PayPal takes needless pain out of money transfers

Net Results: Sometimes the internet can be most useful at introducing competition into a previously closed market.

Take money transfers. In the past, if you wanted to move money between an account in the US or Britain and one in Ireland, the options all induced some sort of cost - often not nominal but significant.

For example, say you want to send some money to a relative in Ireland from the UK. Banks in the UK will charge about £25 for wiring money between accounts. Similar charges apply if you want to wire money to a UK account from an Irish account.

Say instead you want to deposit a cheque from someone in Ireland, written in euro, into a US account. The US banks will charge a transaction fee of around €10 for this to be done.

The cheapest way to send people money in their own currency until this past week was to get a bank draft made out in sterling or dollars or whatever currency you need, at a charge of about €4.

Now both businesses and individuals have a much cheaper option - an online PayPal account. Money transfers in the same currency, which can go directly to an Irish bank account, are free. Transfers from another currency to or from an Irish account cost all of one euro.

All you do is go to www.paypal.com and set up an account. You can link it to a credit card if you want, or directly to your Irish bank account.

Then you can make payments using either your credit card or a direct money transfer from your bank account to another, and you can receive money the same way.

You can make a payment simply by sending the cash to another's email address - it is ridiculously easy.

It's not that the idea is anything new - PayPal launched its service in mid-1999 (I even wrote one of the first articles on it around the time it launched, for Wired.com, the online sister publication for Wired magazine. If you want to read it, you can find it here: www.wired.com/news/ technology/0,1282,20958,00.html).

Since its launch, the company has done very well indeed, and can boast over 50 million account holders in 45 countries worldwide. PayPal's rise came in large part due to its perfect fit with the auction site eBay.com - buyers and sellers liked the fact that money could be transferred directly upon a sale or purchase.

Not surprisingly, eBay bought PayPal in 2002. The mesh seems to be a good one, and the interrelatedness of the two companies increases user trust in each.

Both eBay and PayPal have had to address problems of fraud and misuse of their services, and working in tandem certainly helps produce payment solutions in which site and service users can feel more confidence.

Many internet retailers also took advantage of this quick-pay capability - sometimes in lieu of more traditional routes such as credit cards.

PayPal has also proven to be a real boon to non-profit and charitable organisations, as it makes donating easy and relatively painless, especially for people needing to donate in one currency for an organisation operating using another.

PayPal came to the UK a year ago - but, to the frustration of many in the Republic, not to Ireland. This is despite the fact that PayPal has a European payments centre here in Ireland - though heralded as an eBay operation, the activity in Dublin is actually a PayPal operation.

The reason for the delay is - surprise! - bank-related. PayPal has to establish relationships with the relevant banks and then set up its service to mesh with their operations.

Banks, especially Irish banks, have never been swift movers when it comes to incorporating that darn new-fangled internet thing.

The suspicious side of me wonders whether the banks dragged their collective feet at losing more lucrative fees from old-style money transfers, too.

Whatever the case, all is now sorted, and Irish people can set up a PayPal account. An individual account is free, although there is the €1 charge if the currency sent or received is not in euro.

PayPal also offers accounts to businesses with more services, but charges a percentage of the transaction, with an extra 2.5 per cent assessed on foreign-currency transactions. Still, merchants are likely to find it a cost-effective option to use alongside credit card purchasing, especially if selling to the US, where PayPal is very popular.

How does PayPal make money? Well, there are those business charges - which is why it is in PayPal's interest to encourage the rest of us to open individual accounts for free, so that we want to use them to buy from business account holders, spurring business adoption.

They also are operating a huge float - the money sitting idle in user accounts, which earns interest - but some analysts have guessed that PayPal's income from the float may be as small as 5 per cent of revenue, and would be superceded by money it can earn from charging for various services.

PayPal still has some niggling issues. Recently it made a multi-million dollar settlement to compensate PayPal users who had been victims of identity theft and had accounts frozen for a long stretch of time, for example.

But in general, it offers most internet users an extremely simple and convenient way of making payments or transferring funds.