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The drastic reduction in debit card interchange revenue mandated by the Durbin Amendment will be somewhat favorable for PayPal Inc., an official with the e-commerce processor’s parent company said on Wednesday. “In the short and the medium term, we believe it’ll probably be neutral to positive on our performance,” said Robert Swan, chief financial officer for San Jose, Calif.-based eBay Inc., during an earnings conference call with analysts to discuss fourth-quarter results. Also on the call was John Donahoe, eBay’s chief executive.
Swan cited lower transaction costs for PayPal as a primary reason for his optimism about Durbin’s changes. Between 55% and 60% of PayPal’s volume stems from card transactions, Swan said, though he did not break out credit from debit volume. PayPal pays interchange and then passes it on to client merchants in its own pricing. The Federal Reserve, which the Durbin Amendment charges with implementing the law’s interchange cuts, has proposed a system calling for caps of either 12 cents or 7 cents per transaction on debit card interchange.
“We believe our transaction expense will go down as we incur lower processing costs on debit transactions, and that’ll be a reasonably significant number,” Swan told the analysts. Swan added that eBay and PayPal haven’t yet decided whether any of those savings will be passed on to users, calling the question “a bit of a TBD [to be determined] at our end.”
A concern for PayPal, Swan said, is that banks may raise fees for automated clearing house processing to compensate for reduced debit card income. PayPal depends on the ACH for part of its processing and indeed encourages ACH transfers because they are less costly than card transactions. But he added that he doesn’t see such increases in the immediate future. Plus, he said, PayPal has in place agreements, details of which he didn’t specify, that protect the processor against price increases at least through 2012.
Swan cited, and quickly dismissed, another concern having to do with the potential for PayPal to be regulated by the Fed as a card network. “I would say we do not believe this will be the case,” he said, citing the fact that PayPal doesn’t levy interchange fees, the primary focus of the Durbin Amendment. Moreover, he argued, PayPal uses the existing card networks itself to process transactions, and is treated by those networks as a merchant. Overall, “I think we feel comfortable with where we are” relative to Durbin, Donahoe told the analysts.
As it does each quarter, eBay reported a wealth of statistics about PayPal. The processor racked up 421.1 million transactions in the three months through the end of last year, a 28% increase from the same period in 2009. Dollar volume was up 26%, to $26.9 billion. Some 61% of PayPal’s volume now comes from online merchants rather than from eBay’s marketplace. Both transaction and dollar volume numbers include eBay’s Bill Me Later unit but exclude traffic through PayPal’s gateway business. PayPal finished 2010 with 94.4 million active accounts, up 17% for the year.
Bill Me Later, which offers consumers transactional credit for online purchases, reduced its chargeoffs to 6.07% in the fourth quarter, down sharply from 11.14% at the end of 2009. Similarly, its 90-day delinquency rate fell nearly by half, to 2.37% from 4.2%. Meanwhile, the unit processed $460 million in payments in the fourth quarter, up 49% over the year-ago quarter. Donahoe said Bill Me Later is benefiting from its acquisition by eBay in 2008. “Ebay is increasingly a source of customers for Bill Me Later,” he said.
For all PayPal transactions, including the gateway business, the processor recorded a net transaction margin of 63.8% after deducting processing costs and fraud losses, up from 62.1% at the end of 2009. PayPal’s revenue rate per transaction in the quarter was 3.45%, down slightly from 3.54% a year earlier.
