Investors in PayPal Holdings Inc. gave an early thumbs down to the company's deal with Visa Inc. on Friday.

Shares of the online-payments provider slid as much as 9% after releasing earnings late Thursday and outlining its deal to work more closely with Foster City, Calif.-based Visa. Since splitting from eBay Inc. a year ago, PayPal's biggest drop for a full day of trading had been a 5.7% drop Feb. 5. Shortly after noon Eastern time, shares had recovered a bit, but were still down 7%.

The Visa deal could help PayPal by making it an option when people pay in stores with their smartphones. But analysts worry the tie-up gives Visa the better economics of the deal. While the agreement gives PayPal access to Visa's digital network in exchange for promoting its cards, Royal Bank of Canada cut its 2017 earnings estimates on PayPal in the wake of Thursday's news.

The bank's analysts on PayPal said they were concerned that as the company moves from pushing cheap bank transfers to fee-based Visa transfers, PayPal margins will be pressured.

Craig Maurer, analyst at Autonomous Research, wrote in reaction to the deal that the fee discounts won't offset the higher expense of using Visa's network more.

"Investors will likely react positively to the announcement initially," he wrote. "But once they pore over the details, we believe they will come to the conclusion that Visa came out far ahead in this deal." Indeed, shares popped after-hours Thursday before giving back gains in Friday trading.

PayPal, based in San Jose, Calif., acknowledges higher costs, but points to greater revenue opportunities. With the deal, it will now be possible for users of PayPal's popular mobile apps, including Venmo, to instantly withdraw money they get through the peer-to-peer payments service if they link it to their Visa debit cards.

The agreement between the two companies ends a year of tense negotiations between the firms and removes uncertainty for PayPal about the fees it pays Visa.

It also helps PayPal move beyond what helped it first revolutionize internet payments in the 1990s—providing an online alternative to cash and credit cards—to what it hopes is a bigger role in the system, serving people and businesses that use Visa or any other payment tool everyday.

"This is a new PayPal, one that is actively partnering across the digital payments landscape," Chief Executive Dan Schulman told analysts.

In an interview, he added: "We want customers to pay any way they want, and the deal with Visa allows us to move more aggressively into the store."

The shift, which Mr. Schulman called "fundamental to long-term growth," is investors' strongest indication of PayPal's direction as an independent company. It was split off from eBay, where it focused on helping buyers pay sellers in the online marketplace, as part of a plan to unlock more value. Before Friday's slide, PayPal's shares were up 11% in the year to date.

PayPal has recently expanded its range of moneymaking services, such as one-touch online checkout, business and personal loans, customer-loyalty tools and cross-border remittances.

The instant Visa linkage also gives PayPal another tool with which to fend off the growing focus of banks on their own instant mobile-app payments aimed at competing with Venmo. Venmo transactions more than doubled in the second quarter to $3.9 billion, PayPal said Thursday.

As part of the deal, PayPal agreed to stop steering customers to link directly to bank accounts, which allows it to avoid paying fees to card networks such as Visa or MasterCard Inc.

Write to Telis Demos at telis.demos@wsj.com

 

(END) Dow Jones Newswires

July 22, 2016 13:55 ET (17:55 GMT)

Copyright (c) 2016 Dow Jones & Company, Inc.
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