PayPal’s Vision for the Future: No Pain, No Gain

Posted on July 18, 2008. Filed under: eBay, Paypal | Tags: , , , |


Just about every eBay buyers know that full protection is available through PayPal as long as the payment is funded with a credit card.  It doesn’t matter if a buyer purchases from an eBay seller who accepts Paypal with a $200 Buyer Protection Policy or a $2,000 Buyer Protection Policy.  The buyer is fully covered, regardless of the amount, as long as the buyer used a credit card through PayPal.  The eBay buyer, then, doesn’t have to take any responsibility for choosing to buy from a seller who has terrible feedback and for which only $200 buyer protection is offered.  It is ultimately PayPal who will be the loser in the case of a chargeback where PayPal is unable to recover all of the funds from the seller. 

And, of course, PayPal incurs a higher transaction fee when buyers use credit cards rather than funding their PayPal payment with a checking account.  So, while PayPal would like more eBay buyers to fund their PayPal payments with a checking account so that PayPal can make more profit, the reality is that buyers won’t do so because they are not fully protected.  Therefore, it is in PayPal’s best interest to make changes.

During the Q2 Earnings Report, eBay had the following to say: “We’ve recently announced more changes that will take effect in the second half of this year. The most important of these are major enhancements to both buyer and seller protections that leverage the unique power of PayPal. Buyers who pay with PayPal on eBay now have unlimited coverage on most transactions. This gives buyers greater confidence when they shop on eBay and pay with PayPal.

PayPal will also now extend protections to all U.S. sellers offering unmatched protections on eligible transactions at no additional cost. These new protections for buyers and sellers underscore the power of eBay and PayPal together. We believe that PayPal buyer and seller protections will be a cornerstone of a safe, trusted, and convenient shopping experience on eBay.”

It is clear why Paypal will offer unlimited protection.  First, eBay in essence already offers unlimited protection when buyers pay by credit card.  Second, by offering unlimited protection for payments made through checking accounts, PayPal will be encouraging users to fund their purchases through their bank accounts which will help PayPal’s bottom line.

The question, then, is how will PayPal accomplish their goal of providing unlimited protection for PayPal purchases for eBay transactions?  PayPal will achieve this objective in two ways.  First, eBay will continue to restrict or suspend underperforming sellers and will continue to favor stellar eBay sellers in the Best Match Search Results.  In that way, eBay buyers are presented with the choice of purchasing mostly from good sellers or from marginal sellers on a limited basis.  Purchasing from better quality sellers means that there is less likelihood that the buyer will experience a problem. 

Second, Paypal will increase their use of the 21-Day Hold Policy.  More sellers than ever will find themselves having to supply tracking information and waiting for items to be delivered before PayPal releases the funds.  In that way, if the buyer is unhappy with the product that is delivered or if the item never arrives then PayPal already has the funds available to refund the buyer 100%.  PayPal will begin offering 100% Buyer Protection with absolutely no risk.  All the risk will be on the eBay sellers.  I can’t say that I blame PayPal for implementing this new policy and for instituting the 21-Day Hold.  And, of course, the buyers will be protected no matter what type of risky purchasing decision they make on eBay. 

Make no mistake, though.  This PayPal change, which will provide 100% Buyer Protection, will also change the dynamics on eBay.  Currently, there is a risk/reward system on eBay.  Buyers who purchase from sellers who have lower feedback and DSR ratings are usually able to get a better deal because there is some risk involved in the transaction which means that the ASP for these sellers is likely to be lower.  But, of course, if the buyer funds their PayPal payment with a credit card then the risk has been all on PayPal.  When the new PayPal policy is implemented, all eBay sellers will present virtually the same level of risk to all buyers since all PayPal payments, no matter the funding method or the amount, will be covered under the Buyer Protection Policy. 

What I predict will happen is that the eBay sellers who have poor feedback and DSR ratings will find themselves on the 21-Day Hold Plan and with their cash flow squeezed, these already-underperforming sellers will not have the funds to ship timely or to provide good customer service.  And as their items are shipped more slowly and their customer service level continues to drop, they will find themselves further restricted by eBay.  And, in the short term, there will be even more eBay buyer dissatisfaction as the eBay “bargain hunting shoppers” continue to experience more problems with the sellers who are offering the “best deals”.  In the long term, though, the entire process will likely result in higher ASPs as only the sellers who are operating at a decent margin and providing adequate customer service will able to survive the new eBay policy changes.  The entire process, though, is going to be painful. 

It is going to be painful for PayPal as they begin enforcing even more 21-Day Holds.  It is going to be painful for the buyers who encounter sellers who sell items cheap but cannot afford to ship items without having their funds released.  And it is going to be painful for all sellers – the underperforming sellers will be slowly choked out of the eBay marketplace and the good sellers are going to have to endure the extreme eBay bargain hunters who demand to get the same good price as they have been getting previously from the underperforming sellers who are disappearing from eBay.  These extreme buyers send pressure emails before their purchase and demand partial refunds after their item is delivered so that they can get the good eBay deals to which they have become accustomed.  While I understand and can appreciate eBay’s plan to provide 100% Buyer Protection for Paypal purchases, I am afraid eBay has no plan to deal with the unintended consequences.  After the most painful part of the process is complete, it is both PayPal and the eBay Buyers who will gain the benefits.  It is the eBay sellers, however, who will ultimately continue to bear the pain long afterward.  Until eBay takes a hard-line stand on buyers who extort partial refunds, the remaining good sellers are going to have an uphill battle on their hands.  


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