Why are PayPal and MasterCard fighting over transaction data? It's hugely profitable for PayPal

MasterCard (NYSE:MA) and PayPal have gone to war over customer transaction data, and PayPal made the reason very clear at an eBay (NASDAQ:EBAY) analyst presentation presentation on Thursday (March 28): Transaction data is crucial to PayPal's ability to push its own credit to consumers -- and that's the most profitable part of PayPal's business.

"Consumers who use PayPal credit are by far our highest-value customers," said Gary Marino, head of eBay's Global Financial Service Division. "They spend 39 percent more, and incredibly our transaction margin is over 70 percent higher than our average customer." That's PayPal's own credit services, including Bill Me Later -- not Visa and MasterCard credit cards.

But the eBay credit services depend on strong risk management, Marino said, which in turn depends on using as much customer data as possible -- including transaction data, which PayPal gets from all its transactions, including those paid through Visa (NYSE:V) and MasterCard cards.

The card brands want the data for their own risk-management systems. Thus MasterCard's decision last year, which became public in an eBay filing in February, to slap PayPal and other mobile wallet operators with extra charges if they don't pass along all transaction data.

PayPal's share of MasterCard's transaction stream is negligible. But MasterCard clearly doesn't want to be fighting a much bigger battle over customer data as PayPal's credit business grows.

In the meantime, retailers -- who thought those customers and transactions belonged to them -- probably won't be caught in the middle. PayPal isn't likely to pass any additional MasterCard fees along to merchants, which would cripple its new effort to make its in-store payment service available to all stores that take Discover (NYSE:DFS) cards. That's scheduled to go live "in just a few weeks," according to PayPal in-store chief Don Kingsborough.

For its part, MasterCard can't risk going after just PayPal -- that would smack of attacking a single smaller competitor. The result may be that Google (NASDAQ:GOOG), Apple (NASDAQ:AAPL), the Merchant Customer Exchange (MCX) backed by Walmart (NYSE:WMT), and other potential mobile wallet operators will either have to retool their systems to pump detailed transaction data to the card brands -- or watch their already dim chances for profitability disappear.

For more:

- see this Bloomberg story

- see this Reuters story

- see this Financial Times story (free registration required)

- see this WSJ story (subscription required)

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