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PayPal’s flywheel forces merchants’ hands for B2B, B2C payments

01/13/2021 By

Many readers are familiar with Amazon’s flywheel. But do you realize that PayPal also has a flywheel?

Its driver has always been to persuade customers to share their email address as well as banking and credit card information in return for both global peer-to-peer payments and purchases on e-commerce sites at the push of a button.

For small merchants, it was the ability to take payments without having to set up a merchant credit card account with their bank. For larger merchants, it was the convenient payment option to attract global buyers without worrying about accepting local currency.

Today, PayPal leverages its network of 346 million customers around the world to to encourage merchants to accept the PayPal button as a payment option on their e-commerce site.

And because 57% of online shoppers globally purchase from a retailer not domiciled in their home market, it’s imperative to be able to successfully sell around the globe.

PayPal was founded in 1998 by technology entrepreneurs Peter Thiel, Elon Musk and Max Levchin. The company’s initial name was Confinity, and the proposition became successful with consumers, small businesses and online merchants. PayPal was eventually acquired by eBay in 2002 for $1.5 billion to merge auction services with convenient online payment. eBay spun it off in 2015, and the companies agreed to a five-year window whereby PayPal would continue to be eBay’s primary payments provider.

Since 2015, PayPal has gone on to have a market capitalization of $278 billion and be valued at more than the vast majority of large global banks. (Note: Is that telling us more about banks and their market-to-market value or PayPal and its value proposition?)

And with all its monstrous success, PayPal has developed a network effect with excessive fees and policy practices, despite increasing competition in the cross-border and digital wallet space — with competitors like Veem (see coverage here), XTRM (see coverage here) or TransferWise.

Fees and policies

I have found PayPal’s fees and policies stifling in four areas:

1. Extreme foreign exchange (FX) markups

While it’s great that consumers can buy globally, if for example you use US dollar PayPal funds to buy from say a local Canadian e-commerce site, you will find the FX conversion costs are well beyond any quoted by Bloomberg or other internet rates. For example, a conversion of 1.22025 USD / Cdn was used on Jan. 2 when the Bloomberg rate was quoted as 1.2729.

2. Holds on merchant accounts deemed ‘high risk’

PayPal has an anti-money laundering policy (AML) and is regulated as a money transmitter, so they do have certain KYC and AML rules to comply, just not as stringent as a bank.

But one merchant told a story on LinkedIn recently that shed light on AML logic used by PayPal. Without notice over the holidays, PayPal stopped paying CROSSNET, a maker of the four-net volleyball game, on their PayPal sales. PayPal decided to hold their money for 180 days without warning, according the CEO’s post on LinkedIn). The rationale appeared to be increasingly high order volume, and whatever AML logic PayPal uses, that happened to trigger the hold. Imagine having sales in January 2021 and not having access to funds until June 2021!!!

This is the power of the flywheel effect. If customers use the PayPal button for convenience and convert at a much higher level, then you just have to take it or leave it.

In the United States and Canada, PayPal is the second most popular online payment method, surpassed only by credit card payments. It is also very popular in Europe.

3. Fees to receive funds out of PayPal to your bank account.

PayPal’s general rule of thumb is that for domestic personal transactions (between friends and family in the same country), there are no fees. But if it is a business transaction, PayPal can take a fee for sending funds to another PayPal account, upward of 3.75%. So if you are a freelancer receiving a $2,500 payment for a job, that’s $93.75.

4. Fees to receive funds out of PayPal to your bank account.

Though withdrawing directly to your bank account is claimed to be free, there is a fee to withdraw outside of the US and UK. Some banks may also individually charge for a withdrawal from PayPal.

Strong flywheel effect

Today, e-commerce sites must think globally, and certainly PayPal acceptance is less a choice than a must-have. While there are a number of global providers of payment technology solutions to merchants to help deal with B2B and B2C to support online and mobile sales, marketplaces, subscriptions, invoice payments and manual orders, a PayPal button does convert sales.

Make no mistake, the flywheel effect is strong.

David Gustin runs Global Business Intelligence, a research and advisory practice focused on the intersection of payments, trade finance, trade credit and working capital. He can be reached at dgustin (at)