Why Banks Are Pissed @ PayPal

The contentious relationship between PayPal and banks is a difficult one to describe.

On the one hand, banks benefit from the interchange (the percentage issuers charge merchants to accept cards) they make on the money that electronically moves from their customers’ accounts to PayPal; But, on the other, PayPal steps in between those banks and their customers.

This answer submitted to Q&A website Quora is one of the best I’ve seen.

The guy providing the info here is Dana Stalder. He says he’s a former executive at PayPal and the company’s parent, eBay.

1)  Does a bank prefer to have money pulled out of it via debit/credit card or directly via ACH transfer on PayPal?

The short answer is that banks strongly prefer that PayPal payments are funded through bank cards and not through ACH.  PayPal has the opposite preference, thus the natural tension between PayPal and card issuing banks.  When a PayPal transaction is funded through a bank card, interchange fees are charged to PayPal on the transactions and those fees go back to the issuing bank (and Association and payment processor).  The bank also has a greater probability of the transaction revolving on a  credit line, whereby they can charge interest and fees to the consumer.  When a PayPal transaction is funded via ACH, the transaction fees to PayPal are < $0.01, the banks earn no transaction fees and there is no chance of the transaction revolving on a credit line.

2) Do banks benefit from PayPal?

Banks earn incremental revenue from PayPal in some situations and lose revenue in other situations.  For PayPal transactions between a consumer and merchant that would have otherwise gone through a traditional credit card process, the banks lose revenue. For those PayPal transactions that would have otherwise been on cash, check or money order because the merchant is too small to set up their own merchant account (think friends exchanging money or individuals selling stuff on eBay), the banks benefit from PayPal.  For this reason, banks greatly benefited from PayPal in its early days.  PayPal pushed billions of dollars in eBay transactions through the credit card system that would have otherwise been settled with check and money order.  As PayPal grew, larger merchants began to substitute PayPal for traditional merchant accounts and PayPal began to enable consumers to fund transactions with ACH and Stored Value rather than with their bank card, ultimately shifting transaction revenues / profits from the banks to PayPal.

Read Quote of Dana Stalder’s answer to PayPal: Do banks benefit from PayPal? on Quora


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