MasterCard vs. PayPal

MasterCard International recently imposed a deadline (originally May 1, but that has reportedly been extended) on its member institutions to comply with rules aimed at protecting consumers from unscrupulous Internet merchants. The credit card giant says it is merely enforcing its rules; that it’s wary of merchants that link consumers to websites that aggregate transactions, then process them through MasterCard without identifying the merchant.

That declaration surprised one of the more popular payment services. Executives at PayPal, which has nearly 16 million users and relies on eBay transactions for about 60 percent of its business, say they have been doing business with both MasterCard and Visa for the past two and a half years “and brought them millions of dollars in transaction volume,” says Vince Sollitto, spokesman for Mountain View, Calif.-based PayPal. He says both companies are trying to agree on rules to govern transactions processed through PayPal, and PayPal is still processing MasterCard transactions.

It could be in both parties’ interests to resolve the conflict: PayPal is so popular with eBay users that the San Jose, Calif.-based online auctioneer last month agreed to acquire PayPal for $1.5 billion in stock. EBay plans to keep PayPal as a separate brand.

According to the Internet Fraud Complaint Center (a partnership between the FBI and the National White Collar Crime Center), Internet auction fraud was the most commonly reported online offense in 2001, accounting for 43 percent of 16,775 complaints. Although the threat of auction fraud is real, Avivah Litan, an analyst at Stamford, Conn.-based Gartner, thinks MasterCard is laying the groundwork for a turf war. Litan says both MasterCard and Visa have initiatives in the works that will eventually compete in the peer-to-peer payment space dominated by PayPal prior to its acquisition by eBay. “That’s sort of the unspoken dynamic behind all of this,” Litan says. “The truth is the P2P payments are a drop in the bucket in [MasterCard’s] overall business, but it’s growing so much it becomes a threat to both Visa and MasterCard.”