(November 20, 2008) Often viewed by retail banking officials as public enemy No. 1, PayPal Inc. sent its top executive to a major banking-technology exhibition on Thursday to propose closer collaboration between banks and the San Jose, Calif.-based non-bank e-commerce payments processor. Indeed, PayPal president Scott Thompson suggested banks and PayPal create direct links to move funds between demand-deposit accounts and PayPal accounts.

Currently, PayPal accounts can be funded from checking accounts via the automated clearing house network, which lacks same-day funds availability, and through credit cards.

Thompson said PayPal is already testing the direct-link concept with JPMorgan Chase & Co. and college students in Ohio. Speaking with Digital Transactions News, Thompson declined to say how many students are involved in the test with Chase, in which users at Ohio University in Athens are signed up for Chase and PayPal accounts simultaneously and are also given PayPal Mobile capability, allowing them to use their cell phones to make payments. “We want to understand through the pilot whether this is something we want to do more of,” Thompson says.

Another feature of this tighter relationship could be the use of bank-issued rewards points as a form of currency on PayPal, Thompson said in his address. This move, he said, would give customers easier access to their credit and debit card rewards and allow banks to move the incentives off their balance sheets, where they are an accumulating liability. “Imagine turning rewards into cash that can be used on PayPal,” Thompson said to the audience of bankers attending the Bank Administration Institute’s Retail Delivery System conference in Orlando, Fla. “Issuers can get million of dollars off their books.”

Thompson’s general theme was partnership with banks, which have eyed the decade-old PayPal as a rival for consumer-payments business almost since its inception. “An opportunity lies in working more closely with you, our banking partners around the world,” Thompson told his audience. “By working more closely with you we add more value to [bank and PayPal] customers by allowing them to move money faster.”

Sellers on exchanges like eBay Inc., PayPal’s parent company, and other small merchants are demanding faster and more efficient funds movement between their PayPal accounts and their bank accounts, Thompson told Digital Transactions News. “The small merchant doesn’t understand why it takes three days” to get the money into the bank, he says. “Seventy-two hours to not have the funds in a bank account is a long time. We should be able to take the time delay out of the system.”

At the same time, consumers appreciate faster money movement when they’re trying to make last-minute payments or get money into the hands of friends or family members in an emergency, Thompson says.

Though he didn’t give details on how the direct links might work, Thompson says they would open a channel that would bypass the ACH and allow banks and PayPal to clear and settle transactions on a near real-time basis. “It’s a good-funds model,” Thompson says.

The PayPal president says it’s too early to tell how bankers will react to his proposals, though he says at least one approached him to indicate an interest in talking further. Given the suspicion with which many banks have regarded PayPal over the years, that alone could be a hopeful sign for the processor.