Fees are a necessary evil of receiving payments online. There are very few solutions online that offer low transaction fees. That’s a lie – there are alternative payment solutions out there that offer fair transfer fees. The problem is that very few people are using them.
In the world of freelancing, PayPal is the de facto payment system for freelancers and website owners. The de facto current is, of course, US dollars.
What many Americans don’t realise is that when people outside of the USA accept payments in US dollars, we lose a lot of money. We get charged the same fees as Americans do, but we also get charged a high conversion rate.
The more money you accept, the more money you lose. For example, when I sold WP Mods for $80,000 through Escrow, I lost a few thousand dollars because of the terrible exchange rate. An American who sold a website for $80,000 like me would automatically be two or three thousand dollars richer because they would not have to pay currency conversion fees.
PayPal Fees are Very High
PayPal charges a lot to use their service. In the UK, they charge 3.4% + 20 pence per transaction. They also charge a 0.5% cross border fee for international payments and a further 2.5% fee above the market exchange rate for converting US dollars to UK pounds.
Unfortunately, there is little you can do to avoid this additional conversion fee. The only way for a British PayPal user to do it is to have an US dollar bank account tied to their account. However, I have read that they do not allow this anymore as it loses them money.
The only way to avoid a conversion fee is to charge customers in your native currency. For me, that means charging everyone in UK pounds, whether it be members of Rise Forums, or a freelancing client of mine.
I must admit that I am considering charging people in UK pounds as it is sickening to lose a further 2.5% in fees on top of the already high payment fees of PayPal. This would save me thousands of dollars every year. Though I know that US dollars is what people generally use within the internet marketing world; and charging people in a different currency might put some buyers off.
An Example of How Much I Lose
I was speaking about this issue to a client last night. I do not think he realised that people outside of the USA get charged for converting US dollars to their local currency.
To illustrate my point about fees, I showed him the fees taken for my last four payments.
- $97 paid to my account – Fee of $4.08. I received $92.92. Fee percentage = 4.2%
- $150 paid to my account – Fee of $7.65.I received $142.35. Fee percentage is 5.1%.
- $9.99 paid to my account – Fee of $0.69. I received $9.30. Fee percentage is 6.9%.
- $1,137 paid to my account – Fee of $44.64. I received $1,092.36. Fee percentage is 3.9%.
These figures do not take into account the additional 2.5% conversion fee I have to accept when actually cashing in my money.
- $97 paid to my account – Fee of $4.08. I received $92.92. Fee percentage = 4.2%. Conversion fee is $2.32. Total received = $90.60. Total fee = $6.40. Total fee percentage = 6.60%
- $150 paid to my account – Fee of $7.65. I received $142.35. Fee percentage is 5.1%. Conversion fee is $3.56. Total received = $138.79. Total fee = $11.21. Total fee percentage = 7.47%
- $9.99 paid to my account – Fee of $0.69. I received $9.30. Fee percentage is 6.9%. Conversion fee is $0.23. Total received = $9.07. Total fee = $0.92. Total fee percentage = 9.21%
- $1,137 paid to my account – Fee of $44.64. I received $1,092.36. Fee percentage is 3.9%. Conversion fee is $27.31. Total received = $1,065.05. Total fee = $71.95. Total fee percentage = 6.33%
As you can see, I am losing a lot of money by using PayPal. The above figures do not even take into account the additional 0.5% cross border fee that is charged!
The $150 payment above has a slightly higher fee that expected. From reading PayPal’s fees policy, it looks like I am being charged even more because the buyer paid all or part of the payment using a debit card or credit card. Kind of sucks to lose money because of the way that someone else funds their account; though that is what you need to deal with when using PayPal.
Between six and seven percent is lost in most transactions. The fee for my $9.99 payment is relevant to me as that is the cost of a monthly membership to Rise Forums. 9.21% is a high fee to pay, whatever way you look at it. I am losing close to a dollar with every $9.99 payment. I could reduce this fee by charging members in UK pounds.
