Amazon rains on PayPal's parade
Posted on August 22, 2007
PayPal is a great story. In less than 8 years they've been able to sign up 133 million users in over 100 markets. In 2006, they generated nearly 30% of eBay's (PayPal is owned by them) $1.4 billion operating income.
But Amazon is about to rain on their parade. The secret to PayPal's lucrative business model is that they charge the equivalent of credit card fees for transactions that really amount to ACH (electronic check) transactions.
The cost of an electronic check transaction is substantially less than a credit card transaction. (Click here to see where credit card fees come from.) For example if you take payment from a PayPal user who's pulled funds from their checking account, you're going to pay 2.90% and .30 cents. PayPal's cost on that is less than a penny.
If someone uses a credit card to fund their PayPal account, PayPal increases the rate and charges the receiver 4.9% and .30 cents. PayPal has been making huge profits for years now using this model. Amazon has squarely set their crosshairs on PayPal's making machine of processing electronic check transactions at credit card rates.
Amazon is the only player in the online payments space that could pull this off. They are leveraging 69 million registered and active Amazon users who can immediately replace their PayPal account with one from Amazon. So with a third and probably final major entrant into the online payment processing space, PayPal, Google, and Amazon will have to hash it out between themselves.
Google's attempt at buying market share by waving fees has not been successful and their inability to access funds from a checking account has been a shortcoming. We'll just to wait and see if this is a space they really want to play in. Until then, most merchants are trying to gauge demand for each different payment type to determine if integrating all of these different methods makes sense. PayPal had the sandbox all to themselves for quite sometime but they better start brainstorming about ways to replace the income they are going to lose when Amazon starts raining on their parade.
