Ask Glenbrook: PayPal's Revenues, Seller Fees

The question continues:

First, I thought "why would a merchant want to accept Paypal at 3.67% when it can pay Amex, Visa and Mastercard even less?" Then on Paypal's website I found their fee schedule and it states that, for the smallest merchant, PayPal's fees are 2.90% + $0.30/transaction.

For a $100 transaction, the seller fees to PayPal would be $2.90 + $0.30 = $3.20 or 3.20% and again this is only for the smallest merchants. Sellers with higher volume pay less. So I am having a hard time getting to that 3.67% - any ideas?

PayPal's sellers pricing is reflected in the numbers you cite -- but PayPal's average transaction amount for 2005 was a bit over $57. On a $57 transaction, PayPal's seller fees would be $1.65 +$0.30 = $1.95 or 3.4% of the transaction amount.

It's very likely that PayPal handles more small transactions (median vs. mean issues) which would result in a correspondingly higher percentage of the transaction amount. For example, on a $25 payment, PayPal's take would be $0.725 + $0.30 = $1.025 which works out to be 4.1% of the purchase amount.

In addition, PayPal has some additional sources of revenues beyond what they charge the seller in fees. Here's a paragraph from eBay's just released 10-K Annual Report that explains a bit more:

"PayPal earns revenue in five ways. First, PayPal earns transaction fees when a Business or Premier account receives a payment. Second, PayPal earns a foreign exchange fee when a user converts a balance from one currency to another. Third, PayPal may earn fees when a user withdraws money to a non-U.S. bank account, depending on the amount of the withdrawal. Fourth, PayPal earns a return on certain customer balances. Finally, PayPal may earn ancillary revenues from a suite of financial products, including the PayPal-branded debit card, the PayPalbranded credit card and the PayPal Buyer Credit offering."

The transaction fee component is the first way in the description above that PayPal earns revenue . Presumably, it's also the largest component of their revenues - although we don't believe any breakdown among the five components of revenue has been provided.

The following paragraph, also from the eBay 2005 10-K uses this same approach to describe PayPal's revenues:

"... During 2005, over $27.5 billion in total payment volume was transacted on the PayPal platform as compared to $18.9 billion during 2004. As of December 31, 2005, PayPal had 96.2 million accounts, compared to 63.8 million accounts at December 31, 2004. Our Payments segment net transaction revenues as a percentage of total payment volume was 3.6% in 2005 and 2004. The growth in Payments net transaction revenues was positively affected by PayPal’s continued penetration of eBay Marketplaces transactions in all countries, particularly in the United States and the United Kingdom. ..."

In summary, PayPal earns the major portion of its revenues from the fees it charges to sellers - but it has several other components to its overall revenue stream. When all of the revenues components are added together and divided by the total payment volume handled by PayPal, it results in the 3.6+% number.