Walmart, First Data Say No To PayPal. (Is That Even Allowed?)

PayPal's plan to use Discover's (NYSE:DFS) payment-card network to get its in-store payment system into most U.S. stores that accept payment cards isn't quite working out. Contrary to what the eBay (NASDAQ:EBAY) subsidiary has been touting, all stores that accept Discover aren't automatically able to take PayPal payments—at least not until they and their acquirers explicitly sign on.

Result: Both Walmart (NYSE:WMT) and acquirer First Data have declined to accept the system, and Discover is now doing deals with acquirers one by one in order to get PayPal's system available in more stores. Discover said on Tuesday (April 30) that it has gotten a green light from 50 acquirers, and it is hoping PayPal will be live in 2 million stores by the end of this year, up from 250,000 now.

"Hope," by the way, is exactly the word Discover president Roger Hochschild used in an interview with the Wall Street Journal. That doesn't exactly inspire confidence, especially after PayPal claimed last month that 90 percent of all U.S. stores that accept payment cards would accept PayPal in-store as of April 19.

In fairness, there is reason to hope. Among the large acquirers who have signed on are Vantiv (NYSE:VNTV), WorldPay, Global Payments (NYSE:GPN), Heartland (NYSE:HPY) and TSYS (NYSE:TSS). But none of them come close in scale to First Data, which is the acquirer for roughly 1 million stores. Discover said it is still negotiating with First Data, which told its customers last week that it "has decided not to implement support" for PayPal, according to a Dow Jones story.

And while some large retailers, such as Nordstrom, have cut deals directly with Discover and PayPal, Walmart—the biggest target for any new in-store payment scheme—has firmly declined. "Walmart does not accept PayPal in-store. The added complexity at the point of sale does not justify acceptance of PayPal," Walmart spokesman Randy Hargrove told Reuters.

That's not a big surprise. Walmart is pushing MCX, which makes it a direct competitor to PayPal in-store. More than that, chains participating in MCX are being asked to commit to mobile payments exclusivity for three years, which really would stand in PayPal's way.

But while high-profile holdouts aren't going to make things easier as Discover and PayPal attempt to whittle away at the long list of Discover merchants that still don't accept PayPal, that's not PayPal's biggest problem. It's not even the second-biggest—which at this point is credibility.

PayPal in-store looked like a winner because it appeared to have cracked the system, bypassing the need for merchants and acquirers to explicitly accept this payments system. Sure, retailers could always opt out—retailers can always opt out of any payment system except cash, simply by refusing to accept a particular card. But we all know from experience with customers the difference between opt-out (which requires effort for people to not participate) and opt-in (which requires effort to bring people onboard). When you're dealing with millions of customers (or stores), opt-out is way easier.

It turns out that PayPal isn't opt-out after all—it's opt-in, at least at the acquirer level. Actually getting all those acquirers on board, one at a time, is only a little less miserable than Google's attempts to get card-issuing banks on board for Google Wallet. That's way too many one-by-one negotiations to work. It killed Google Wallet's original incarnation, and it raises serious doubts about PayPal in-store.

And that's still just PayPal's second-biggest problem. The biggest? That's the nut no one in alternative payments has cracked: breaking consumers of the decades-old habit of pulling out Visa or MasterCard at checkout time.