Under the terms of the agreement, Providian will take a minority stake in privately held PayPal. It has agreed to create a cobranded credit card that will be offered to PayPal customers. Providian, the fifth-largest issuer of credit cards in the United States, also has the option of launching a Web-based money-transferring system that PayPal would operate.
Both companies declined to discuss the size of Providian's investment in Palo Alto, Calif.-based PayPal, but sources close to the deal said the share is less than 10 percent. Regardless of the size of investment, the partnership is validation of the Net company's business, according to Gomez analyst Paul Jamieson.
"PayPal is no longer just a New Age payment service," Jamieson said. "It has shown that person-to-person systems have a broader agenda and use."
The industry that allows people to send money via e-mail is exploding. The size of PayPal's audience has mushroomed to more than 6 million in just more than a year, and venerable offline banks and lending institutions are getting into the act. In the past year, Citibank launched c2it and Wells Fargo joined forces with auction stalwart eBay to create Billpoint.
For all the attention and growth PayPal has generated, it is profitless. The company, which lets people draw money from their bank accounts or credit cards and send it via e-mail, has struggled to find revenue streams.
PayPal charges businesses to send or receive money, but the service is free for personal use. The cobranded credit card will offer a new source of revenue, said PayPal spokesman Vince Sollitto.
Providian will share some of the fees it collects from each transaction made with a cobranded card. PayPal will also have greater control in monitoring the cards and who is issued a card, Sollitto said. The companies said they hoped to unveil the cobranded card sometime this spring.
In another potential revenue generator, PayPal gets access to Providian's 16 million cardholders should the banking company launch its own payment service, said Bill Buchanan, Providian vice president of partnerships.
Providian also gets a seat on PayPal's board of directors, which should help the online company make inroads with other credit-card issuing companies.