PayPal is Too Popular
It is not the fact that there are not many alternatives to PayPal out there. Solutions such as Stripe charge 2.4% and 20 pence per transaction. Their conversion rates are 2%. That drops the total fee from at least 6.315% (PayPal) to 4.352% (Stripe).
If you have a good working relationship with a client, you can also asked to be paid directly. This allows you to save even more money, though neither buyer or seller has any real protection (which is why you need a good relationship). Solutions such as TransferWise only charge 1% for sending money abroad.
The problem is that many clients are reluctant to send payments using any service but PayPal. So what do we do? We grit our teeth and accept a large percentage of our income going to a large behemoth such as PayPal.
PayPal’s fees page claims it is “Straightforward and no surprises”. With some countries suffering from 4% currency conversion rates, and additional cross border payments costing up to another 2% if funded via PayPal and up to 7.4% if funded by a credit card; PayPal is anything but straightforward. This means that customers from some countries will lose up to 15% in fees.
Their fees are sneaky and purposely overcomplicated so that customers cannot see exactly what they are being charged for. Obviously, I am aware that banks always charge a fee of 1% or 2% for converting currencies; however it is a bitter pill to swallow after being charged already.
Sadly, due to my love of travel, I am hurt by fees again. I am heading over the Colombia a week today. Every time I use the bank I will be charged a poor conversion rate and around seven or eight dollars for using the bank’s ATM. I must admit that when I sit down and think of how much of my income is lost to banks and payment services, I get very frustrated.
What Can You Do to Avoid Such High Fees?
The only sure fire way to avoid high conversion fees is to only receive money in your local currency. If you are involved in internet marketing, that simply is not possible.
I do have the power to charge my freelancing clients in UK pounds and I could charge members or Rise Forums in UK pounds too. It is something I might do so that I do not have to suffer conversion fees and poor exchange rates. However, the vast majority of affiliate programs pay in US dollars. As a result, these high fees are unavoidable to anyone who makes money through affiliate marketing.
My opening sentence in this post was that fees are a necessary evil of receiving payments online. That remains the case. PayPal is very easy to use and I have been fairly happy with the quality of their telephone support (as long as you don’t go crazy during the automated question and answer section).
What I am not happy about is how much they charge me for receiving payments. The problem is that PayPal is used by almost everyone and many clients are reluctant to use other services. So what’s the alternative?
TransferWise is one good option. They were created for people who send money abroad regularly. They note that banks and other payment services normally charge around 5% in upfront and hidden fees but that they charge eight times less. More Transferwise info can be seen on MoneyTransferComparison for a breakdown on fees.
Again, the biggest problem with TransferWise is convincing others to use it. People are so used to using PayPal for doing business that they are reluctant to give anything else a try.
As always, I’d love to hear your thoughts on this issue.
Kevin
Hi Kevin! Great post and may I say as someone not registered on Rise Forums, I am more interested in joining if it is charged in £GBP.
I read the the biggest export of the U.S is the dollar just because it is the world reserve currency, but was there ever a vote for this?! It is because of this that in my profit & loss spreadsheet, I have a column just for $USD because some some sellers don’t even consider the possibly of other currencies, they only show the dollar amount, which is not the amount on my bank statement.
There is one sure fire way to accept payments with minimal fees by using a system that cuts out the banks and the merchant account providers like Paypal. That system is used by restaurants and cafés worldwide and is accepted by many governments, that system is a cryptocurrency such as Bitcoin. It’s not perfect obviously and not enough people use or understand Bitcoins, but as it is now stabilising and better understood, it is improving. I think today is the day that the UK get it’s first high street Bitcoin ATMs courtesy of Satoshi Point.
Thanks Ian.
It is a difficult situation. Do I switch membership prices to UK pounds and potentially alienate a large number of users, or do I offer memberships in pounds and in dollars? The latter may be a good option for members, though it does not really solve my problem with conversion fees.
Please don’t talk to me about bitcoin!!! A year or so ago, I was going to buy a few hundred pounds worth of bitcoin when it was priced below $20. I downloaded the bitcoin miner but did not follow it up. I’m such an idiot! I could have made close to $15,000 at today’s prices…and more than double that at its peak.
