It's PayPal Time

Online retailers are discovering that alternative payment services fit their businesses to a "T."
Magazine Contributor
4 min read

This story appears in the February 2003 issue of Entrepreneur. Subscribe »

A growing number of Web retailers are plunging into the world of alternative online payment options to replace or supplement credit card . Alternatives include a "bill me later" button on the site, payment by paper or electronic check, or the use of payment services such as . Although the use of other payment systems reflects ongoing consumer concern about online credit card fraud, these options are often less expensive and easier to use than setting up a merchant account, which is required to process credit card payments.

Most e-tailers favor PayPal's service. Based in Mountain View, California, it's the world's largest online payment system. Recently acquired by eBay, PayPal lets consumers send to anyone with an e-mail address through their credit card or checking account. Consumers sign up once for the free service-after that, they use their account number to buy products online securely, conveniently and cost-effectively.

A Merchant's Pal?

Currently, PayPal has more than 20 million registered users and more than 3 million business accounts, and that number is growing by an average of 28,000 accounts per day. While PayPal may be best known as the leading online payment service for online auction sites (buyers use it to make instant payments), it is being used more at regular e- sites. Price is one factor luring online merchants. "There is a big interest in PayPal from small online retailers that can't afford credit card accounts," says Avivah Litan, a vice president at Gartner Inc. In general, PayPal charges just 3.3 percent per transaction. Those who use traditional merchant accounts know they have to pay for costs such as setup fees and transaction fees.

of searches on retail Web sites yield correct results when one of the words is spelled wrong.
SOURCE: eMarketer Inc.

Rob Leathern, senior analyst at Jupiter Research in New York City, agrees. "PayPal is a good way to accept credit card payments for small merchants lacking volume for a credit card merchant account or wishing to easily set up a way to accept payments online," he says. "They also offer neat features, like integration with UPS, which may be valuable to small merchants."

The cost-effectiveness of PayPal is demonstrated in several scenarios. For example, if entrepreneurs have sales of $250 per month, they pay a credit card company about 35 percent of every transaction, and if that number goes up to $7,500 per month, they only pay about 5 percent. "But PayPal is always charging the same 3.3 percent," Litan says.

It's also easy to use. A merchant adds PayPal's "Web Accept" button to its site; customers then click on the button and pay with their PayPal account. The payment is processed and sent directly to the merchant's account, then the customer is returned to the Web site.

Jennifer Geronaitis of Tea Time World Wide, a small online retailer of tea, gifts and gourmet foods in Hanson, Massachusetts, began using PayPal over a year ago because it was less costly than the traditional route. "I was concerned about paying a monthly fee for a merchant account without knowing what my online sales would be," says the 39-year-old founder, whose company made less than $1 million in sales last year.

Geronaitis, who gives PayPal about 2.9 percent plus 30 cents per transaction, says she examined merchant account fees last year before signing on with PayPal and found that fees would have been about $50 per month--plus 2.25 percent of the sale and $0.25 per transaction. "The fees for a merchant account," she says, "were much more for a small business than PayPal until the sales exceed about $6,000 a month, at which point the fees balanced out."

PayPal, however, may not be the perfect solution. When Geronaitis first signed up, she faced challenges with shipping: Initially, PayPal said shipping had to be calculated on a dollar scale or by attaching a shipping amount to each product. "[So] when a product was heavy, I lost money," she says. "Now a company can override the scale and attach a specific shipping to each product. The best scenario would be if a program calculated shipping based on carrier, weight and destination."

It's a good idea for online merchants to consider several factors before signing up with PayPal. "Small businesses that have a regular credit card merchant account are probably not going to get a ton of additional value from PayPal," says Leathern. "Merchants should survey customers first and see if there is interest in using PayPal. It [probably] depends on the nature of their business."

Melissa Campanelli is a marketing and technology writer in Brooklyn, New York.


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