A few days ago, I received an email from PayPal informing me that some of their terms and conditions of service had changed – ostensibly to ‘ensure high standards of service continue to be maintained’. I read that immediately as a greedy grab: turns out I was right. Buried in the fine print of the changes were a bunch of rate amendments, effective 10 Sep 2013, that now make the cost of receiving payments in my part of the world anywhere up to 6% plus a fixed fee (for commercial payments that fall into the “International micro payments for digital goods” category, which includes my videos). On top of this, there’s a ‘micropayment fixed fee’ of MYR2.00 (US$0.65). And then there’s a 4% currency conversion fee to Malaysian Ringgit on conversion. And a further 2.5% added to the exchange rate when you withdraw the funds to your bank account. Very cunningly, they don’t provide a like-for-like fee comparison, either. That’s a grand total of anywhere up to 12.5% PLUS RM2.00. Previously, I calculated the net cost of using PayPal at about 5% inclusive of FX; a merchant credit card terminal would be around 3%. Given the long payment times for credit card providers and relative discomfort of people using cards overseas, I elected to stay with PayPal for the time being – lousy service and lack of regulation notwithstanding. See why this has now become a problem?
My underlying costs have increased by 7%; on top of that, there’s a lot of seemingly arbitrary discrimination going on between countries for a supposedly international payment service – the fixed fee is US$0.30 in the US, but US$0.65 in Malaysia. What gives? 2.5% to the FX spread? That’s even worse than the worst of the bank counters here; typical money changer spreads are closer to 1% here. And they have nowhere near the volume PayPal does. To make things worse, PayPal is not a regulated financial institution. They can do as they please with your funds; and they frequently do: random freezes and no end of documentation required to un-freeze. In the meantime, they enjoy overnight placement rates on your balances. Bottom line: this company is a bunch of crooks that’s effectively going to cause a lot of small businesses to die, with a negative impact to themselves in the long run.
Don’t get me wrong. I appreciate that there should be some difference in price given the convenience and speed of PayPal over credit card providers; I don’t think it justifies 9-10% of the retail price of the product. I can make allowances for a bit more if the quality of service is good, but it isn’t – some of you will remember my woes trying to use the service during a trip to Myanmar – frozen accounts for not just outgoing but also incoming payments; that landed up costing me quite a bit in the end due to rejected payments and lost sales. Needless to say, there was no compensation offered or forthcoming; not even so much as an apology. Just a thinly-veiled ‘f*** you, if you don’t like it, go somewhere else – except there isn’t anywhere else’ couched in consultant-tainted marketing speak.
If you’re getting the impression that there’s a lot of vitriol here, you’d be right. I find the notion of a company that’s made its success of small businesses trying to kill them by increasing margin pressure very hypocritical and short sighted, to say the least. I’m troubled, for two reasons: firstly, because after investigating the possible alternatives, I’ve simply been unable to find any: either the alternatives have very slow payouts and perceived trust/ security issues due to my location (merchant credit card account), or they don’t pay out money to a bank account in Malaysia. It’s pretty much useless for me to go with a service provider where the money has to be left with them – not only do I not see the benefit of it, I might as well be giving away free interest, too. Perhaps I should seriously think about starting an alternative service – I think the important point is that it has to be a cooperative institution owned by the depositors – similar to a shareholder structure – rather than a corporate black hole. This would ensure that fees are kept reasonable and management decisions are made in favour of the users. Perhaps the business model could be along the lines of a fixed fee per transaction with stepped rates proportional to the number of transactions you do, rather than a fixed percentage of the transaction value – this would be far more in keeping with how the actual underlying costs work. FX would be at the prevailing market rate. The primary challenges would be licensing and regulatory oversight, and to get the huge installed user base to move over, but given the recent changes to PayPal’s fee structure, I think that might be less of a problem than it first appears.
This brings me to the second point of this article-rant: the general consumer and business environment is making it tougher and tougher for small businesses to survive; photographers fall squarely into this category. Of late, I’ve noticed clients increasingly trying it on with ridiculous budgets/ offers – knowing full well what my rates and costs are because we’ve worked together on many occasion previously – and then making noise when I decline to drop prices. They might also pay late: hideously so, in some cases. I was engaged to give a workshop seminar by Sony earlier in the year; it took five months to get payment. These are the kinds of clients I can do without. On the other end, our underlying costs are increasing – base costs such as rent, food, fuel etc. go up because of inflation; travel isn’t any cheaper; gear seems to get more and more expensive, too – with minimal incremental improvement. And then there’s the new cost of receiving payments…
Compounding things is the recent slide of the Ringgit: 10% devaluation in a matter of weeks is starting to look pretty catastrophic (and our government claims inflation is just 3% per year). We are being margin squeezed on every side: unable to increase prices due to stingy clients; but costs are rising alarmingly due to a deflating currency. To be honest, I don’t even know whether to take payments via wire transfer and lock in the exchange rate now, or hold foreign currency balances at the mercy of PayPal – either way seems like it’s going to be equally painful.
To maintain the same level of absolute returns we have to do more work, but there comes a point when you are fully utilised and costs have seemingly no ceiling. I think there are only a couple of solutions, really: either offer a product or service that is unique and not easily replaceable, for which demand is greater than supply and you can set prices at the level you see fit; or alternatively, change the business model to offering something that can survive and scale with smaller margins. The latter is nigh on impossible to do for photography: we are providing a product that is highly labor intensive and very customized. Unfortunately, most clients perceive the output as being commoditized, expect commensurate pricing, and make unhappy noises when things don’t match. I think this is still an education problem, but fixing a long-standing mindset is something that takes time and effort.
In all seriousness, if there are any bankers or other people more familiar with the payments industry, I’d love to get in touch and explore some ideas. In the meantime, if there are PayPal alternatives that you know of which a) are cheaper b) are fully functional for a business based in Malaysia, please also get in touch or leave a comment. So far, there haven’t been any: this is bad news, because it’s carte blanche for the incumbent monopoly to charge whatever it wants. I will need to evaluate what the net revenue change is to my end after a month or so; if it’s significant and there are no alternatives, I will be forced to increase prices accordingly. For large amounts such as workshops and the Email School, I’m going to switch to wire transfer only; this follows the fixed-fee model and makes sense above a certain threshold. Giving PayPal 10% of my revenue over the wire transfer fee for adding no value whatsoever makes no sense – and I certainly don’t want to increase prices by 10% if I can help it. MT
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