Other not-so-free-anymore things

December 26, 2000 6:55 PM

Other not-so-free-anymore things Apropos of the NetZero not-so-zero-anymore change, PayPal has essentially made its system unusable for the purpose that first sucked us in -- a fast, convenient way for friends to share rent, settle up bills for dinners and weekend getaways (more inside).
posted by MattD (16 comments total)

Basically, the new policy -- to which I cannot find a convenient link from the non-logged-in-site (and though I trust you all, not so much as to post a secure URL linked to my VISA) -- prohibits one from receiving more than $100 in credit-card-source payments in any single month, from all sources.

So, if you take 6 friends to dinner, and they each owe $80, you can't let them PayPal you the balance anymore, unless they go through the (considerable) hassle and delay of linking their checking account to their PayPal, not to mention overcoming the (much more steep) mental barrier of giving a company unfettered access to one's checking account.

Now, a user had to do that eventually in order to withdraw money easily that others had sent them, but the meme-power viral proliferation of PayPal was all about getting your friends on board with the quick and easy proposition that they could pay you something they owed you with a credit card and on email, rather than with a check in the mail or a trip to an ATM and then an in-person meeting.

Of course we all knew that PayPal couldn't continue with its intrinsically negative-gross-margin business forever (since it had to eat the credit card processing fee for each payment) but (I think) they needed to craft a less radical solution from the one they adopted. Becoming (essentially) a discount credit-card processor for online auctions is not a very healthy business to be in.


posted by MattD at 7:06 PM on December 26, 2000

The $100/month limit is in place only if you have a personal account. If you bump to a "premier" account, then you would still be able to collect all that money from your buddies by paying a small transaction fee.

If you have $560 to toss around for a dinner, then I don't see how the ~$10 transaction fee would be a big deal.

But yeah, paypal is going downhill....

Non-members should be able to view the personal/premier chart here

posted by gluechunk at 7:15 PM on December 26, 2000

Doesn't, by itself, cut off any of the stuff I use PayPal for. I got started using it to pay for auctions. That's still feasible: I'd certainly eat a higher "shipping and PayPal" fee, or factor it into my auction bids. And beyond that, well, there was the pay-people-to-read-my-site experiment, but at a quarter a pop, there'd have had to have been a lot more people enbaged in similar stunts (399 more, in fact), to put any private Netizens up against the $100 limit.
posted by grimmelm at 8:42 PM on December 26, 2000

Matthew - I disagree.

I have my checking account linked with Paypal. I've had no problems and I love the service. Being able to pay for things with my checking account instead of my charge card is a good thing.

Every month my bank statement lists the money that's gone to Paypal. There's no way they could rip me off.

I haven't seen it going downhill either. Seems to me it's gotten better.

What am I missing?
posted by y6y6y6 at 8:59 PM on December 26, 2000

I only use it for auction payments as well, and it continues to work fine for me in that limited capacity. I'm not sure about PayPal's finances, though. X.com, the company that owns PayPal, just closed its Internet-only bank on the first of the month. And I can't figure out how PayPal's supposed to make any money, except on the float from members' deposits.
posted by aaron at 9:53 PM on December 26, 2000

y6y6y6 -- what you're missing is that unlike a credit card, a debit to a checking account is final. If you find an incorrect debit you can't dispute it.

I use a debit card instead of a credit card, and that's the downside of doing so. If someone manages to get my number and make an unauthorized charge, *I* eat the cost; the bank or credit card company does not. The charge is real and final and my only recourse is to report it to the police and hope they attempt to find the person who made it. (Nonetheless, for me the advantages outweigh the disadvantages and I choose to use it anyway.)

posted by Steven Den Beste at 10:57 PM on December 26, 2000

I'm somewheres inbetween. Like y6, I think the service is improving -- they actually PAY INTEREST on certain balances. Better interest than my BANK pays, indeed.

On the other hand there is a slight security risk -- that someone could get insider Paypal authorization or break into my account and transfer money. I think these are livable risks, and we'll be taking more and more of them as time goes by. Though it may end up developing an ancillary niche. Just as credit card numbers are morphing into "one-time-use" numbers, you may see bank accounts with "safe harbor" provisions letting you control interaction with certain providers (like Paypal), or at least that e-mail you when certain things happen.

