Amazon FPS takes PayPal by its horns

By Mainak Biswas August 04, 2007 - 892 views

Amazon has officially launched its must awaited payment gateway service. Unlike Google Checkout, this is not a copy of Ebay owned PayPal.

There are very bright chances that Amazon will make Ebay a bit uncomfortable as it has got a powerful incentive for merchants to signup for its service. PayPal basically charges its merchants the same transaction fees for processing credit card transactions as well direct bank debits. Now, direct bank debit charges that PayPal has to pay in turn to the banks are not as high as the charges that are required to be paid to VISA or MasterCard when a credit card is charged. Thus, PayPal makes much profit with Direct Bank debits which consequentially is has made the default method. Amazon wants to charge its merchants a seperate transaction fees based by the type of transaction they do, this will make it more profitable for the merchants to sign-up with Amazon as they will pay lower fees for bank debits and Amazon balance transfers.

Here is what Amazon has said:

Additionally, Amazon FPS exposes a different fee structure for each of the underlying payment methods enabled: credit cards, bank account debits, and Amazon Payments balance transfers. Amazon’s cost to process a payment through a bank account debit is less than our cost via credit card. Our cost for processing an Amazon Payments balance transfer is less still. By exposing different fees for each of these three methods, we can pass on savings from bank account debits and balance transfers, allowing developers to save money. In each case, we take on the complexity of managing security and fraud protection.

Thus, there is a big advantage for merchants to use Amazon FPS. This is why Amazon has highlighted this several times in their FPS page. Here are some other things:

  1. Amazon customers can use their in-built profiles for accessing its service. So, there is for re-enter card, shipping information.
  2. It’s a pure webservice that has been targeted at developers rather than being a web-front. There is a strong incentive to leverage it as a platform to build innovative new applications.

Will it be more profitable than PayPal?

No Likely! Hold on to your eBay stocks, the markets show no change in its trading price by Amazon’s announcement and there is a good reason why. Let me explain:

The money in Payment Gateway business does not lie in membership fees but in transaction fees. This is the money that you as merchant as to pay to the payment gateway on every transaction.

PayPal allows funding of account and storing of money in that account. This money pressumably lies in PayPal’s bank account where is generates interest for PayPal but, a Merchant is loosing interest if it keeps money in PayPal account vs keeping it in a savings/checking account. In case of a PayPal to PayPal transaction i.e. one merchant is using its funded account  to pay another merchant, Paypal charges the transaction fees again to the merchant who is receiving the money but guess what ?, its an internal transaction so all of that money is pure profit. So PayPal has two extra channels of making money!

That’s a secret that will keep PayPal ahead of both Amazon and Google for many more days. Lets wait and see if PayPal starts to offer flexible transaction fees. As one of the biggest customers of PayPal in India, I guess we will be very happy. We cannot shift to Amazon immediately becuase of one major shortcoming as listed here:

Credit cards currently accepted by Amazon Payments are Visa, MasterCard, Discover, American Express, and Diners Club.

You may also use a bank account to make payments using Amazon Payments. Only U.S. bank accounts may be used and a verification process must be completed before the bank account can be used as a payment method.

We simply have too many customers outside US who pay us via PayPal.

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