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Visa and PayPal have finally settled a long-standing feud

Two months ago, Visa's CEO issued a thinly veiled threat to PayPal: Stop driving business away from us or risk increased competition like you've never seen.

He got his wish.

The two payment companies just announced a wide-ranging partnership that includes a promise from PayPal to stop steering Visa cardholders away from using their Visa cards for PayPal transactions.

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The new accord will also enable PayPal's mobile app to work as a payment option in brick-and-mortar stores whose equipment accepts tap-and-pay Visa payments.

The PayPal application is arranged for a photograph on an Apple Inc. iPhone in Washington, D.C.
Andrew Harrer | Bloomberg | Getty Images
The PayPal application is arranged for a photograph on an Apple Inc. iPhone in Washington, D.C.

The partnership appears to bring to a close tension between one of the world's biggest credit companies and the biggest alternative online payment option in the U.S. PayPal has been viewed warily by the credit card companies that don't appreciate PayPal pushing their customers to pay with a bank account hookup — known as ACH — rather than a payment card.

PayPal historically makes more money on a transaction when a user funds his or her PayPal wallet with a direct bank account hookup, since that method carries lower transaction fees than payment cards do.

"It's about consumer choice," PayPal's No. 2 exec, Bill Ready, told Recode in an interview.

It's also about money.

"The agreement affords PayPal certain economic incentives, including Visa incentives for increased volume, and greater long-term Visa fee certainty," according to the press release.

Translation: Visa is paying PayPal for increasing the amount of PayPal transactions that flow through Visa pipes. It appears PayPal is also getting a promise that Visa will not raise the fees it charges PayPal when a PayPal customer uses a Visa card to make a PayPal purchase.

But it still appears likely that the deal will eat into PayPal's profits as more Visa customers choose to pay with cards through PayPal instead of bank accounts, according to Craig Maurer, an analyst with Autonomous Research.

"Yes, PayPal will get some form of incentives from Visa, but we believe the off-set will be minimal while this drag will be material," he wrote in research note to clients.

By Jason Del Rey, Recode.net.

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