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What does that mean? In simple arithmetical terms, it means that if you run a small business, and you sell someone something for which they are willing to pay $1,000, then Paypal will take $35.39, whereas previously it would have taken $29.30.
Making this more palatable: there is a sense in which the transaction fee is falling for some merchants here. The earlier fee, 2.9% plus, applied to basic online transaction processing. The new charge of 3.49% plus applies only to transactions through Paypal’s digital wallet or through the Paypal button on merchants websites.
The new fee does not apply to other payment processing, in particular to the use of Paypal to process payments with cards issued by other companies. In that circumstance, Paypal’s cut gets smaller: going to 2.59% plus $0.49.
How it Works
Paypal is also changing the fee structure for the use of its Venmo. Until now, Venmo accounts were either personal or business. If you had a business account, the company got a transaction fee when you made a sale. But, if you had a personal account, it did not.
Personal accounts under the old structure were not supposed to be used for the sale of products or services. They were marketed with an eye to person-to-person transactions. It was a way to pay back a friend who had made an impulse purchase (with cash let us suppose) on one’s behalf the day before.
Now the change is that the personal account, too, can be employed for buying goods or services. A person-to-person transfer still won’t involve a fee. But if you want to buy a gift for your friend from a merchant, using your personal Venmo account, you are expected to tag this as a purchase.
In that case, the fee of 1.9% plus $0.10, will apply. The $1,000 transaction we mentioned above, through Venmo, will yield the middleman a transaction fee of $19.10. The same fee applies to “instant transfers,” as when an account holder transfers money from the Venmo account to a debit card.
What is the incentive for any buyer with a personal account to tag the transaction as such? If the buyer does so, the buyer benefits from the Purchase Protection Program. She will be protected if she never receives the item purchased, or if it proves disappointing when it arrives.
Consequences for Small Businesses
Through the company explains both the Paypal and the Venmo moves as restructuring of fees rather than raising them, to many small businesses, including those for whom the business is a side hustle, the effect will be a real hike in the costs of doing business with a lot of their customers: a cost that will add up.
In very competitive environments, the merchants may well have to absorb these costs. In other situations, a business with a distinctive product or a loyal customer base, may be in a position to pass the cost along.
A complete pass-along is unlikely, and wouldn’t be simple. Price discrimination based on the card a customer uses becomes complicated, unpopular, and can run into regulatory blowback. So even if the merchant is in a situation in which he can increase his price, the goal will probably be to pass the costs along to his customer base as a whole rather than customer by customer.
The real reason, of course, that a complete pass-along is unlikely is that most merchants simply can’t do it. They run the risk of losing customers. They will likely make incremental increases at a level that they are confident won’t have that effect. The result amounts to a sort of arm’s length haggling, in which buyers and sellers work out between them who will bear how much.