by Dr. Ralph F. Wilson, E-Commerce Consultant
Web Marketing Today, Issue 101, July 9, 2001
Palo Alto, California 94303
broad-featured system I've found for receiving payments on the Web
is PayPal - and it doesn't require a merchant account or payment
gateway. What's more, many international merchants can use it with
relative ease to sell products in US dollars. With its integrated
shopping cart feature, it is finally mature enough for small online
merchants to use to launch low cost e-commerce sites.
in 1999 as a tool for transferring money for payment in eBay auctions
and is currently the most popular online payment system of its kind.
PayPal estimates that it is the payment vehicle for 28% of the auctions
that close on eBay, with its closest competitor used for only a
small fraction of that.
the system allows a PayPal member to e-mail money to anyone, though
to retrieve the money the recipient must set up a free PayPal account
for himself or herself. To date, PayPal boasts more than 8 million
members, which account for a considerable fraction of those who
make purchases via the Internet.
One of the most
attractive features of PayPal is its low cost. Though personal account
members can receive payments up to $100 per month at no charge,
businesses pay fees to receive money. Instead of paying high set-up
fees and substantial monthly service fees (as is common for merchant
credit card accounts with payment gateways), PayPal only charges
a percentage of the transaction plus a 30¢ transaction fee.
But rates are going up. PayPal has announced that effective July
18, 2001, it will be charging two-tiers of fees.
(newer members with lower volume)
(established members with higher monthly sales volume)
via ACH to your local bank account
transaction fee plus 2.9% of transaction
transaction fee plus 2.2% of transaction (which is what PayPal
charged previous to 7/18/01)
(US only, optional fee)
transaction fee plus 2.5% of transactions over $15
plus 1.75% of transactions over $15
(plus 1% currency conversion in Canada), required to get your
money out of the account.
In the chart
above PayPal's closest competitor, eBay's BillPoint, appears to
offer lower fees, but since BillPoint assesses a 0.5% fee to get
money out of the account, eBay's effective rates are 3% standard
and 2.25% merchant. Fees seem to be rather volatile right now -
they've gone up and down in the recent past -- as these companies
vie for members and seek to ensure a sound economic basis for their
businesses. In the auction arena, BillPoint and PayPal are quite
similar, but PayPal is a more mature product that offers tools,
such as a shopping cart, that non-auction merchants need.
PayPal Makes Money
most of its money on fees paid by its business members. According
to PayPal Vice President of Corporate Communications Vince Sollitto,
less than 10% of PayPal's income comes from the "float"
- interest on money that accrues between the time it is deposited
in the account and transferred out of the account. For PayPal this
period is a minimum of about 3 to 5 days. The time period protects
PayPal from fraud, but it also gives them time to earn interest
on the money.
began offering an optional Money Market Account that, as of this
writing, pays 2.89%. (For comparison Vanguard Prime Money Market
Fund currently pays 3.95% and charges a 0.33% expense ratio - a
substantially higher return.) PayPal Money Market Account seems
to be paying similarly to some bank money market accounts, netting
them about 1%+ on funds deposited. US residents can opt for an automatic
daily sweep that will transfer any funds from your PayPal account
into your local bank account via ACH (Automated Clearing House)
system for a 0.35% fee on the money transferred. (US residents can
make the transfer to their local banks manually at no charge.)
One reason for
PayPal's rapid growth was the viral marketing element of offering
a bounty of $5 on new PayPal members. However, the newest fine print
indicates that for you to qualify for the bounty only when your
new member deposits at least $250 into his or her PayPal account
in a single transaction. It's nice for PayPal if it happens, but
many people pay with a credit card directly, rather than out of
money sitting in their PayPal account. Don't expect to earn much
I see PayPal's
fees quite competitive and reasonable, and they'll probably stay
that way since the competition is nipping at their heels.
How well are
merchants and customers protected through PayPal? Quite well, it
appears to me.
First, the order
form that pops up to take the customer's credit card uses PayPal's
SSL (secure sockets layer) secure server. With PayPal the merchant
doesn't need a secure server, only a standard website. PayPal provides
the secure order form.
both sellers and buyers, are also covered by PayPal's contract with
Travelers Insurance for up to $100,000 for unauthorized withdrawals
from the PayPal account. Be aware, however, that US buyers who make
purchases using money in their PayPal account rather than paying
via PayPal directly by credit card don't have the same legal protections
that they would if they make the purchase with a credit card. (See
"PayPal no friend to online buyers," by Bob Sullivan,
ZDNet News 7/20/00, www.zdnet.com/zdnn/stories/news/0,4586,2605840,00.html).
