Why Can't We Be Pals?

John is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

I've recently moved from my home way out in the country to one that's a bit closer to town. While country living was great most of the time, it was kind of a pain when we needed to go shopping. With almost a 30-minute drive to get to a grocery store or shopping center, the closest place that we could go for general shopping was a Dollar General store that was around 12 minutes away.

On one trip to the Dollar General to pick up a couple of things, I noticed an option that I hadn't seen before while checking out. Right there on the screen of the card processor was an option to pay with eBay's (NASDAQ: EBAY) PayPal service in addition to credit or debit card payments. While I have a PayPal debit card that I would use if I wanted to pay directly from my PayPal account, I thought that it was an interesting option to see and decided to do a bit of checking up on it.

Lots of new friends

It seems that PayPal has been making a number of new pals. Beginning in Home Depot stores in 2012 and then expanding to Office Depot and several other retailers, PayPal is expected to be an accepted payment option in over 2 million physical retail stores before the end of 2013. In addition to the retailers that have already been mentioned, PayPal is also an option at RadioShack, Barnes & Noble, Foot Locker, Toys "R" Us, J.C. Penney and other retailers. By the end of the year, a total of 50 retailers will accept the payment option including Burger King and Nordstrom.

All of this wouldn't be possible without Discover Financial Services (NYSE: DFS), though. Discover is the partner that brought PayPal into the stores, processing payments and signing agreements with merchant acquirers such as Total System Services and Heartland Payment Services to expand PayPal's reach even more. Discover is said to have direct relationships with approximately 1,500 retailers in the US, giving the company additional leverage in negotiations to bring PayPal into the physical retail space.

Some not-so-friendly words

Not every large merchant is happy to see PayPal expanding into the physical retail space, however. Back in April, Wal-Mart's (NYSE: WMT) Randy Hargrove told Reuters that "We do not see the value proposition for brick-and-mortar merchants to accept PayPal in-store," explaining that it would add additional cost and complexity to existing payment options. This isn't the first time that Wal-Mart has balked at the idea of introducing PayPal to its physical stores, either; similar statements were made by a Wal-Mart executive at a mobile payment conference back in November.

Much of Wal-Mart's reluctance seems centered around the fact that PayPal is typically linked to credit cards and bank accounts that customers could already use to check out. The belief is that using PayPal to pay would simply add a processor between the point-of-sale and the credit or checking account that customers were using to make a purchase. This does neglect to consider funds that are held in PayPal accounts that come from other sources, however; Ebay sales, gifts from friends or relatives and even some forms of online work can net you funds in your PayPal account that are completely unrelated to the bank and credit accounts that you've linked to your PayPal account.

So will anyone use it?

Both PayPal and Discover want to get PayPal payments in as many stores as possible. PayPal already does big business, accounting for around $175 billion in commerce payments in 2012. As the service becomes a payment option in more stores, it opens it up to millions of additional potential customers who will simply need to enter a phone number and PIN to pay. The company is so serious about trying to get new retailers to adopt it as a payment option that company president David Marcus has even gone on the record as offering to cover credit card processing costs for the rest of the year for small businesses that adopt PayPal. If the partners hit their 2 million store goal for the end of the year then it's likely just the beginning of PayPal's expansion.

Getting companies to accept PayPal as a payment option is the easy part, however. The bigger problem is getting people to use it. While the service was being tested at Home Depot stores, managers reported that most customers still chose other payment options even though they were aware that they could use PayPal. While marketing might make PayPal seem like a more attractive payment option in time, the company will have to overcome force of habit and preferences for using other payment options. It may even be competing against itself since PayPal offers a MasterCard-branded debit card that offers 1% cash back on purchases.

It's all but assured that PayPal will continue its expansion into the real world with Discover's help. In time it may even be available as a payment option at Wal-Mart if it proves successful enough. But before that can happen, the companies will have to figure out how to get people to choose PayPal over the more-familiar options that consumers have been using for years.

John Casteele owns shares of Wal-Mart Stores. The Motley Fool recommends eBay. The Motley Fool owns shares of eBay. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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