Charging a Convenience Fee with PayPal

[boosami]

I recently launched a business startup. The details are not really important, but it is a service where people pay a monthly subscription fee. I am waiting until cash flow goes into the positive to set up my merchant account for payment processing, but until then I am using a PayPal business account for online payment processing. To cover the merchant processing fees, I built in an extra 3% for credit card payments. The PayPal TOS states:

4.6 No Surcharges. You agree that you will not impose a surcharge or any other fee for accepting PayPal as a payment method. You may charge a handling fee in connection with the sale of goods or services, as long as the handling fee does not operate as a surcharge and is not higher than the handling fee you charge for non-PayPal transactions.

It gives no more specific information on the definition of a "surcharge" or "non-PayPal transactions." In this case, the fee I charge is not really a surcharge for PayPal-specific transactions, but rather for the convenience of paying online. There is no other option available (other than sending a physical check), so it doesn't discourage people from using PayPal if they want or need to pay online.

Do you think I am in violation of the TOS, and if so will PayPal really notice or care? Should I avoid the hassle and just build in the 3% fee to the price and risk losing a competitive edge? I know many here are frugal and will probably chastise me for charging a fee, but this is a business startup and for it to remain viable in its infancy I need to cover such costs. After profitability is reached, I will revise my pricing and there will be no additional fees for payment options so we can all sleep well at night.

Thanks in advance for thoughts!

[project15]

I don't know if you're in violation, but whenever I see that I'm paying more for a service based on the type of payment I'm using, I won't use it. Do you have any other way of paying? If not, I would just build it into the price to hide it. It looks better to the customer. On the other hand, is 3% really a deal killer for you? It may put your price into a different price point and you may lose customers (ie...the mental difference between $19.99 and $20)

[red92s]

This sounds exactly like the "we are not charging you to use a credit card, we are giving you a discount for paying cash" thing that gas stations use to skirt the major CC TOS.

The fact that your "convenience fee" is just about exactly what PayPal deducts tells me that no matter what you call it . . . you are passing the paypal fee along to the buyer.

You'd be pretty pissed if your power company or cell phone company charged you an extra 3% for the "convenience" of paying online with a credit card, and you'd probably move towards other vendors pretty quickly if they existed. Processing online credit card payments really isn't a "convenience" these days . . . it's a necessity. If you can't reach a profitable cost structure without passing it on, build it into your pricing.

[disneysteve]

If every customer is paying the same price for the service regardless of how they pay, then you are not in violation. If, however, a customer paying by PayPal has to pay 3% more than a customer mailing in a check (which I don't think is what you are describing), then you would be in violation.

I have no idea how the gas stations get away with it, red92s. I refuse to get gas at a station that charges extra to use a credit card. Even if they are cheaper, I will go elsewhere on principal.

[boosami]

I don't know if you're in violation, but whenever I see that I'm paying more for a service based on the type of payment I'm using, I won't use it. Do you have any other way of paying? If not, I would just build it into the price to hide it. It looks better to the customer. On the other hand, is 3% really a deal killer for you? It may put your price into a different price point and you may lose customers (ie...the mental difference between $19.99 and $20)

To stick to my business plan I have to have a certain % of profitability so I will break even by a certain point. Will raising the price 3% kill my business? Probably not, but it looks bad on my business plan falling behind schedule. It is an option, but one I'd rather not take if I don't have to.

The fact that your "convenience fee" is just about exactly what PayPal deducts tells me that no matter what you call it . . . you are passing the paypal fee along to the buyer.

You'd be pretty pissed if your power company or cell phone company charged you an extra 3% for the "convenience" of paying online with a credit card, and you'd probably move towards other vendors pretty quickly if they existed. Processing online credit card payments really isn't a "convenience" these days . . . it's a necessity. If you can't reach a profitable cost structure without passing it on, build it into your pricing.

As mentioned above, it will be built into my pricing when I incorporate a real bank merchant agreement, after initial profitability. Because the cost of this is different as compared to PayPal, my pricing will be revised at this point and it will incorporate the fee without an extra charge (since it will be less than 3% when all is said and done). There are other changes that will occur after I break even, bring the cost down, allowing for me to basically eliminate the 3% cost entirely. Part of charging $x + $fee is so that I will not have to change $x, just eliminate the fee. The pricing doesn't change for customers, they just no longer have an extra fee to pay. This effects a lot of things like advertising, etc.

If every customer is paying the same price for the service regardless of how they pay, then you are not in violation. If, however, a customer paying by PayPal has to pay 3% more than a customer mailing in a check (which I don't think is what you are describing), then you would be in violation.

I have no idea how the gas stations get away with it, red92s. I refuse to get gas at a station that charges extra to use a credit card. Even if they are cheaper, I will go elsewhere on principal.

Customers who mail in a check do not have to pay the 3% fee. I know from what PayPal says that looks to be a violation. However, I have had many merchant agreements with banks for credit card processing, and they all have stated that it is ok to charge a fee for different methods of payment like "telephone orders" or "online orders" just not for credit cards specifically. PayPal doesn't seem to go into enough detail. It looks like the first part of a standard merchant agreement without the rest of it. I read "non-PayPal transactions" as "other methods of paying online." In a normal merchant agreement I would not be in violation doing what I am doing. The PayPal TOS is just very vague.