Buyers who encounter problems with a purchase can, however, submit
a Buyer Complaint Form that will prompt an investigation by PayPal
that could result in the suspension of the merchant's PayPal account
unless the merchant cooperates. PayPal doesn't have much tolerance
for bad sellers or buyers.
In this policed
environment, merchants are fairly well protected against credit
card fraud. PayPal allows merchants to specify exactly what kinds
of payments they will and will not accept: non-confirmed addresses,
unverified users, international users, unconfirmed bank accounts,
Web Accept and instant purchase payments, and payments using the
"Send Money" capability on the PayPal website. This allows
merchants to determine their own levels of risk. Elsewhere, you
won't find such features outside of the fairly pricey fraud detection
systems offered as options by payment gateways.
merchants protection against chargebacks so long as they follow
certain guidelines that include: shipping only to a "confirmed
address" in the US and obtaining proof of shipment for tangible
goods. This chargeback protection doesn't extend to buyers outside
the US, nor is it offered for downloadable software, information,
or entertainment, but it is a good start - better than any merchant
account or bank will give you! I'm told PayPal is working on confirming
addresses of members outside the US to extend their offer to international
merchants and customers in the future.
that PayPal protects both sellers and buyers is by displaying information
on how many PayPal transactions the seller or buyer has participated
in. The idea is that a buyer who has made a lot of purchases via
PayPal probably isn't a crook (at least they haven't been reported
to PayPal for fraudulent activity). That can be quite helpful in
preventing fraud. Merchants may not want their competitors to know
how many sales they're making - and can opt-out of this feature
- but the trust it builds with customers seems worth the loss of
As I talk with
small business people, the only criticism I've heard of PayPal is
that some have had their accounts suspended arbitrarily. That didn't
leave a very good impression. I asked Vince Sollitto about this.
He told me that last summer and fall cyberthieves, especially in
Russia, learned how to use PayPal to get money from stolen credit
cards. They would steal credit card numbers, then use PayPal to
send funds from these PayPal accounts funded by these credit cards
to another PayPal account where they would withdraw money from the
system. The effect on the fledgling payment transfer industry was
disastrous; many of PayPal's competitors went out of business as
a result. Sollitto said that, in the thick of combating this, any
PayPal account that had received payments from a stolen credit card
was frozen. Now it's pretty well sorted out, he says. As a result
of their anti-fraud measures, the fraud rate within PayPal is only
0.45% compared to about 2.6% of all credit card based transactions
on the Internet.
Though it may
not be a big factor, PayPal offers to help merchants promote their
website in two ways. US residents can list their website under PayPal
Shops for no cost, and that may bring some traffic. In addition,
when a payment is made through your PayPal order form (such as for
an auction purchase), the order form encourages the buyer to visit
you at your website URL, also.
The important question merchants should be asking is how they can
get PayPal Money into their own checking accounts.
easy for US residents and the residents of seven other countries
that can make transfers from their PayPal accounts to their local
bank checking accounts. For US resident's there is no charge for
this ACH transfer, though there is a small charge for residents
the other countries. People in 43 countries (www.paypal.com/cgi-bin/webscr?cmd=p/gen/approved_countries-outside)
can currently be PayPal members. But in only seven countries outside
the US can members transfer money from their PayPal account to a
local checking account: Australia, Canada, France, Germany, Netherlands,
New Zealand, and the UK. As noted above, it takes 3 to 5 working
days to get money out of PayPal, so it isn't instantaneous.
seven countries and the US, merchants have no easy way to get their
money out of the PayPal system. I asked Vince Sollitto why PayPal
couldn't mail a check in US funds to merchants in these countries.
PayPal is in the business of electronic - not paper transmission
of funds - he told me. He spoke about the high costs of issuing
checks. I'm not convinced.
But to PayPal's
credit, they're doing something that really hasn't been done before
- developing a low-cost system to transfer US funds to banks in
other countries. Costs to wire funds from one country to another
can run $10 to $15 or more, but PayPal's fees are only $1.50 for
merchants in these seven countries to get money into a checking
account. PayPal has been working at this project country by country,
working first with countries that have the highest PayPal volume.
The seven countries they've developed so far account for nearly
half of PayPal's international volume.
Here's one way
for a merchant outside the eight favored countries to get their
PayPal account converted to cash. Just make sure it doesn't break
any banking laws in your country. A merchant in Sweden (who can't
make local bank deposits from a PayPal account) can e-mail $200
via PayPal to a friend in the UK who then deposits it in a local
bank and snail-mail the Swede a check. But it will be a happy day
for all when funds transfers to all countries will be possible.
The feature that makes PayPal especially useful to non-auction merchants
is PayPal's WebAccept (for single item purchases) and Shopping Cart
(for multiple item purchases).
