Ina Steiner EcommerceBytes Blog
News and insight focusing on ecommerce.
by Ina Steiner, Editor of EcommerceBytes.com
Thu Apr 19 2012 22:14:42

Why PayPal Doesn't Like Credit Card Funding

By: Ina Steiner

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Did you know that PayPal incurs varying fees depending on how you fund your PayPal purchases? PayPal pays significant transaction fees for credit card funding, pays lower fees when customers fund payments with debit cards, and nominal fees when customers fund payment transactions by electronic transfer of funds from bank accounts.

PayPal incurs no fees when customers fund payment transactions from an existing PayPal account balance or through the Bill Me Later service, or use buyer credit issued by GE Money Bank.

Why Customers Prefer Credit Card Funding
Customers fund a significant portion of PayPal's payment volume using credit and debit cards. eBay explains that customers may prefer funding payment transactions using credit cards or debit cards rather than bank account transfers for a number of reasons, including the following:

- the ability to dispute and reverse charges directly with their payment card provider if merchandise is not delivered or is not as described;

- the ability to earn frequent flier miles, cash rebates, or other incentives offered by payment card issuers;

- the ability to defer payment;

- or a reluctance to provide bank account information to PayPal.

In addition, some of PayPal's offerings, including the ability for buyers to make a limited number of payments without opening a PayPal account, have a higher rate of payment card funding than PayPal's basic product offering.

Why PayPal Hates Credit-Card Chargebacks
So while credit- and debit-card funding costs PayPal more, it's crucial that it offer users those options, since that's what so many buyers prefer. But as any retailer with a credit card merchant account knows, too many chargebacks can put your account in jeopardy. And that's why PayPal tries to discourage users from filing claims with their credit card companies.

As eBay's writes in its annual report, "if losses incurred by PayPal related to payment card transactions become excessive, they could potentially result in PayPal losing the right to accept payment cards for payment" - just like a merchant would be put on the TMF list.

Pay After Delivery - For Real?
It could also explain why PayPal offers Pay After Delivery - in exchange for giving buyers 14 days to pay for purchases (for eligible users only), PayPal avoids credit and debit card payments:

"Add and confirm your Bank Account so that you can take advantage of Pay After Delivery. PayPal will pay the seller immediately, but won't deduct the money from your bank account until 14 days later. We'll send you a reminder email four days before we deduct anything so you won’t find any surprises. There's no cost to you. And because the money is deducted from your bank account, there's no credit check and no credit card fees."

What's Your Preference?
I haven't heard many reports of buyers having problems specifying which funding source they want to use for PayPal purchases lately.

As sellers, do you prefer to use the money in your account to fund purchases? Which funding method do you use, and why?




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Readers Comments

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This user has validated their user name. by: Ming the Merciless

Thu Apr 19 22:55:41 2012

If I'm not mistaken and certainly could be, if you have a PreyPal balance sufficient to cover the purchase, then PreyPal gives a buyer no option but to pay from that balance.

It seems to me that if PreyPal lives in such fear of chargebacks, then they ought to change the policies they and ebafia created that encourages all sorts of fraud.

The fact is that PreyPal can't successfully exist without the credit companies who I suspect will make life more difficult for Preypal as each of their e payment services gets some traction.

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by: Sunflower This user has validated their user name.

Thu Apr 19 23:24:14 2012

I am a bit confused. I tried to change my primary funding source from my checking account to my credit card, but PayPal would not allow it. I phoned them and was told that they do not allow credit cards and that I could only use the PayPal Mastercard and that I could apply for it on the phone which I declined. I found it strange that they would only accept the PayPal Mastercard but no other credit cards.
Has anyone else experienced this or did I just get someone from PayPal whom did not know the answer?
I would really like to fund my purchases from my credit card and not my checking account.

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by: JoyfulA This user has validated their user name.

Thu Apr 19 23:45:26 2012

Use your credit card. On the rare occasions I use PayPal, it first flips up my bank account, and I have to click "alternate" or something like that to get to my credit card as the means of payment. (I seldom have meaninful money in PayPal; when I do, PayPal grabs it as payment without offering any alternatives.)

PayPal definitely wants to avoid handling credit cards yet can't do without them because that's what most customers want to use. PayPal always shoves me and everybody else to bank withdrawal, but I already have enough swirling around there not under my direct control with client payments, customer payments, etc.  

