US Consumers Claim Harm From PayPal Merchant Fees

October 10, 2023
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A class action complaint filed last week in California claims that certain merchant agreements in PayPal’s contracts have led to higher consumer prices.

A class action complaint filed last week in California claims that certain merchant agreements in PayPal’s contracts have led to higher consumer prices.

According to Hagens Berman, the law firm seeking to represent American consumers, PayPal charges an “industry-high” fee for its transactions, which are “baked into” the prices consumers pay at retailers due to a set of anti-competitive measures in PayPal’s rules.

These rules prevent merchants from using other, lower-cost payment platforms such as Stripe or Shopify, the law firm said.

The lawsuit seeks to represent all US consumers who used a non-PayPal payment method, such as a credit card or a non-PayPal digital wallet, and claims they may have the right to reimbursement.

Similar to Square and Stripe, PayPal processes card transactions for millions of typically small- and micro-merchants serving as their “merchant of record”. 

During this process, PayPal stands in the shoes of the merchant for all transactions it facilitates on behalf of its customers and bears financial responsibility for the payment.

Opening a PayPal account often has lower set-up costs than partnering directly with an acquirer, but merchants typically pay higher transaction fees. 

For instance, PayPal charges a 2.99 percent fee plus $0.49 for processing credit and debit card payments, which is above the average estimated cost of 2.24 percent for accepting credit cards.

The complaint also alleges that PayPal’s e-commerce payment processing outstrips the fees of rival gateways. PayPal’s website shows that the company charges 3.49 percent plus $0.49 for a standard checkout transaction, while the complaint claims its competitors charge on average a 2 percent fee plus fixed or monthly fees.

Consumers claim anti-steering rules raise prices

The complaint concerns PayPal’s gateway service, which allows consumers to pay for e-commerce purchases.

The attorneys argue that PayPal is the dominant e-commerce payment platform, with approximately 35m merchant accounts globally and a 400m consumer base. It further estimates that 75 percent of Americans use PayPal and nearly 1m US e-commerce websites accept it. 

With its widespread acceptance and large consumer base, the lawyers claim PayPal can enforce strict “anti-steering” rules that prohibit merchants from offering incentives to "steer" consumers away to cheaper alternatives.

For instance, merchants must agree not to offer any discounts or inducements to persuade consumers to use other payment options that have a lower cost.

Merchants also cannot tell customers that other payment methods are more cost-effective or preferred, nor can they prioritise them in their online storefronts or checkout flows.

“Merchants must present PayPal as an entirely neutral option when, in fact, the economic consequences of clicking PayPal at checkout are significant and adverse,” according to the complaint.

“These rules serve only to stifle PayPal’s competitors, inflating the prices consumers would otherwise pay,” the law firm said.

Attorneys argue that if PayPal’s agreements “were transparent”, consumers would “quickly see” a price difference between PayPal and Venmo and its competitors.

PayPal processes 41m transactions on a daily basis and reported a $27.5bn revenue in 2022, most of which came from these fees, according to Hagens Berman.

The fintech's spokesperson told Vixio they are reviewing the filing. "PayPal continues to put our customers first in everything that we do, and we take this responsibility seriously," the spokesperson added.

Card steering at the centre of previous legal battles

The legality of steering consumers away from one payment method to another has been subject to several lawsuits over the last decade, without a clear position on anti-steering rules.

Up until 2010, major card brands Visa, Mastercard and American Express (AmEx) all used anti-steering rules to prevent merchants from offering consumers discounts, rewards and information about card costs that could prompt consumers to use an alternative payment method.

In October 2010, however, the Department of Justice (DOJ) sued the three card networks over these provisions. Visa and Mastercard settled the case immediately with the DOJ committing to dropping those rules.

Steve Berman, managing partner and co-founder of Hagens Berman argues that PayPal’s anti-steering rules are “draconian” and akin to the rules of Visa and Mastercard prior to 2010.

“Visa and Mastercard rescinded their anti-steering rules to resolve the Justice Department’s claims, and now we see PayPal doing precisely the same thing,” Berman said.

Debates over the legality of anti-steering provisions, however, did not end there.

The case against AmEx, which did not settle with the DOJ, went up to the US Supreme Court (SCOTUS). In June 2018, the top court ruled in favour of AmEx’s anti-steering rules and said that those rules do not necessarily harm competition in the overall market just because they drive up fees for merchants.

AmEx has also been sued in a so-called “umbrella claim” by retailers that do not accept AmEx cards. 

The card network successfully fended off those claims in November 2021 when the Second Circuit Court ruled that the retailers lacked antitrust standing.

Vixio has reached out to Hagens Berman for comment and will update the story accordingly.

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