I don't think that getting charged 18% on top of my Paypal transactions is something I want to be doing.
posted by dhartung at 11:10 PM on December 26, 2000

aaron, the X.com bank was closed because not enough people used it and it was burning up money.

Paypal, on the other hand, makes bundles of money very simply. You know how you or I always seem to have $5-10 in our accounts, and everyone we know might have more or less, but we all have something in our accounts?

All unused funds go into one big account that earns daily interest. Get a few million users, each with a few bucks in their account, total it up and the interest ain't half bad.
posted by mathowie at 11:39 PM on December 26, 2000

Everyone: I just singed up for Yahoo! PayDirect. Works quite similarly to PayPal, it seems, except for some deep down quirks. The big thing is that you don't directly pay from checking or CC. Rather, you first "fund" your PayDirect account and then, from the PayDirect account, pay someone. The big risk, buried the fine print but obvious to my suspicious lawyer's mind, is that your credit card company will treat the "funding" as a cash advance -- subject to heinous fees, interest, and no grace period, rather than a purchase. (Yahoo acknowledges the risk in the full terms of service). PayPal receives "purchase" treatment, at least from my card issuer.

Mathowie: are you sure that PayPal makes bundles of money? That doesn't square with my information, which is that business and premier accounts are essentially break even (a non-negative gross margin, but too small to make a meaningful contributed to overhead) and that personal accounts are, of course, money losers as recipients of funds, as sources of funds to business and premier accounts, are only just the other end of the zero gross margin.

Also, contra your math, one of their selling points for business and premier accounts is the daily "sweep" from their custody account into your bank account, so they are not earning a significant float (like the way your bank does on your non-interest-bearning checking). That $5 balance that a PayPal personal user might have in that account on an average day will yield them (aggressively) 10% per anum, or 50 cents. If the person who has a $5 float spends just $40 in that same year in credit card payments to other Personal users, at a 2.5% cost-of-transaction, that 40 cents is now overwhelmed with 60 cents in negative gross margin.

y6y6y6 and grimmelm: I agree, if you are already a PayPal buyer and purchase from merchants like eBay sellers who are willing to pay the fees charged by PayPal, you're fine. The problem is that the huge memetic force that spread PayPal was not paying merchants, but paying one another in social and roommate situations (and even in informal business situations). PayPal may be caught in a horrible Catch-22: they can no longer afford the policies which, so expensively, bought them a XX millions user base, but, even with all those costs, their best-case margins are so low that they still don't have enough volume and users to generate profit.

dhartung: 18% forsooth! One simply must pay one's balances every month -- the big payoff (assuming, as mentioned above, that one gets "purchase" not "cash advance" treatment) in using the card is the frequent flier miles or other goodies that you get. (We try never to pay cash or check for anything -- works out to a plane ticket a year or more!)

One thing to note is that PayPal's strategy for business and premier accounts, it is to (gradually) push up the credit-card-receiving pricing, which is likely to very quickly cause resistance from the core market of eBay and Yahoo! auctioneers. Already, I (a fairly regular eBay shopper) have noted a small but perceptible decline in the percentage of eBay sellers who are accepting PayPal -- for the first time since eBay broke, I just had to pay for something with an old-fashioned check in the mail. Of course, it is instructive to note how I did that: with an electronic check cut by Citibank and mailed at Citibank's expense and labor to the eBay seller.

(I expect to see very soon a rash of eBayers afixing a 2% surcharge on anyone who uses a PayPal-with-credit-card payment ... but I suspect that such an explicit surcharge violates PayPal policy).
posted by MattD at 1:09 AM on December 27, 2000

"...unlike a credit card, a debit to a checking account is final. If you find an incorrect debit you can't dispute it."

Steven, actually you can. Under the Electronic Funds Transfer Act (AKA Regulation E) you have a certain number of days to dispute a perceived erronious debit to your checking account. (That's not the best link, but it proves I didn't make it up.)

So while there is provision to dispute charges to your account, there is a downside. The bank has ten business days to investigate your claim, then as long as they contact you initially within that time they can take as long as they want to resolve it.

With a credit card charge dispute, you are usually excused from paying the disputed charge until the investigation is complete (although that charge may accrue interest) and the issue is resolved. However, with a Reg E dispute, it's your real live actual money that you can't access until the bank gets done dicking around with it.

