PayPal taps Discover to bring in-store payments to 7M locations

PayPal (s ebay) has lined up the biggest partnership to date for its in-store payment campaign, tapping credit card company Discover (s dfs) in a deal that will ultimately bring PayPal payments to seven million merchant locations in the U.S. Under the partnership, PayPal will utilize Discover’s credit card network to enable PayPal users to make payments at retail stores starting in April of 2013.

This arrangement will greatly accelerate PayPal’s in-store payment efforts, which have so far focused on signing-up big name retailers like Home Depot(s hd). By riding on Discover’s network, PayPal can get into many more locations quickly, without requiring any significant integration work by merchants. That potentially puts PayPal at a big advantage against rival mobile payment systems such as Google Wallet (s goog), Isis, Square and others.

Discover is integrating PayPal’s payment system into its software, which will be uploaded to millions of point-of-sale terminals that support Discover Card payments. PayPal’s branding and rules will be presented to consumers who choose to pay in store with PayPal. PayPal currently has more than 50 million U.S. customers who will be able to take advantage of in-store payments.

At launch next year, PayPal users will be able to pay with a PayPal Access Card, which connects to a PayPal account and can be funded from a bank account or credit card. Users will be able to use the card in conjunction with a PayPal mobile wallet app, which will deliver e-receipts, offers and other services. But a few months later, PayPal users will be able to pay directly through point-of-sale terminals by entering in a PIN or phone number or by authorizing a payment through their mobile app after sharing their location with the merchant. That will eliminate the need for any cards or traditional wallets and will enable consumers to get the benefits of a digital wallet to receive offers, track spending and tap into loyalty programs.

Don Kingsborough, PayPal’s vice president of Retail Services, first approached Discover shortly after joining PayPal a year and a half ago. He believed the deal would be key in achieving ubiquity, which he said is critical for consumer adoption. So far, PayPal has signed up retailers like Home Depot, Barnes & Noble, Toys R Us, Office Depot.

“When I got to PayPal, I saw the need for consumers to be able to use PayPal. You need to be able to be everywhere fast,” Kingsborough said. “With Discover, we have 95 percent of the distribution of other card networks. We have scale.”

For Discover, the PayPal deal puts the card network back into the role of white label provider for a mobile payment system. If you recall, Isis, the carrier joint venture of Verizon (s vz), AT&T (s t) and T-Mobile originally wanted to create its own payment network built off Discover. But the venture changed gears and ultimately decided to move away from a separate network to a system that embraced Visa (s v), MasterCard (s ma) and American Express (s axp). Now, by joining PayPal, Discover gets a chance to pick up more payment volume by tapping PayPal’s 50 million U.S. members. Isis would likely have seen slower adoption because it was tied to near field communication, which would have required many merchants to upgrade their point-of-sale hardware to accept contactless payments and consumers to buy NFC-enabled phones. And partnering with PayPal will allow Discover to learn from PayPal’s experience in online and mobile payments.

“The establishment of this relationship is a major industry milestone, which will help shape the emerging payments landscape by bringing together an established direct banking and payments company with a leading commerce enabler to create an alternative payments option for consumers at the point of sale,” said Diane Offereins, President of Discover Payment Services in a statement.

Tapping Discover is part of PayPal’s larger plan of lining up key partners who can enable fast merchant adoption of PayPal payments. PayPal previously signed up the biggest point-of-sale terminal makers and also partnered with payment integration software providers to make it easy for retailers to support PayPal in store. Those deals are still important because it enables some retailers to set up PayPal transactions in-store now without having to wait for Discover integration. For merchants who want to include their own loyalty program or provide more services via PayPal’s wallet, they will also need to do more integration work compared to what will be available through Discover.

PayPal has said that this year is still a testing and experimenting year for in-store payments and the real work will begin next year. But with deals like the one with Discover, it’s really showing that it wants to go big and really compete in the market for mobile and in-store payments. Getting acceptance at seven million locations is going to really help PayPal because they can soon tout how many locations they are in. That’s important for consumers, who I don’t think will want a mobile payment system that only works in select locations. But PayPal will also need to ensure that its mobile application is robust, offering valuable services to consumers like easy ways to save money. PayPal has talked about how acquisitions like WHERE and BillMeLater will allow consumers to get location-based offers and the ability to change their payment source after a purchase. It will need to show people that it makes sense to use an alternative to cash and credit cards, which are still pretty handy for most people.