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by: hzATL This user has validated their user name.

Fri Apr 20 00:10:37 2012

If PayPal doesn't want to allow payments via credit card that option should never have been made available! As a buyer on eBay I HATE the fact I have no choice but to use my PayPal funds to pay for eBay purchases if I have a PayPal balance. I would much rather pay via a credit card. Seems as though I constantly transfer PayPal funds to my bank account (for a fee!) or go to an ATM to withdraw PayPal funds (for a fee!) so I can pay for my eBay purchases with a credit card. Ridiculous.  

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by: bulky This user has validated their user name.

Fri Apr 20 00:23:40 2012

if paypal want buyers to use their bank account for funding a purchase then they need to improve the delay in the time it takes an echeque to clear.  Most do not clear for at least 5 days and some take 10 days. No good for the buyer who want's his purchase and no good for the seller who wants to complete the transaction.
Further, how about some honesty from paypal? The comment they use when trying get get buyers to fund from a bank account is a very long drawn bow.  Why not tell the purchaser the real reason which is the cost to paypal each time a cc is used

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by: MadamH This user has validated their user name.

Fri Apr 20 00:25:17 2012

Sunflower,

Have you recently tried to establish a Paypal account?  I'm curious if the problem you encountered occured recently.  I've had a PP account for (unfortunately) many years now, and have never heard of your dilemma.

I ALWAYS use a credit card to remit an ebay purchase, knowing full well PP will incur charges from the credit card company.  At one time I also sold on ebay, until the site became unbearable, but still buy occasionally.  (not nearly as frequently as I used to do.)

I know ebay and PP are charging the seller outrageous fees, so I figure I'm just doing my part to help PP and ebay to show the smallest amount of profit margin possible on my transactions.

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by: ruthie This user has validated their user name.

Fri Apr 20 00:33:44 2012

''Seems as though I constantly transfer PayPal funds to my bank account (for a fee!)''

I've been using PP since the beginning and have never had a charge to transfer money from PP to my bank account.

What is their reason for charging you?

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by: alaska This user has validated their user name.

Fri Apr 20 01:21:52 2012

When I pay with PayPal using my credit card, doesn't PayPal pass the extra credit card fees onto the seller? That's what I always understood.

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by: RAOTFLMAO This user has validated their user name.

Fri Apr 20 07:44:23 2012

For large purchases (over $50) I have always used a credit card.  You really have no protection as a buyer if you pay using only paypal.  With a credit card you have greater protection.  

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by: Theresa This user has validated their user name.

Fri Apr 20 08:29:54 2012

When I want to pay with a credit card, which is often, I simply transfer all of my paypal funds to my checking account so I have a zero balance and then I can use my on file credit card as desired.  And it is a good idea to always transfer funds out of paypal as fast as possible no matter the reason.

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This user has validated their user name. by: Tula

Fri Apr 20 08:51:11 2012

Ming is correct. Paypal always uses your Paypal account balance first, then tries to get you to use your bank account by making the other options hard to see (tiny print).

@alaska: Paypal charges sellers the same amount to receive money, regardless of the source. That's why they prefer Paypal balances and bank account transfers, since it costs them the least and gives them a bigger profit margin.

The recent debit card legislation actually lowered debit card fees for merchants, so I'm surprised they haven't pushed harder on those,as well. Regardless, I always use my credit card for purchases, except for postage, which I use my Paypal balance for before transferring it out to my bank account.

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by: Moonwishes This user has validated their user name.
Web Site

Fri Apr 20 09:11:39 2012

"So while credit- and debit-card funding costs PayPal more, it's crucial that it offer users those options, since that's what so many buyers prefer. But as any retailer with a credit card merchant account knows, too many chargeback’s can put your account in jeopardy. And that's why PayPal tries to discourage users from filing claims with their credit card companies"

LOL! So PP gets a taste of its own medicine! Ebay and PP have systematically been training buyers to complain and get refunds while keeping the product. Which I'm sure means a higher percentage of chargeback’s than should be the case. IF ebay and PP had been treating SELLERS fairly in controversies, then I'm sure that this wouldn't be such a problem for them. All merchants want cash as their prices reflect the built in cost of doing business with credit cards, thus they make a better profit with cash. Until they give me a discount for a cash payment, I will continue to use cc to fund any payments. I do that by making sure all my cash is transferred to my bank BEFORE shopping and using any kind of check out. More and more I dump PP funds into my bank even sooner than I used to. At least with GCO they aren't trying to make money off of float, the money is transferred ASAP with nothing that we have to do. PP will hold our money for years if it can. They are making plenty of money and I’m not going to cry for them that is for sure!

