It May Be Late to Faster-Funding Game, But PayPal Boasts Size And Experience Edge

Catching up with rivals, PayPal Inc. on Monday joined a growing list of e-payments providers that are speeding up settlement time for U.S. merchants. But instead of making faster payments generally available, the San Jose, Calif.-based eBay Inc. subsidiary is offering to cut funding time from up to four business days to next day only for select merchants as part of a pilot program.

The accelerated settlement refers to the transfer of funds from merchants’ PayPal accounts to their bank accounts. Funds availability is often a sore subject among businesses that use alternative payments services.

“We’ve heard your concerns so we’ve been working with our banking partners to optimize processes on both their end and ours so that we can make the 24-hour transfer a reality,” says Steven Chien, lead product manager for money management at PayPal, in a blog post.

The post goes on to say that businesses that are “eligible” for the pilot are being notified so they can elect to participate, but it doesn’t define eligibility or say how many businesses qualify. “We are working with select merchants to determine eligibility,” says a PayPal spokesperson. PayPal isn't disclosing number of participants, she says, adding that an end date for the trial hasn't been determined.

Some of PayPal’s competitors have already moved to next-day funding for merchants or have significantly accelerated settlement times. Square Inc., for example, offers next-day funding if merchants hit a 5 p.m. cut-off time. And online payments provider Stripe in May sliced its settlement time from seven days to two. Similarly, American Express Co. is notifying merchants that it has cut funding time by one to two days. “In most cases,” the notices read, merchants can be paid the next day if their processors hit a 5 p.m. cut-off.

In the face of such competition, “in some cases PayPal is playing a little bit of catch-up,” notes Dan Schatt, a former PayPal executive who is now chief commercial officer at Stockpile Inc., a Palo Alto, Calif.-based payments firm. The spokesperson counters that PayPal has provided instant U.S. funds availability “for some time” through its debit card, a prepaid MasterCard product that accesses an account at The Bancorp Bank. The card carries a $3,000 daily spending limit and a $400 daily withdrawal cap.

Faster settlement is becoming increasingly important in the effort to hold down merchant attrition and justify transaction costs, experts say. “The number-one issue small businesses care about, other than sales, is cash flow,” says Schatt. He adds that speeding up funding can help support current pricing or even justify increases. “Businesses are willing to pay more to have access to cash flow, so it’s worth the investment [in faster settlement],” he notes.

Payments processors also have to be mindful of digital currencies like Bitcoin that move instantly and at ultra-low cost, Schatt adds. “The concern is with Bitcoin,” he says. “I don’t think it’s much of a threat now but it will be in the future.”

Still, PayPal’s move to faster settlement remains only a pilot for now. Schatt speculates the “eligible” businesses are merchants that have long tenure with PayPal and whose track records indicate low risk. “I don’t think you need very many [for the pilot], but you need a broad range of businesses,” he says. He figures the pilot will run at least six months. A year would be better, he says.

Risk management will be critical. Processors like PayPal must ensure funds are good before they can pay them out to merchants, and faster settlement allows less time for such vetting. Still, larger and more experienced processors have an advantage. “The number-one concern behind the scenes is if you let funds go faster you open yourself up to losses,” says Schatt. “The only way you can get good at it is with scale and experience. PayPal’s got the scale. They can do this.”