Getting Rid of PayPal? Priceless

M asterCard says that PayPal and other third-party credit card payment systems are not subject to the same regulations as issuing banks and wants to prohibit their merchant members from accepting and submitting these transactions for online purchases.

MasterCard is proposing a new rule that would block e-commerce merchants from accepting credit card payments through third-party payment services like PayPal. The change was expected to go into effect May 1, 2002.

If MasterCard's plan is put into place as originally proposed, the third-party transaction companies as well as e-commerce providers, from small operations to giants such as eBay, could face revenue problems.

Many online retailers cannot afford to participate directly in MasterCard's network. Many also will not be able to afford the higher fees charged by credit card companies to conduct online transactions, which are riskier than card-present purchases. Credit card companies have less control over customers who work through the third-party services.

MasterCard's "Clarification of Rules for MasterCard Merchant Agreements" specifies the proposed change in policy. Effective May 1, it says "MasterCard will clarify its rules to prohibit members from accepting or submitting into interchange a transaction that was submitted to the member directly or indirectly from a commercial entity that does not have a valid merchant agreement with the member."

Consumers also might find it harder to use their MasterCards to make purchases at sites that use third-party services.

Credit card issuers like PayPal and similar services because they enable smaller, less established merchants to accept card payments by charging lower user fees than the networks. PayPal might charge a retailer 3 percent of its card payment revenue whereas MasterCard might charge 7 percent.

Once a company has been established for at least one year, MasterCard has preferred that it drop the third-party services, resulting in the retailer paying the higher fees that MasterCard charges. The rule change would force PayPal clients to contract directly with MasterCard. Visa and American Express will continue to accept transactions made through PayPal.