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PayPal fee may make users less chummy

The payment site plans to charge all members, including small-transaction customers, a fee if they accept credit cards.

Free is gradually giving way to fees at PayPal.

The Palo Alto, Calif.-based online payment company, which in September filed for an initial public offering, will soon charge all of its members for receiving credit-card payments. Previously, PayPal exempted some small-transaction customers from paying to accept credit cards.

Personal users accepting payments using money from PayPal accounts or debited from bank accounts will still be able to use the service for free, PayPal spokesman Vince Sollitto said.

"The change is simply designed to reserve services that cost us money to people that pay us money," Sollitto said. "Obviously, credit card processing is a service that costs us money."

But the change could go over poorly with PayPal members, many of whom balked when the company instituted other fees or when it increased them. Although PayPal has seen its greatest success with auction sellers, the company has touted its services as a way for anyone to pay anybody with a credit card. Along those lines, customers have used PayPal to split group registration fees or dinner bills.

Nashville, Tenn., resident Steve Moore said he plans to look at other online payment options for his auction and personal transactions.

"I'm a frequent user of PayPal, but (I'm) not a real business," Moore said. "To pay for a premium account is more than most people want to do. I don't want to do it."

PayPal has to balance the need to attract more casual members like Moore with the need to reach profitability, said Jim Van Dyke, a financial services analyst with Jupiter Media Metrix.

"PayPal has to make its systems very easy to use, very trustworthy and very cost efficient," Van Dyke said. "If it gets too greedy--if it charges too much too early--it will dampen adoption."

But Sollitto said the company's efforts to reach profitability played only a small roll in the change. About 90 percent of the 210,000 transactions that go through PayPal's system each day already go to fee-based accounts, meaning that the change will have only a small effect on profitability, he said.

After debuting as a free service that planned to make money by investing the balances held in members' accounts, PayPal began charging fees last year. The company initially introduced transaction fees to its business customers, then extended those fees to anyone who received credit card payments in excess of $500 during a six-month period. The company later changed that requirement, charging anyone who accepted $100 or more in credit card payments in a single month. This latest change takes these moves one step further.

PayPal originally charged 25 cents plus 1.9 percent of the cost per credit card transaction. The company now charges most customers 30 cents plus 2.9 percent of the transaction cost for each credit card payment.

The service change means that any PayPal customers who accept a credit card payment will have to upgrade their account to a fee-based business or premier account. PayPal plans to make the change Nov. 13.

Little IPO?
The change comes just weeks after PayPal filed to raise up to $80.5 million in an IPO. Despite being the most successful online payment service, some analysts say the IPO has little chance of being a success.

During the last year, investors have fled the Internet sector, driving down share prices for public companies and stymieing the market for public offerings. Especially hard hit have been companies that have struggled to reach profitability.

PayPal could be considered in that class. Although the company improved its finances during the last year, it still lost $27.7 million on $19.9 million in revenue in the second quarter. Last year, the company lost $169.5 million on $14.5 million in revenue.

Payments to credit card companies have proven costly for PayPal. The company pays 18 cents plus 1.9 percent of each payment made using a credit card, according to documents filed with the Securities and Exchange Commission. In contrast, the company pays only 3 cents per transaction for payments made using a bank account and incurs no charges for payments using PayPal balances.

In recent months, the company has tried to discourage members from using credit cards, not only by charging fees, but introducing its own debit card that draws from PayPal accounts and awards a cash-back bonus to cardholders.

However, the change could put an end to most person-to-person payments on the service. Small-volume members like Moore say they will not pay to accept credit cards, and accepting transfers from bank accounts may not be much of an option because, Sollitto said, only 25 percent of its members register their bank accounts after signing up for the service.

Part of the problem is the time element. While paying with credit cards is nearly instantaneous, PayPal can take up to three days to register a bank account that members can use to move money back and forth to and from their PayPal accounts.

Moore, a director of information systems, said he has used PayPal about 30 times when he has sold items on auction and about 10 times to pay back friends and for other personal uses. What drew him to PayPal was the ability to receive a credit card payment from anyone for free.

"If I have to require someone to send me a check via PayPal, they're not providing much service in that," Moore said. "I'll look around and see what else is available," he said, adding that he might even go back to accepting regular checks.

New York resident Izzy Goodman, who sells digital cameras through his own Web site and through online auctions, said he has all but given up PayPal.

"They keep changing the terms. They keep stating things that aren't true," Goodman said. "PayPal said from day one, 'We'll always be free; we won't force you to upgrade,' and then they proceeded to do so."

Despite the outcry from some members, PayPal is not worried "in the slightest" that the latest change will affect new registrations or use of its services, Sollitto said.