Under the new agreement with Discover Financial Services, Ebay’s PayPal will now have access to millions of physical stores in the United States by next year.

Ebay & Discover

According to the deal, PayPal users, with the help of their cards, will be able to purchase from stores that use Discover Network, a payment network with more than 7 million U.S. retail locations. PayPal, a unit of eBay Inc (NASDAQ: EBAY), has been expanding its presence in the physical world. The payment facilitator, which boasts of more than 50 million active U.S. customers, has already teamed up with 15 retailers, including The Home Depot, Inc. (NYSE:HD), Abercrombie & Fitch Co. (NYSE:ANF), Barnes & Noble, Inc. (NYSE:BKS), and Office Depot Inc (NYSE:ODP) to accept PayPal payments in their stores.

According to Ken Paterson, a director at Mercator Advisory Group, “It’s a big step for both companies,” Paterson said. “This would provide a ready-made route for PayPal to get into most card-accepting retail establishments in the U.S.”

In a win-win deal for both parties, PayPal will get a big boost for the initiative of expanding its physical presence, and Discover will benefit from PayPal’s large user base that will certainly add transaction volume for its payment network. It will also help Discover to gain more coverage, as enjoyed by payment processing giants such as Visa Inc (NYSE:V) and MasterCard Inc (NYSE:MA).

“We are going to process a significant amount of volume over time with PayPal,” said Diane Offereins, president of Discover Payment Services.

For purchasing at the network stores, PayPal users will be issued a new card and a four-digit PIN.  According to the company, merchants won’t require any extra hardware or software to accept PayPal, their existing check-out machines will be used for collecting payments from PayPal users. The new cards will have a Discover Issuer Identification Number or IIN for identity verification. According to the company, Discover has already set up the IINs for the PayPal cards on its network.

“Now we can do this at a scale that the consumer can adopt this and be able to use it every day in their life,” Don Kingsborough, vice president of retail services for PayPal, said in an interview Tuesday.

As per the deal, PayPal will be charging a small fee from the retailers on the use of its cards by its users and will pay Discover on a per-transaction basis, for access to its network.

Piper Jaffary noted before the deal was announced that Paypal is a very valuable asset for accepting payments, stating:

Despite ample competition we believe PayPal has a strong payments position with its 113m customers and millions of merchants. Second, PayPal has announced relationships with 16 physical retailers (detailed below), three terminal providers (Verifone, Equinox, Ingenico) and software company AJB Software. Further, PayPal is one of few that has had noted success in mobile payments. This year it expects to see $10B in mobile transactions while we believe that private Square is on pace to process ~$6-$7B this year.