Why PayPal raised its processing fees — and why it could backfire

Is the fintech giant's price hike a show of strength or a fatal mistake?

| More on:
pypl on the wall representing paypal

Image source: PayPal

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

PayPal (NASDAQ: PYPL) just announced that it will raise its processing fees for U.S. merchants. Starting on Aug. 2, the rate for each online PayPal or Venmo transaction will rise to 3.49% plus $0.49 -- compared to its current rate of 2.9% plus $0.30 for most online transactions.

However, PayPal's fees for in-person PayPal and Venmo QR code transactions will remain unchanged at 1.9% + $0.10 for transactions over $10, and 2.4% plus $0.05 for transactions under $10.

PayPal's stock rallied after the announcement, and several analysts lauded the decision as a sign of its pricing power. But could the decision backfire and leave it more exposed to competition?

Why did PayPal raise its processing fees?

PayPal owns one of the world's largest online payment networks. It has a presence in 202 countries and processes payments in 25 currencies. Last quarter, its number of active accounts rose 21% year over year to 392 million as its total payment volume surged 50%.

PayPal likely believes that massive market presence, along with the stickiness of its services for merchants, gives it pricing power against competitors like Square (NYSE: SQ), Stripe, Apple (NASDAQ: AAPL) Pay, and Alphabet's (NASDAQ: GOOG) (NASDAQ: GOOGL) Google Pay.

Moreover, PayPal claims consumers "who choose PayPal as a payment method are 60% more likely to convert than consumers who do not choose PayPal as a payment method." It also claims consumers are "nearly three times more likely to complete their purchase when PayPal is available at checkout."

PayPal's growth rates support those claims. Its revenue and adjusted earnings rose 21% and 31%, respectively, in 2020 as merchants and consumers used more digital payments throughout the pandemic.

PayPal doesn't anticipate a significant slowdown after the pandemic ends. It expects its revenue and adjusted earnings to grow 20% and 21%, respectively, this year, and for its active accounts to climb to 430 million. In other words, PayPal wants to raise its rates while it's still firing on all cylinders.

But could its price hike backfire?

However, PayPal's new rate of 3.49% plus $0.49 for online transactions makes it the priciest option for most merchants. Square's e-commerce API, which enables businesses to integrate its payment services into their websites, still charges 2.9% plus $0.30 per transaction. Stripe charges the same rate.

Apple Pay and Google Pay don't charge any merchant fees, since they're considered "card present" transactions, but merchants still need to pay the underlying credit card's swipe fee of about 1.3%-3.5%.

PayPal, Square, and Stripe cover those swipe fees with their fees. That solution can be simpler and more economical than dealing with varying swipe fees. These three competitors also have unique strengths. Square serves fewer countries and merchants than PayPal, but its Cash App has been growing faster than PayPal's Venmo in the peer-to-peer payments market. That's probably why PayPal didn't raise its Venmo fees for in-person payments -- which remain comparable or lower than Square's Cash App's fees. Stripe's code is easily customized for individual apps, making it an attractive option for companies like Lyft and Pinterest.

Apple and Google, meanwhile, can both leverage their dominance of the smartphone OS market to promote their own payment solutions. Apple Pay's number of activated users rose from 441 million to 507 million between September 2019 and September 2020, according to Loup Ventures. Google Pay serves 150 million users across 30 countries, and it recently rolled out new peer-to-peer payment tools.

Therefore, PayPal is a market leader, but it doesn't have unlimited pricing power. Some of its merchants might switch over to Square or Stripe, or roll the dice with swipe fees on Apple Pay or Google Pay.

The key takeaway

PayPal is still a good long-term investment on the fintech market, but investors shouldn't automatically praise its price hike and assume it will instantly boost its revenue and margins.

Instead, they should keep an eye on its churn rate to see if it was the right move. If it wasn't, PayPal's stock could pull back as it struggles to justify its high forward P/E ratio of nearly 50.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

Should you invest $1,000 in Paypal right now?

Before you buy Paypal shares, consider this:

Motley Fool investing expert Scott Phillips just revealed what he believes are the 5 best stocks for investors to buy right now... and Paypal wasn't one of them.

The online investing service he’s run for over a decade, Motley Fool Share Advisor, has provided thousands of paying members with stock picks that have doubled, tripled or even more.*

And right now, Scott thinks there are 5 stocks that may be better buys...

See The 5 Stocks *Returns as of 6 March 2025

Leo Sun owns shares of Apple, Pinterest, and Square. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. The Motley Fool Australia's parent company Motley Fool Holdings Inc. owns shares of and has recommended Alphabet (A shares), Alphabet (C shares), Apple, PayPal Holdings, Pinterest, and Square. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has recommended the following options: long January 2022 $75 calls on PayPal Holdings, long March 2023 $120 calls on Apple, and short March 2023 $130 calls on Apple. The Motley Fool Australia has recommended Alphabet (A shares), Alphabet (C shares), Apple, PayPal Holdings, and Pinterest. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

More on International Stock News

Businessman using a digital tablet with a graphical chart, symbolising the stock market.
International Stock News

Goldman Sachs lowers S&P 500 Index forecast 2nd time this month

Tariffs and US recession concerns continue to weigh in hard.

Read more »

A woman sits at her computer with her hand to her mouth and a contemplative smile on her face as she reads about the performance of Allkem shares on her computer
International Stock News

This artificial intelligence (AI) stock is a "Magnificent Seven" leader. But is it a buy?

What should investors think of Microsoft right now?

Read more »

AI written in blue on a digital chip.
International Stock News

Nvidia stock keeps heading lower. Is it time to buy?

Let's take a look.

Read more »

Hologram of a man next to a human robot, symbolising artificial intelligence.
International Stock News

A Market Downturn Creates a Perfect Entry Point for This Promising AI Player

Across the board, AI stocks had a difficult 2025, but the AI revolution still looks like a long-term win.

Read more »

Man looking at digital holograms of graphs, charts, and data.
International Stock News

Is a New AI Model the Catalyst Alphabet Stock Needed?

Let's take a closer look.

Read more »

a smiling picture of legendary US investment guru Warren Buffett.
International Stock News

Where Will Berkshire Hathaway Be in 5 Years?

Here are two potentially large changes to watch for.

Read more »

tesla
International Stock News

Cathie Wood Thinks Tesla Will Hit $2,600 a Share. Here's Why $26 Is More Likely

Let's separate fact from fiction.

Read more »

Businesswoman meditating in lotus position while colleagues argue and yell during negotiation in office.
International Stock News

Worried about a recession? Heed this Buffett advice to "Keep Your Head."

Take a page from Warren Buffett’s playbook.

Read more »