What’s Behind PayPal’s SMB Price Hike?

Small businesses in the very long tail of PayPal’s merchant portfolio will find that the cost of getting paid will change effective Oct. 1.

Roughly 1 percent of PayPal’s 10 million global merchants received emails notifying them that they will no longer receive the volume threshold discounts that have been extended to them over the last several years. These 1 percent are among PayPal’s smallest sellers, many of whom were operating under old contracts that provided discounts on very modest transaction levels, some on volumes as low as $3,000.

As of Oct. 1, 2015, PayPal will charge these merchants a flat rate of 2.9 percent on domestic transactions, along with a $.30 transaction fee. For international transactions, that fee is 3.9 percent, plus a transaction fee that will vary by country.

This change is not likely to impact large sellers or global brands that have negotiated contracts with PayPal.

In its email to affected businesses, PayPal highlighted the many new services that it offers SMBs, including access to new customers given its presence in 203 global markets and Seller Protection, which helps SMBs mitigate the risk of “losing money to chargebacks and reversals related to ‘Unauthorized Transaction’ or ‘Item Not Received’ claims,” according to PayPal’s website. Many of these services did not exist when these small sellers entered into, what was at the time, contracts for pure “payments processing” services.

Larry Berlin, analyst at First Analysis Securities Corp., said that the change will keep prices competitive with Square and other digital transaction businesses, and he estimates that it will add $10 million to PayPal’s bottom line.

Bloomberg reported that PayPal’s price increase is an effort to bolster its revenue growth, implying that it was doing that on the backs of small merchants. Doing the math though, $10 million on a $7.9 billion revenue base (PayPal’s 2014 revenue) accounts for about .13 percent of PayPal’s total revenue  – not a big revenue needle-mover.

PayPal reports that it has 169 million users that drive 1.1 billion transactions per quarter (Q2 figures). PayPal has seen significant revenue growth each quarter, with transaction volume increasing 27 percent in Q2 2015.

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