When Ahmed Farooq bills his customers, it's as easy as a few clicks of the computer mouse. The payments arrive in his bank account a few days later.
Mr. Farooq has been using PayPal for his Toronto-based firm Enthropia Inc. since it was incorporated in 2003. The company sells tools for web bloggers and content-management software for Web sites.
"PayPal's biggest benefit is that it makes things very easy," says Mr. Farooq, a University of Toronto computer engineering graduate. "It's e-mail-based. So, I write, 'Send me X amount of dollars. This is my PayPal address.' They send it and there's no hassle."
Clients have accounts with PayPal and register either their credit card numbers or bank accounts. When they respond to Mr. Farooq's e-mail, they can either charge the amount owed to their credit card or bank account. He can do everything on-line, including review his PayPal account and send monthly summaries to his accountant.
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Like Mr. Farooq, hundreds of small business owners have turned to PayPal to conduct their back-office transactions, largely because of the convenience and security offered by a large organization.
A San Diego-based subsidiary of eBay Inc., PayPal has developed into a significant processor of on-line payments. Since its start seven years ago, it has attracted 100 million accounts in 55 countries.
While most of the payments come from private individuals buying and selling items on eBay's on-line auction site, about 30 per cent is generated by small businesses.
"It's a business that is driving growth today and we expect will drive growth in the future," says Amanda Pires, a spokeswoman for PayPal. She adds that the total volume of so-called merchant services payments was $2.5-billion (U.S.) in the fourth quarter of 2005, a 56-per-cent increase year over year.
In 2005, the company's total payment volume was $27.5-billion. PayPal does not break out its volume on a country basis, although Canada and other international markets accounted for about 35 per cent of the volume.
The success of PayPal, Ms. Pires says, is attributable to the fact that it gives buyers the right to choose the method of payment, and their information is secure. "People don't want their financial information floating around. Buyers prefer PayPal, and merchants are starting to realize that," she says.
The other reason, she adds, is that "PayPal made it very easy for the small guys to accept payment. They didn't need to get a merchant account, which is an expensive, time-consuming process."
Merchant accounts, offered by credit card companies and banks, cost 3 to 10 per cent for each transaction, depending on the credit worthiness and sales volume of the merchant Ms. Pires says. "But we allow anybody, small business or individuals, to accept credit cards or bank accounts instantaneously."
PayPal works on a sliding scale. In Canada, businesses with monthly sales of less than $3,000 pay a 2.9-per-cent fee, plus 55 cents for each transaction. For sales of $3,000 to $12,000 the fee drops to 2.5 per cent plus 55 cents per transaction.
Sales of $12,000 to $125,000 are charged 2.2 per cent plus transactional fees. Monthly sales that exceed $125,000 are charged 1.9 per cent, plus 55 cents per transaction. There are no set-up fees.
Many small businesses operate on eBay, says Becky Reuber, associate professor at the Joseph L. Rotman School of Management at the University of Toronto.
"PayPal is linked to eBay and on-line portals like it. If that is your best sales channel, it makes sense to use PayPal," says Prof. Reuber, adding that PayPal makes it easy to deal with anonymous buyers and handles verification as well. "It's a very popular payment mechanism."
Indeed, security is one of the main reasons Toronto business owners such as Ed Arabian favour the company. "PayPal is very good at covering sellers and buyers, if someone tries to pull a scam," says Mr. Arabian, who operates an e-Bay store called Tiesource that sells high-end men's clothing.
He notes that PayPal has a system in which it confirms a person's address in Canada, U.S. and Britain. If the person is unconfirmed, Mr. Arabian can refer to an informal feedback network that alerts business owners to potential troublemakers.
But some small business owners find PayPal not entirely satisfactory, even if its rates are comparable with those of credit card processors.
Nathaniel Brown, president of Vancouver-based Inimit Innovations Inc., has been in software development for four years and also organizes technical conferences. About one-third of his software clients are overseas, and he takes PayPal payments from them. For the conferences, he has an e-commerce engine on a subsidiary Web site that allows customers to buy tickets on-line using PayPal.
He notes that one drawback in Canada is that his customers must register with PayPal in order to make payments. For U.S. merchants, customers don't have to register and can make direct credit card payments.
That led him to investigate another option: signing up with Moneris Solutions. A Toronto-based joint venture between Bank of Montreal and Royal Bank of Canada, Moneris is one of the largest North American processors of credit and debit card transactions and handles payments for VISA, MasterCard and American Express.
In principle, Mr. Brown can link his Web site's e-commerce engine with Moneris's system and behind the scenes conduct credit card transactions. He must purchase a so-called secure socket layer (SSL) that provides data encryption, but he argues it is justifiable in his case.
"For an entry-level business person who doesn't know much about technology, he or she can rely on PayPal to provide encryption and security," he says. "But at my level, where I am doing custom services and it's not an issue to buy an SSL certificate and have that security, I can provide a seamless interaction."
In short, customers can enter their credit card information and address and Mr. Brown can process the transactions behind the scenes. "They never leave my site. That's the big difference."
From a financial standpoint, Mr. Brown admits PayPal and Moneris are not too far apart. Moneris charges 3 per cent for transactions worldwide regardless of size, plus 25 cents a transaction. It also charges a one-time set-up fee of $525 and $52 a month.
Mr. Brown conducted an examination of both providers' rates and found that in some cases the difference is not significant. For example, it would cost $85 to use PayPal to sell 100 conference tickets at $10 each. Moneris would charge $55.
"If you only do 10 transactions a month, for instance, and invoice $1,000 each, then PayPal is a better option. But if you are selling 100 tickets a month at $10, you want to consider Moneris."
Even though there are set-up fees, they can be amortized over about 16 months, Mr. Brown adds. "Over the longer term, Moneris is better because you will get more bang for your buck."
Still, Mr. Farooq says he is satisfied with PayPal.
"The best thing that it does for us is fraud protection," he says. He once had a problem with a credit card processor where his account was briefly disabled because a customer used a stolen credit card.
"As a small business, we don't have a dedicated team to verify accounts. It's not affordable," he says.
PayPal, which has the resources, "makes things a lot safer."
Special to The Globe and Mail
