PayPal works to keep MasterCard business

Shares of online payment system PayPal fell 2% Friday on news that MasterCard would no longer work with third-party credit card payment systems.

PayPal is working hard to get an exemption from the change, reported Friday by USA TODAY, and due to take hold May 1. Many analysts expect the two to work out a deal.

But if not, it will hurt PayPal and many small Internet merchants who cannot afford the higher fees charged by credit card companies to do online commerce. MasterCard, analysts say, is likely to require PayPal to give it more information on its riskiest customers.

MasterCard is worried because PayPal isn't subject to the same regulations as the banks that issue its cards, says Friedman Billings Ramsey analyst Christopher Penny. Competitors such as eBay Payment, Yahoo PayDirect and Citibank c2it all have bank affiliations and won't be affected by the change, Penny says. But many sellers on auction sites, including eBay, use PayPal.

Credit card firms such as MasterCard keep close tabs on risky customers, such as those without long credit histories. And they charge rates as high as 7% for risky customers to compensate for defaults. If those customers work through PayPal, MasterCard has less control over them.

PayPal could be asked to build a bigger cushion against fraud or request more information from customers. PayPal customers such as Larry Birnbaum, who sells watches online, aren't too worried yet. But they say they hope PayPal won't change. "I should be so lucky that everybody paid through PayPal," Birnbaum says.

News source: USAToday - PayPal works to keep MasterCard business

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