PayPal Inc. made a move Wednesday that the big card companies have long resisted - it cut its fixed transaction fees for purchases under $2.
"The opportunity for PayPal was to address the micropayments issue, and we went straight at the issue by reducing the fixed fee," said Peter Ashley, the eBay Inc. unit's director of digital content and micropayments.
Analysts said this could help PayPal further diversify outside its parent company's business, online auctions, and stimulate the sale of low-cost digital content online if merchants adopt the new option.
PayPal's standard transaction fee structure mirrors that of credit cards, with merchants paying a fee of a few cents and a small percentage of the transaction price every time they accept a payment.
PayPal's normal pricing is a 30-cent base fee plus 1.9% to 2.9% of the transaction cost. Its new, optional rate for under-$2 transactions is 5 cents plus 5% of the cost. Analysts said the higher percentage rate should not deter merchants, because even at $2 the total transaction cost would be 15 cents - less than half the old rate.
Online merchants have long urged card companies and merchant acquirers to lower their rates for microtransactions. But those companies have shown little indication they are interested in making this change.
"I obviously can't comment on their business models," Mr. Ashley said, but "we're excited to help the card associations get into business that previously was not accessible."
Visa spokeswoman Randa Ghnaim said there is "nothing to talk about" regarding new micropayment rates but that Visa is "continuing to evaluate and understand the market, because we realize that consumers want to make purchases in this space and we want to find a solution that balances the needs of all stakeholders."
Christine Elliott, a spokeswoman for American Express Co., said she could not comment on PayPal and said Amex is not considering special rates for micropayments.
"Our rates for micropayments are set the same way as they are for any transaction," she said. Amex sets its terms by risk and volume, not by whether sales dip into the micro range.
MasterCard International returned calls but did not provide comment by press time. Discover Financial Services Inc. (a unit of Morgan Stanley) did not return calls.
This is not PayPal's first attempt at special pricing for microtransactions, but it is its most extensive. Since December 2003 it has offered special pricing for music vendors: 2.5% plus a 9-cent fixed fee. To qualify vendors had to exceed 3,000 song sales a month.
Napster Inc. of Los Angeles has offered PayPal as a payment option to its customers under its special microtransaction pricing since October and still has a PayPal logo on its home page.
Apple Computer Inc. of Cupertino, Calif., began offering PayPal at its iTunes site in December 2004 and promoted PayPal through a limited offer of five free songs to the first 500,000 new customers who chose to pay with PayPal.
Because card payments do not offer lower rates for microtransactions, some online merchants have used special pricing or special software. Apple, for example, uses software to aggregate several purchases into a single transaction that incurs a single transaction fee.
Other merchants sell their digital products by subscription, charging a large up-front fee for continual access to a Web site or to song downloads instead of a smaller fee per item sold. (Napster offers both options but advertises subscription pricing more prominently.)
Mr. Ashley said subscription pricing might address the merchant's costs but could stunt the growth of many businesses that try it.
"When I want to send an online greeting card, I just want to send one card and I want to send it right now, as an impulse buy," he said. "And I'm willing to pay $1 or $2, but I'm not willing to commit to an annual subscription."
PayPal has expanded beyond online auctions before, but still gets the lion's share of its volume from eBay sales - 70% in the second quarter. On June 17 it unveiled a product set that streamlines PayPal payments and can mask PayPal's brand when merchants use PayPal to accept card payments.
Last year Bank of America Corp. and Wells Fargo & Co. started encroaching on PayPal's territory by allowing free person-to-person transfers among their own customers. However, PayPal's person-to-person services are also free - it makes its money from merchants, including those that operate on eBay - and last year a B of A executive said its service was not meant to target the auction field or to compete with PayPal.
John Gould, a partner with Prepaid Advisory LLC of Boston, said, "PayPal has had, for some time now, the ambition to become an alternative to MasterCard and Visa, and they are aggressively establishing themselves not just at eBay, but now, for micropayments."
Merchants may promote PayPal instead of cards because of this new option, Mr. Gould said. "The merchants do not have control of the pricing when a MasterCard or a Visa or an American Express card is used," he said.
They will not drop the major card brands entirely, however. "They will offer this as an additional payment mechanism," Mr. Gould said.
Chris Musto, a vice president for research at Watchfire GomezPro in Waltham, Mass., said PayPal may be able to lower its fixed fee because it has lower fixed costs.
"Dispute resolution and customer service in general isn't intrinsic to the electronic transaction," he said. "PayPal is able to lower its cost to customer service through handling a lot of this online and mandating certain dispute-resolution rules."
Also, low-cost digital goods - such as music files, online games, or telephone ringtones - are less apt to be targets of fraud because they have little resale value, Mr. Musto said. "One of the drivers of Internet fraud is people buying things they have shipped to them, which they then fence," he said.
PayPal spokeswoman Sara Bettencourt said of both of Mr. Musto's observations: "It's true. That's actually one of the reasons that we know that we can pass on low rates to our merchants."
Dan Schatt, a senior analyst for the Boston market research firm Celent Communications LLC, said "online content sales are being held back, to some extent, by payment processing costs." PayPal's pricing addresses this directly, he said.
Under-$5 digital sales could be a $3 billion market this year, Mr. Schatt said. This estimate excludes sales related to adult entertainment (itself a $5 billion market) and online gambling ($4.5 billion).
As for the card companies, "it's really a wait-and-see attitude," Mr. Schatt said. "They're looking at the market very carefully and seeing how big a potential it has."
