The Federal Reserve Board accepted its final comments this week on a proposed debit card rule that could have a major impact on PayPal as well as on merchants and banks.
The rule would restrict debit card interchange fees—the fees merchants typically pay to card issuers—to a maximum of 12 cents per transaction, which would slash the current fee structure and have major ramifications for both merchants and banks.
It’s less clear, however, how the rule might impact PayPal Inc., the online payment services unit of eBay Inc. PayPal pays online merchants when consumers with PayPal accounts make purchases, and consumers load those accounts with value using debit or credit cards or other forms of payment. PayPal earns revenue by charging merchants a percentage of the purchase transaction value, typically about 2% to 3% plus a fixed fee of about 30 cents. That’s at least $2.30 on a $100 online order. If the Fed determines that such a fee structure can be defined as an interchange fee, PayPal could be subject to the 12-cent maximum, dramatically reducing its revenue.
The Fed’s proposed rule was made in response to the interchange fee provisions contained in section 1075 of the Dodd-Frank Act. The rule aims to reduce costs imposed on merchants by major credit card issuers. (Card issuers with under $10 billion in assets are exempt from the rule.) Debit card transactions typically have interchange fees of more than 1% of transaction value.
PayPal submitted its position on the matter to the Federal Reserve Board this week in time to meet the Feb. 22 deadline for comments, but declined to make its position public, says a PayPal spokeswoman.
In its annual 10K financial statement filed with the U.S. Securities and Exchange Commission for the year ended Dec. 31, 2010, however, PayPal said: “The Federal Reserve Board’s proposal also requests comment on whether non-traditional payment systems such as PayPal should be treated as ‘payment card networks’ subject to the new law on debit card interchange. If PayPal is treated as a ‘payment card network’ for this purpose, PayPal’s revenues could be reduced and its business could be adversely affected. Any material reduction in credit or debit card interchange rates in the United States or other markets could jeopardize PayPal’s competitive position against traditional credit and debit card processors.”
Another PayPal spokeswoman told Bloomberg News last month that the payment services firm would argue before the Fed that it is “not a payment-card network” and does not charge interchange fees, and so did not expect to be covered by the new regulation.
Patricia Hewitt, director of the debit advisory service at consultants Mercator Advisory Group, who has been monitoring the Fed’s meetings on the matter, says the Fed has not indicated so far that it would exempt PayPal.
“Until the Fed defines exactly what a regulated payment network is, there’s no telling which alternative solutions will be impacted, other than to say that the Fed has excluded ‘pure’ Automated Clearing House transactions from the definition of a debit card,” Hewitt says in a recent blog post, adding that this “does not protect payment schemes dependent on ACH to settle transactions, like PayPal and Bling.” Bling Nation is a payments system that uses the PayPal platform to process online and mobile payments.
Payment transactions designated as ACH are deducted from a consumer’s bank account through the Automated Clearing House system, which connects financial institutions outside of payment card networks. Fees on ACH transactions are only a few pennies, making them the least expensive type of transaction for PayPal to process.
PayPal reported revenue of $3.4 billion last year, up 23% from 2009. For the fourth quarter, its revenue of $971 million was more than 39% of eBay’s total revenue, eBay says.
Under the Dodd-Frank Act, the Fed is supposed to release its final rule by April 21, but a spokeswoman for the Fed’s board, noting that it has more than 8,000 comments to review, says it hasn’t yet determined an actual release date. The scheduled date for the rule to take effect is July 21.