Wells Fargo to process PayPal payments

The banking giant will become the third credit card processor to handle transactions for the online payment company--displacing Electronic Payment Exchange.

3 min read
Wells Fargo will process credit card payments for PayPal under a deal the companies announced on Thursday.

Reader Resources
PayPal review

Wells Fargo will become PayPal's third credit card processor in less than a year, displacing InterCept's Electronic Payment Exchange (EPX). PayPal originally disclosed the deal last week in a regulatory filing.

"Wells Fargo is excited to win the business of PayPal," said Debra Rossi, executive vice president of Wells Fargo's business Internet services. "Wells Fargo is in a position to help PayPal's service with its payment processing expertise, its relationships with the credit card associations and its customer care experience."

A PayPal representative declined to comment, citing a quiet period due to the company's filing last week for a secondary public offering. Wells Fargo representatives did not return calls seeking comment.

The ability to pay anyone online using a credit card has been one of PayPal's chief selling points and the reason why the service became popular with online auction users. But credit card acceptance has presented a number of issues for PayPal.

Although the company started its service for free, it eventually introduced fees, in part to cover the costs it incurs when members use their credit cards. The fees resulted in an uproar among PayPal users.

In 2001, MasterCard fined PayPal $313,600 because of excessive charge-backs, which occur when a credit card holder challenges the validity of a charge and the charge is removed from the cardholder's bill. PayPal users made $5.1 million in charge-backs in 2000 alone.

More recently, PayPal ran into more problems with both MasterCard and Visa.

In April, MasterCard threatened to require sellers who accepted its credit cards on a regular basis to do so through a merchant account with a bank, instead of through third-party services such as PayPal's. The companies have since worked out a deal whereby merchants who use PayPal can satisfy MasterCard's requirement by registering with PayPal's bank, PayPal said in its regulatory filing.

Meanwhile, Visa has charged PayPal with violating some of its operating rules and has begun assessing fines to EPX. Visa has fined the credit card processor $130,000 through May 31, and $95,000 of that has been passed on to PayPal, the company said in its regulatory filing.

Wells Fargo will charge PayPal a fee for each credit card transaction and for each charge-back under a deal the companies signed last month, according to the filing. Wells Fargo will handle all U.S.-based credit card transactions for PayPal as part of the three-year deal. PayPal will have to keep a permanent $3 million on reserve with Wells Fargo as collateral.

PayPal plans to move from EPX to Wells Fargo by November of this year, PayPal said in its filing. EPX began processing credit card transactions for PayPal last November.

The online payments company used Chase Merchant Services for nearly all of its credit card payments until December of last year. As of March 31, Chase still held about $10.5 million of PayPal's money in reserve in case of possible charge-backs.

PayPal already uses Wells Fargo to processes checks and electronic payments that go through the automated clearinghouse (ACH) network. Under that deal, which began in August 2000, Wells Fargo also issues wire transfers, prints checks and provides some fraud protection for PayPal.

Earlier this year, Wells Fargo sold its stake in PayPal rival Billpoint to eBay. Wells Fargo bought its 35 percent stake in Billpoint two years ago. Despite its divesture from Billpoint, Wells Fargo continues to process payments for the company, according to PayPal's regulatory filing.