Gartner: PayPal threatens banking business

Banks and vendors should sell PayPal payments to retail customers, instead of trying to compete with the online company, an analyst has claimed.

In a report entitled PayPal's New Micropayment Pricing Will Dominate Market, Gartner said the payment company will outstrip traditional payment methods and online transactions.

Author of the report Avivah Litan, a research director at Gartner, writes that retailers should embrace PayPal services rather than use "outdated" payment methods.

She wrote: "PayPal can beat credit card pricing because it blends credit card, bank account transfer and stored PayPal account value funding on the payer side, lowering PayPal's overall cost of funding any payment. PayPal encourages repeat payer customers to keep money in their PayPal accounts (the company's lowest-cost funding method), and to use credit cards (the most expensive funding option) as a last-option funding method."

The report follows a new pricing strategy from PayPal that makes it cheaper for people to trade goods under $3.

The analyst says PayPal was able to lower prices for a long time but waited until it had a large enough customer base (PayPal claims 78 million accounts) to profit from lower commissions for transactions under $3.

Litan adds: "PayPal's expansion is bad news for countless start-ups around the world that have tried to enter the micropayment market. Although credit [and] debit card companies could enter this market simply by lowering merchant transaction fees, these companies don't have the PayPal advantage of funding payments from PayPal stored accounts, as well as traditional bank accounts."