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PayPal Slashes Micropayments Fees

PayPal wants a slice of the online music pie.

The eBay-owned online payments platform on Monday announced it would offer reduced fees for merchants as part of a new micropayments pricing strategy created exclusively for the red-hot digital music sector.

Looking to lure online music services into offering the PayPal platform as a payment option for music subscriptions and downloads, PayPal announced the new payment processing rate of 2.5 percent plus 9 cents per transaction -- well below the average of 2.2 percent to 2.9 percent plus 30 cents per transaction now available for existing PayPal merchants.

PayPal director of merchant services Todd Pearson told internetnews.com the 30 cents per transaction structure did not work for digital music services hawking 99-cent downloads. "Part of what we're doing here is telling the music services that our previous fee structure didn't accommodate them at all. Taking 30 cents from a 99-cent sale doesn't work and we're changing our fee structure to make it work," Pearson said in an interview.

"We've changed our fee structure only for this market," Pearson added, noting that the existing rate of between 2.2 percent and 2.9 percent plus 30 cents per transaction will remain in place for non-music merchants.

He said PayPal would begin negotiations with all the major players in the a la carte download space -- including Apple's , Roxio's Napster but he made it clear the new fee structure was not available for fee-based subscriptions in the range of $10 per month.

"We're not accommodating [fee-based music] subscriptions. We're positioning ourselves as an alternative, not as a standalone payment solution. If the customer still wants to buy a subscription, then the credit card option would work just fine. They don't need PayPal for that," he declared.

Pearson said the fee reduction represented a 30 percent to 50 percent savings compared to existing payment processing rates of approximately 2 percent plus between 20 cents and 30 cents per transaction. Those include interchange, processor and gateway fees.

Pearson said the early phase on the new fee structure is aimed at digital music services with a high volume of transaction. "They have to be doing 3,000 transactions a month, minimum and their average selling price has to be $5.00 or less per transaction,' he said.

PayPal's strategy shift to take advantage of the growth in the digital music space comes on the heels of yet another big-name entrant into the market. According to published reports, Hewlett Packard plans to launch an online music store and portable MP3 player early next year.

Meanwhile, internetnews.com has learned that PayPal plans to simplify the sign-up process for consumers on third-party merchant sites to help push adoption of its payment services platform. Currently, the sign-up process requires users to exit the merchant's Web site and go to PayPal's site to fill out the registration information.

Sources say PayPal will allow sign-ups directly at the merchant site as part of a plan to entice more merchants to use its platform.

PayPal spokeswoman Amanda Pires confirmed the company was looking at several different options to improve the payment flow for merchants but said no decision had been made on a specific move.