A new rule proposed by federal regulators to protect consumers may also endanger the business model of PayPal. The fight comes down to one question: Is using PayPal the same as swiping your debit card?
The Federal Reserve is trying to figure out the answer. At issue is whether new caps on debit card charges, called “interchange fees,” will apply to more than just debit cards, but also to nontraditional payment systems like PayPal.
Right now, Visa and MasterCard charge fees of between 1.5% and 2% for every debit card transaction, according to this report by the Federal Reserve. That means an average of 35 cents to 50 cents per purchase. Visa and MasterCard made $48 billion from interchange fees in 2008, up from $16 billion in 2001, according to the National Retail Federation.
The Fed has proposed two different types of caps for the fees, with the highest being 12 cents per transaction. That would cut revenue on debit card swipe fees by 70%, according to a press release by the Fed.
But should the new cap apply to PayPal? The company says no.
“We will be making the case that PayPal is not a payment-card network,” Sara Gorman, a spokesperson for PayPal, told Bloomberg news. “We don’t charge interchange fees. We’re confident that we won’t be regulated.”
But maybe they shouldn’t get too confident. Even though there’s no plastic card involved, the way PayPal makes its money looks an awful lot like a debit card transaction. The company charges merchants between 1.9% and 2.9% of the purchase price, plus 30 cents, according to the company’s website.
If that happens, it could be a serious blow to profits at PayPal and its owner, eBay. With $94.4 million active accounts and $26.9 billion in total sales processed in the fourth quarter of 2010, Paypal earned $971 million in revenue. That represented almost half of eBay’s $2.5 billion in total revenue, according to a company press release.
Consumers and businesses have until Feb. 22 to comment on the Fed’s proposal.
Image: Liz Wise, via Flickr.com