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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

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  • http://www.jearbear.com Jerry

    Pay Pal offers a debit card to it’s consumers. They are taking a percentage from each sale that is made from eBay and or Websites. If Visa and MasterCard made $48 billion from interchange fees in 2008, up from $16 billion in 2001, then Pay Pal should offer the same information. Very rare that Pay Pal goes in favor of the seller. When the buyer complains (PP) holds the sellers money until the issue is solved. By doing this it is the same as if you over drafted your Visa or Master Card credit card. Not only does PP get a percentage, they take it against the total amount of money in the sale and shipping. This is in a way like what major credit cards do to add extra charges. Yes, PP is doing the exact thing that the major credit card companies are doing. They should be capped and only allow the percentage of the sale. And not to include shipping.

    • http://fuckyeahfeminists.tumblr.com Joan

      My thoughts exactly. I totally agree. I hope that they decide to make Paypal play by the same rules.

  • PayDude

    PayPal is doomed even if they are not directly regulated. PayPal has thrived in a world of excessive interchange fees (2001-present) by switching buyers to low cost ACH and charging merchants slightly lower than credit card fees (1.9-2.9%). The Durbin regulated debit rates will reduce most merchant’s cost of payment below 1.4% forcing PayPal to lower their merchant fees below 1.4% to stay competitive. This reduction in fees will dramatically reduce PayPal’s profit margin and slow their growth into new markets that will now have access to cheap ($.12) fast and easy debit card payments.

  • Christopher Maag

    Wow. Very informed comments, you guys. Thanks for sharing.

  • Pingback: Is ebay becomming way to expensie for peope to run ebay businesses? | Great Minds Think Alike()

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