From TNPC issue #3.24...

PayPal vs. The Freebie Seekers

by Dan Butler
November 30, 2000

PayPal, the online money exchange service that we've reviewed and discussed in past TNPC issues, is taking some serious flak from the auction community. Among the first to embrace PayPal which let them accept credit cards in payment for their online auctions they now feel they've been lied to, cheated, and otherwise treated unfairly by PayPal. We've been promoting PayPal since it began and have given you periodic updates. Here's our latest take on Internet freebies in general and PayPal in particular.

The main problem people are having with PayPal is the charging of fees for services they think should be free. Granted PayPal built their customer base by giving out free services. That business model is old hat. We called it "The Puppy Dog" when I was in sales. Let the customer take the cute little puppy dog home for the night and chances were they would become attached to it and buy it. Same with cars and other products in the off-line world. In the online world you see free services offered to gain customers all over the place.

But the PayPal model was not a scam. They provided free PayPal accounts (and still do) and said early on that they would be offering "business" accounts in the future. The future is now and the business accounts are not free. I always knew, and PayPal was open about the fact that they would charge for business and other enhanced services in the future. Most of the auctioneers on services like eBay are upset that they're being classified as "businesses."

Can you still get a free PayPal account? Absolutely, but given all the people who have quit their day jobs (maybe they've just retired?) to trade on eBay how do you tell the personal users from the business users? PayPal opted for putting limits on how much money you can process from credit card activities. You can have a free PayPal account; you just have limits on how it can be used. Above the limits and your ability to take credits cards is restricted. To go above the limits you must open a business PayPal account and pay service fees.

It does appear, from my vantage point, that PayPal is trying to encourage bank transfers over credit card payments. I would assume that bank transfers cost them less thereby increasing their profits.

PayPal's fee structure is changing so frequently now I won't try to quote their current rates here but their fees for accepting credit cards are now just a bit higher than what I pay offline. Have we stopped using PayPal? No, some of our customers still prefer to pay using that service. Sure it costs us a few cents but that's the way it goes. It would cost me more than the few cents in my time to try and talk those customers into a different mode of payment.

Another complaint is that PayPal (and some other similar services) now require you to use a valid bank account for verification. This is how PayPal hopes to knock out the credit card scammers in the very virtual world in which online transactions operate. To verify with a bank account you authorize PayPal to make direct transfers to and from your bank account. They deposit some change in your account and you have to verify how much was transferred. Weird but true. Personally I'm uncomfortable using my main bank account to verify PayPal (or anyone else's) service. You may be comfortable with that, I'm not. However, I did not cancel my PayPal account or rant and rave about this new policy of theirs. I just set up a free bank account strictly for the purpose of this verification process.

Whether you like or hate PayPal, the bigger message here is that the Internet is changing. We're seeing a shift back to standard business procedures like "profits matter." Companies are going to find a way to make money on their online products and services so you have to be a responsible and wary consumer.

The most important thing you can do when signing up for a new online service is to actually read the Terms Of Service (TOS) documentation. Print it out and mark it up with a pen. Email for more clarification on anything you are unsure of. Don't sign up with any service unless you are satisfied that the TOS works for you. If you decide to join, take the printout and write the date on the top along with the username you choose for your account. Basically this is a record of what you are signing up for.

When the TOS changes in the future make a decision as to whether you will still use that online service. If you stay with the service print out the new TOS, date it, and file it. Don't throw out the old TOS printout just yet! Keep them around so over time you can see trends in the direction a particular company may be headed. And expect the TOS to change. Many online companies have grown so fast they simply are trying to catch up with themselves. Many policies and modes of operating are changing frequently as companies try to get a handle on this beast called the Internet.

Most of these changes will be in the direction of turning a profit so expect fees and fee increases over time. If a company is changing their TOS for legitimate business reasons you can be sure that similar changes will occur with other services in due time. Remember, there is no such thing as a "free lunch."

We've mentioned in the past how you will see more and more Internet services moving from free to paid. Yahoo! has been talking about how it may move to a fee model. The major search engines either already have or now are adopting some soft of fee structure for listing pages.

And this is all happening for a reason. The fact is that advertising-based revenues for Web sites aren't paying the bills. Fewer and fewer people click on banner ads and many, present company included, run programs to prevent ads from being displayed. While we may not like having to pay for our services it may become a fact of life. The structure of the Internet hides a lot of costs from the end users.

You can reach Dan Butler at:
danbutler@TheNakedPC.com

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