PayPal changes will usher in lower percentage fees but higher flat rate costs

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PayPal will introduce a series of rate changes for U.S. merchants starting Aug. 2, 2021.

The exact changes are complex, and PayPal has a summary page, complete new fee guide PDF and “old” rate reference page available on its website.

In most categories of payments, PayPal is dropping the percentage based portion of its fee but increasing the flat rate. In the case of digital payments made through its PayPal Checkout (also known as accelerated checkout), Pay with Venmo, PayPal Credit, Pay in 4, PayPal Pay with Rewards, Checkout with crypto services, it’s rising 19 cents from $0.30 to $0.49.

Like with any payment processing fees, higher flat rate fees tend to affect lower order totals more. For example, a $15 digital order under the old model would pay about $0.74 in fees and $0.86 under the new formula, but compare that to $3.20 fee for a $100 order under the old model but $2.98 under the new one.

Fee changes for payments made via a direct integration from an ecommerce platform, excluding accelerated checkouts or the methods named above, as well as the “virtual terminal” are also changing, but these are a bit more complex because there’s a separate rate for American Express cards.

In general, however, merchants will see a slight drop in the percentage but an increase in the flat rate portion of the fee, with exception of Amex payments, which remain the same and don’t have have flat rate fee.

As noted, these changes are likely to have a great impact on stores that sell more low cart totals, which could lead to price increases on the products themselves. Sellers offering exclusive products will have an easier time doing this since stores that offer products available on other sites often compete on pricing down to the penny — especially when battling Amazon’s dynamic pricing algorithms.

Merchants can combat these changes by encouraging shoppers to add more items to their cart, thus increasing the total. For many businesses, this is a good practice in general since larger order totals can often be cheaper to fulfill since fixed costs remain relatively the same no matter how big of an order is placed.

One potential way to do this could be raising free shipping minimums, so it’s possible there will be a shift in the average threshold for many smaller stores.

PayPal’s general move to increase flat fees but decrease percentage based fees could be a sign that it’s facing higher fixed costs when processing a transaction — no matter what the total — but also is willing to give a little back to merchants in terms of percentage based fees. Trends such as more digital transactions and increased fraud activity could contribute to these price changes as well.

It’s also worth noting that fixed flat fees, which may not have changed in years, don’t generally account for inflation or increased overhead costs. In theory, fees tied to the order total, such as taking a percentage of the sale, can be tied more directly to increases in costs overall, assuming the merchants prices are increasing along with the payment processing costs.