discover Network more appealing to merchants, she said.
Discover's payment service is not used by as many merchants as those run by payment processing giants such as Visa and MasterCard. Offereins estimated about 95 percent merchant coverage compared with other payment networks.
"We've been working on closing the acceptance gap," she said. "This will help us close that last lingering gap."
If the agreement goes well, PayPal and Discover said they may expand it outside the United States.
Kingsborough said that PayPal probably will not be striking similar deals with Visa and MasterCard.
"This agreement would be very difficult to duplicate," Kingsborough said. "Other players in the issuer network realm have a different view of the world and want to do these things on their own."
Editing by Steve Orlofsky