The PayPal shopping
cart differs from most of the basic cart programs that I've seen:
product information, including price, is contained in HTML on
the merchant's webpage. The merchant is identified by a member
product information, including price, is contained in a database
hosted on the cart company's website. The only information contained
in the merchant's HTML is the product number and merchant ID.
For PayPal this
is wonderful since they don't have to maintain huge product databases
for merchants who do little or no business. Instead, all the information
PayPal needs is transferred to it from the merchant's website when
a customer clicks on the "add to cart" button.
For the merchant,
however, there are three downsides to this approach: (1) Petty hackers
can easily change the price they pay for products by copying the
webpage, changing the price amount, and making a purchase from the
altered webpage. (2) Webpages sizes begin to bulk up if they include
the "add to cart" buttons for very many products. (3)
Merchants must do a lot of repetitive typing to create new products.
In my experience,
however, I haven't seen many people changing prices on webpages.
The advantage of this system is that a savvy merchant could hook
up a product database to the mailmerge program in Microsoft Word
and produce HTML code rather quickly for all the products in the
database, then paste them onto the appropriate webpages.
These are the
fields available in the PayPal Shopping Cart for the typical product:
item_name, item_number, amount, shipping, shipping 2 (additional
shipping cost for more items of the same product), handling, image_url
(for a 150x50 merchant logo that personalizes the cart and order
pages), return (URL for redirection after the completed transaction),
cancel_return (URL for redirection if the order is cancelled), and
no_note (whether a box should be provided for customer comments).
One of the strong
elements of the PayPal cart is the ability to sell subscriptions
that include recurring billing. That feature alone will make some
e-merchants drool since it is seldom found in off-the-shelf e-commerce
feature is Instant Payment Notification. When you switch on this
option, PayPal automatically notifies a URL on your webserver of
the details of each sale. PayPal provides some sample Perl and ASP/VBScript
code to implement the feature on your website. With this you can
develop a database on your own website that captures customer and
order details. A programmer could then integrate this into the merchant's
order management system and accounting system.
shopping cart and ordering system still has some rough edges that
may snag merchants.
There's no provision for variations of a single product, such as
size and color. In the PayPal Shopping Cart system, each variation
needs its own separate order button - kind of clumsy if you're
selling T-shirts. Yes, a database-driven site could get around this,
but the average merchant is pretty well stuck. You could indicate
size or color in a drop-down HTML menu corresponding to different
product numbers (SKUs), but this is difficult except for the HTML-savvy.
provision is also very weak. You specify for each item:
- Base shipping.
The cost to ship a single item.
The cost to ship each additional item.
Any additional handling cost.
This may work
fine if your shipping costs are the same no matter where you ship.
But most shipping costs vary according to weight and distance. The
shopping cart system contains no field for weight and no way to
compute shipping to various zones like most shopping cart systems.
An HTML-savvy merchant might set up a work-around to have the customer
indicate location and a corresponding shipping price in a drop-down
menu above the "Add to Cart" button.
Nor does the
PayPal cart have any provision whatsoever for sales or VAT tax.
This is probably because it was developed in the tax-blind auction
environment. But merchants can't ignore paying sales taxes when
sales are made to residents of their states. Using the PayPal cart
they'll have to include sales tax in the purchase price.
of using PayPal is its growing integration with common small business
accounting software. You can download your transaction history into
Quicken, QuickBooks, or a comma-delimited file which can be used
by spreadsheets, accounting ,or order management programs. QuickBooks
2001 now offers you the option to invite payment of invoices via
PayPal. I was able to install my existing PayPal account into QuickBooks
within a couple of minutes. I've also set up my PayPal Money Market
account as a bank account in QuickBooks, so it can be used both
to pay vendors and receive payment on invoices within QuickBooks.
Last week I used PayPal to pay one of my best affiliates who lives
in Australia. As my affiliate program (www.wilsonweb.com/affiliate/)
grows, I can use PayPal's Mass Pay feature to make quick payments
to multiple affiliates and track those payments in QuickBooks.
very impressed with PayPal as a maturing tool for online merchants.
PayPal members can receive payments from 43 countries, which include
nearly all those with large e-commerce traffic (but leaves out a
number of customers in Eastern Europe, South America, and Asia,
including some countries with notorious fraud problems). I think
small merchants have the most to gain with PayPal - the ability
to accept credit cards and e-checks without high monthly or set-up
fees, all from a standard website. Many established merchants, including
yours truly, will begin to offer it as a payment alternative. The
shopping cart's problems with options, shipping, and taxes will
need to be improved for it to become a primary solution for mainstream
e-merchants. But if you're starting your e-business on a shoestring,
I can't think of a better solution than PayPal.
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