EBay's PayPal rule in Australia draws fire

SAN JOSE, Calif. -- EBay Inc. is exploring whether to require customers to use its online payment service PayPal, a move that has angered users and prompted antitrust scrutiny in Australia, where a PayPal-only rule takes effect next month.

After repeated queries, the online auction company said late Friday it will not institute such a rule in the United States. But it remains unclear whether eBay will still try it in other countries. EBay often tests big changes in smaller markets before expanding them worldwide, and says it is open to that in this case.

"We are going to take learnings from it and apply them accordingly," said eBay spokesman Usher Lieberman.

EBay says it wants to reduce disputes and restore trust in its marketplace with the PayPal-only plan. Because eBay and PayPal can share information on each transaction, eBay says use of PayPal allows it to stop fraud more efficiently than outside payment services. Pressing that safety argument in a heated discussion with Australian users, an eBay executive compared the new rule to banning the sale of heroin on street corners.

But critics lament that PayPal is costlier than other payment options, and they suspect eBay is just interested in increasing PayPal's revenue. Australian banks say the plan will eliminate competition for the sake of exaggerated benefits.

"Competition will be restricted, innovation and development will be constrained, new entry will be discouraged and PayPal will be able to increase fees and charges to eBay users," the Australian Bankers Association said in a filing with regulators Thursday.

Because eBay sellers are commonly independent merchants who don't accept credit cards, PayPal acts as a go-between. Buyers use their credit cards and bank account information to make payments, and PayPal relays the funds to sellers' PayPal accounts, charging them 30 cents plus a commission _ up to 4.4 percent in Australia. The second-most common method of payment on eBay Australia, bank transfers, cost 20 cents each.

Australia's bankers group says PayPal is not as immune to fraud as eBay claims. While PayPal does keep bank and credit card account information secret between trading partners, the bankers group decried that it does not verify identity as banks do.

EBay's financial reports indicate that PayPal, while hardly fraud-proof, is getting better at cracking down. Its loss rate is 0.24 percent, down from 0.33 percent a year ago. That means that for every $100 transacted with the service, PayPal has to eat 24 cents because of fraud. That is slightly lower than the rates seen in credit and debit card transactions involving the top 20 online retailers, said Avivah Litan, a payments security analyst with Gartner Inc.

EBay contends that when users opt for methods like bank transfers, their transactions are four times more likely to result in a disputed payment. EBay says reducing that risk will attract new buyers to the site.

And, the company adds, it doesn't stand to profit directly from the PayPal rule. It claims its investments in new buyer protections could outweigh any gains from increased PayPal fees. For instance, under Australia's new plan, if a buyer doesn't get what he or she paid for via PayPal, eBay will refund the buyer up to 20,000 Australian dollars ($18,600).

To make the PayPal rule possible, eBay has applied for _ and automatically gets _ immunity from Australia's anti-monopoly Trade Practices Act. But the Australian Competition and Consumer Commission, which is investigating, could revoke that immunity if it finds the plan will harm the marketplace. A decision is expected soon.