Technically, those stores who have a minimum purchase to use a CC or that charge a fee for using a credit card are in violation of their merchant agreements. However, it's not very enforceable. The banks don't want to lose the business so they look the other way, and Visa/MC are too far removed from the vendor to have visibility of what goes on.

[red92s]

So lets say that it was perfectly acceptable per PayPal TOS to assess a fee for accepting that type of payment. I still wouldn't do it. Customers these days are exceedingly wary of fine print, hidden fees, and "extras" above the advertised cost. Look at the disgust with airlines and banks for their fee menus. If someone is shopping for your service and you advertise "$10.00 per month + x.y% fee" and your competitor is just "$10.XY per month, I'm betting the simple mention of a fee is enough to deter some potential customers. Even with the same net cost, just having "fee" appear in your pricing structure will potentially turn some people off.

[disneysteve]

I don't think you are allowed to do this. I know I can't sell something on ebay and charge more for a winning bidder who wants to pay by PayPal instead of sending a check.

I agree with red92s. Charging a processing fee is going to turn off potential customers. I say price that fee into your service and charge everyone the same price, just like most other businesses do. When I go to Target or the supermarket or a movie theater, I pay the same price whether I use cash, debit or credit. I know that they've accounted for credit card fees when setting their prices and that's fine with me. What I don't like, as a customer, is if they single me out and charge me more than everyone else because I'm using a credit card.

[boosami]

The PayPal TOS has a separate section regarding eBay where they define everything like that in more detail. It is clear, though, that it doesn't apply to non-eBay transactions. The section above is the only substantial mention of surcharges outside the eBay section.

Really my only need here is to know if PayPal is going to shut down my merchart account(s) because of this possible short-term violation in the TOS. I have multiple PayPal business accounts that do processing every day, and a suspension on any or all of them would be a major headache.

Think of it as a mom-and-pop retail shop. They know taking CCs would broaden their customer base and increase profits, but they can't afford to raise prices to cover CC fees and remain competitive with WalMart. Either way they lose out to the competition. I'm simply trying to get the best of both worlds on a temporary basis so I can have the "grand opening" of my "mom-and-pop" shop and build up a large enough customer base so I can afford to accept CCs to compete with WalMart.

I appreciate the insights about charging a fee and the effects it has on potential customers. However, in this specific case customers have already subscribed to the service and are currently expecting to pay by check before having access to the Web site tools at all. Basically, before they even know about the online payment option fee, they are already subscribers paying via another method. The competition does not allow payment online or by credit card at all, so it really is an extra for these customers. If they want to pay online, they simply have to go with my business and pay the fee, there is no other choice. It's a monopoly like cell phone fees: if you want a cell phone you simply have to pay the "extra" federal excise, USF, and other taxes on your bill, anywhere from 10% to 20% of the total depending on your state. Those fees aren't going to stop you if you really need a cell phone whether you like it or not.

And, as mentioned, the fee will ultimately be going away which will lead to higher adoption rates for online payments. In reality, I could care less if customers could pay online versus by check, but part of my marketing strategy relies on the online element so it must be present from the beginning.

I wish I could give the specifics because I think that would make it crystal clear for you but I can't disclose more without exposing my business and tactics prematurely.

[disneysteve]

customers have already subscribed to the service and are currently expecting to pay by check before having access to the Web site tools at all.

If you are offering a service that competitors don't, you should be able to charge a premium for it.

I honestly don't know enough about CC charges but there are definitely exceptions. We've already mentioned gas stations charging extra for CC purchases. Lots of utilities charge if you pay by CC. The IRS lets you pay your taxes by CC but they charge a fee to do so. The DMV lets me renew my registration online for a service fee.

If they can all do it, I don't see why you can't do the same.

[wnlbutterfly]

The irony is that I think it is a bigger hassle (and riskier) to accept a check in the mail than to get the payment via paypal. The wait time for the post office to get it there, then for the bank to process the check (and the trip to the bank) and it could bounce (hopefully not). Yes, Paypal takes a cut, but it has been worth it in my opinion.

Will Paypal get a clue what you are doing and shut you down, maybe...maybe not. I guess the question then comes down to if they DO shut you down, will it be a major step back for your company?

[segmond]

merchant account doesn't cost much to set up. if paypal shuts down your account, no one will be able to pay, and paypal have history of shutting people's account and worse holding your funds hostage.

[boosami]

merchant account doesn't cost much to set up. if paypal shuts down your account, no one will be able to pay, and paypal have history of shutting people's account and worse holding your funds hostage.

I am aware of this, and I have had funds frozen on my personal PayPal account before but not of my business ones. I like to think that PayPal would notify me I am in violation of their TOS and inform me that I must stop the activity before they completely shut down my account... But looks like we'll see!

I have a "hobby" of standing up low-cost business startups (read: I do all the work). Typically I offer PayPal as a payment option before I know if my business model is viable or not. After sustained profitibility, I move to a regular merchant agreement and incorporate that to take care of payments.