Um, I used to work at a bank.
posted by jennyb at 5:24 AM on December 27, 2000

"If you find an incorrect debit you can't dispute it."

Paypal says they'll cover any fraudulent charges made through my Paypal account. I've never had to deal with that, and I haven't read the fine print, but I don't see any reason not to take it at face value.

The 2.5% surcharge is something I wouldn't mind paying. It's a lot less than the 8% I'd pay at a store.

I also don't understand how I'm now prohibited from sending small payments to people. Doesn't this still work just fine?
posted by y6y6y6 at 6:55 AM on December 27, 2000

Paypal may not make a great deal of money off interest yet, but they're set for the future. Aside from new servers, they don't need to do much more development, and they'll keep getting new users, more interest, and more profit.
posted by jed at 9:37 AM on December 27, 2000

Bad debit transactions happen all the time. My previous job was with bank machines, and we had someone on staff whose sole responsibility was rolling back erroneous transactions, be they with card holders, bank machine owners, us, or the banks.

I'm not as up to date on the specifics as jennyb appears to be, but I can say from personal experience that a fradulant transaction greater than 3 months old has been rolled back.

One bank machine owner I'm aware of got money over 9 months after the errors happened that caused them not to get their money, so a debit transaction, while definetely harder to get the bank to suck up the money, isn't 100% final all the time.

Note that Canadian law on these matters (a statute of limitations of sorts for transactions) may be different than American law, also Interac regulations may be different than Cirrus, or any of the other dozen or so cardholder networks. In other words, YMMV.
posted by cCranium at 8:16 AM on December 28, 2000

Actually the big change with PayPal is their new fee structure, effective Dec 1st, 2000. Formerly, transactions under $15 were charged a 1.9% fee. Now they are charged 30 cents plus 1.9%.

Why is this happening? Probably because they have no means in their current technical configuration to detect the method of payment and tack on an additional fee to cover any fees charged by credit card companies (usually over 2.3% + 25 cents or so themselves). If the money is moving from a PayPal or checking account balance, PayPal won't have this cost, but they can't differentiate.

Why does it matter? Because PayPal is effectively abandoning the micropayment arena. If all you're doing is charging $1 for something, you don't want to pay 32 cents of it to PayPal and if you want to charge less than 32 cents for anything, you lose money!

This is a really sad development. It had seemed like someone was finally seeing the potential...
posted by MetaGrrrl at 2:05 PM on January 2, 2001

(quick note: I just survived a round of infamous dot-com layoffs, and didn't even get a chance to say goodbye to the friends that left. I may be more spitful than usual in this post. Apologies for the rant, but the thread's nearly dead anyway, and I need to vent.)

One of the biggest problems I see with the current high-tech company landscape is in funding. It seems to me that there's no longer any situation that a company with a reasonably solid business plan can take 2 or 3 years to turn a profit.

To get funding, VCs want to see their money returned in a matter of months, and they want to see their money multiplied many times over in less than a year.

It seems to me that VCs are living in the past a little too much. For companies that hopped onto the dot-com boom (it can be argued that they created the dot-com boom, but there are so many other factors involved with that) they seem quite happy to ignore the fact that it just doesn't exist anymore.

There will undoubtedly be a company that bucks that trend and has a comparitively large IPO sometime within the next 4 months, but it will be an exception to the rule. For the next 6 months at least IPOs are going to be what they're actually supposed to be - a solid company that's ready to scale up quickly and profitably and needs to get capital so it can pay off its investors and start to invest in itself.

The days of the built-to-flip dot-com are gone. VCs don't seem to realize it, and are only investing in companies that have a chance of successfully forcing an early scale-up.

To beat the current bust, a whole lot of small companies - small meaning under 20 employees, probably under 10 would be even better - need to be able to run at a loss for 2 or 3 years until they've got the technology developed and can scale up properly.

I'm so waiting for the VC firm that starts investing say $100,000 in 100 companies as opposed to $1,000,000 in 10. The immediate pay-off from the later is definetely greater, but having long-term money in 100 companies will make the firm significantly more in 5 years, let alone 10.

The shake-down's happened. While it isn't finished, it almost is. Of the companies that will still exist, or come into existence in 6 months, the vast majority are going to be small (as defined above), smart (many of the people will have been through this before) and they'll be based around ideas that are profitable.
posted by cCranium at 2:32 PM on January 2, 2001