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This user has validated their user name. by: Anonymous Annie

Fri Apr 20 09:31:31 2012

Wha-wha-WHAT?!

Customers **PREFER** to use CREDIT CARDS?! ~ Who knew? :-/

And to think....all this time, I thought that PP is the world's ''most loved'' and ''safest'' way to pay?

Color me shocked!

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by: Sunflower This user has validated their user name.

Fri Apr 20 11:16:19 2012

MadamH- Thanks for your information.
No I have had the same PayPal account for over 15 years so it is not a new account. This was just a couple weeks ago as I really wanted to change the withdrawals from my checking account to my credit card. I also asked if  I could pay my eBay monthly fees with a credit card and she again said no. I think I can go to eBay and edit the payment option there to have my fees charged to my credit card, but I really want the back up protection with using my credit card on PayPal.I asked the PayPal representative why it had to be a PayPal Mastercard and she said she did not know-big surprise there-no answer to what I think is an important question.

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by: lectiodivinabooks This user has validated their user name.
Web Site

Fri Apr 20 11:25:57 2012

When I was a seller, I always emptied my paypal account right away. I always used a credit card  and do now because I have had so many problems with Paypal in the past and I want to  help minimize their profits beacause they are so awful.

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by: Beth This user has validated their user name.

Fri Apr 20 11:26:03 2012

1. Get a Paypal Debit card -  use it to remove your funds as cash and transfer them to your real checking account.

2. ALL of us, Paypal users that is, are allowed PERSONAL and A BUSINESS or A Premier account.  We should have both. Because??

Because then you shift your available balance to the personal account, fund your business/premier account thru your credit card and pay thru that.  (you can't use or accept a credit card on a Personal account I believe).

Now you have your business account funded via a credit card or instant transfer from a checking accounts.


Easy Peasy way around the obmoxious rules - LeGALLY

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by: Patricia This user has validated their user name.

Fri Apr 20 12:42:15 2012

The long and the short of it is...paypal can't fool around with your money when you use a credit card.  They have no choice but to abide by CC rules!

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by: greenmountainsgirl This user has validated their user name.

Fri Apr 20 13:28:46 2012

I spent two days this week trying to pay for an eBay purchase, only to receive the message that my credit card was invalid and that I needed to use a different one or pay via my bank account.

I looked at my card activity online to see what PayPal was doing. Every time the charge was sent to my card, my account read
"Payment: Decline.
Reason: Restricted Country"

Thankfully, my card wasn't charged any fees. I couldn't get any explanation why PayPal did that even though I queried PayPal and eBay on it. Of course they just denied everything or gave me the run around.

Its not like the seller was overseas, it was a US sale. I recently bought from someone in England through PayPal and THAT went through just fine.

It really makes me wonder what information PayPal was sending to my credit card to receive all those red flags. Talk about sneaky and sleezy business dealings.

I VERY rarely sell on eBay anymore, even though I've been a member for ten years. They ran me off as a seller with all their stupid changes.

As a buyer, they seem to be doing their best to try to run me off the site completely.

PayPal, an overseas company in a restricted country...

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by: Digmen1 This user has validated their user name.
Web Site

Fri Apr 20 18:32:48 2012

I don't use a credit card as I have a low income (at the moment)
I am different to the rest of you.
I try to keep about $100 in my Paypal account which I use to buy things, advertising and services through fiverr and freelancer etc.

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This user has validated their user name. by: Roger Rabbit

Fri Apr 20 19:13:32 2012

Credit card funded purchases are the reason PayPal's new Home Depot POS campaign is DOA.

They lose money on CC funded transactions.

Manager at the local Home Depot said that PayPal checkout has only been used twice, failed both times, and the angry customers abandoned their shopping carts and stormed out of the store.

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