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 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

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

Meanwhile, 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.

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