I’d certainly offer bitcoin as an option to members. Think I’d need to find a custom add on to enable it, though I am sure that someone will develop this within the next year.
Hi Kevin, I know what you mean about Bitcoin, I looked into it around August when it was priced about $200 before rising to $1200, but I didn’t invest because I didn’t know how – there are apparently more obstacles to it in the UK. I believe it is still good long-term investment.
For your prices, I suggest you do charge in GBP, maybe you can get some plugin, but at the very least add an estimate of the USD amount for the main pricing options and perhaps update it once a week if there is a big change.
I received your email with the link, but the link doesn’t work and for some reason I didn’t get a comment notification email in my spam folder or anywhere else.
That’s a great idea Ian. I am sure there are solutions out there that will help me do that. I will need to look more into the issue.
Are you referring to the update email about a new comment?
I too find this frustrating living just across the border in Canada. I was, however, allowed to add my US Dollar Visa to my paypal account and I have saved several dollars per transaction whenever I buy something online from the US because it doesn’t convert to CDN. I got the US Dollar Visa after we vacationed in Florida for the month of March this year. We had to pay hundreds of dollars more for our rental unit because of conversion rates through paypal. That was the last straw for me. I signed up for a US visa, and it was a stinger to find out that, through my bank, that US borderless visa account was free. I could have saved hundreds of dollars if I had just called my bank.
Though I have not used it yet, I created a stripe account. I attached it to my Harvest account for invoices. Stripe is great because of the lower fees, and because Stripe allows payment right from the invoice (you don’t have to go to the stripe website to pay like you do with paypal). Stripe is gaining in popularity quickly in Canada.
This is a great article about the benefits of Stripe vs. Paypal: http://robmclarty.com/blog/stripe-vs-paypal and I think you’ll like the design of that blog! 🙂
Andi
ps. I’m new here and your blog is awesome. I’m learning so much!
Glad you like the blog Andrea 🙂
That’s great you have managed to save so much money. I need to look into whether it is possible for me to do something similar. There seems to be a lot of conflicting information regarding the issue.
The cheaper and more open pricing structure of Stripe is appealing. The number of sneaky fees that PayPal add is frustrating. Rob’s article about it summarises it nicely.
Hi Kevin,
I completely agree with the “too popular” part. Even though there are a handful of decent alternatives, none of them come remotely close to having the same trust with the general public that PayPal does.
We really are ready for a new company or an existing one to step up and truly compete with PayPal but unfortunately I can’t really see that happening any time soon 🙁
James.
I know. PayPal are a behemoth. It’s hard to imagine any other company taking them on.
I’ve noticed something similar as a buyer.
As a Swiss buyer, buying anything from outside of Switzerland is better done directly by credit card than PayPal. I also get charged an exchange rate to my disadvantage AND a commission fee, but still cheaper than with PayPal.
Hi Kevin,
There is a solution, but the solution is for the customers. ANother commenter above mentioned they’re from Canada, so am I. There are a few credit cards now that waive the 2.5% foreign currency exchange rate which you can use to pay for your Paypal transactions. Sears MasterCard is one, the one I use is Amazon Canada VISA issued through Chase.
When you first select your credit card, lets say you’re billing in UK pounds and I’m buying from you, it will convert to Canadian dollars for me and that will include all the BS fees Paypal tags on. BUT before finalizing you change it to say “bill me in originating currency and let my credit card do the currency exchange” – if your item was around 60 pounds then I’ve just saved at least CDN$2.50.
I found this out last year before buying a 60″ Panasonic plasma from Paul’s TV, my old CC used to ding me the 2.5%. I paid with my Amazon Canada card and saved almost CDN$50 on my $1900 TV purchase.
So while the options may be few and far between for sellers, advising people of these options in any website you’re selling from, or in any auction you might list items on, woudl be a great way to spread the word that you can still use Paypal but avoid their exchange fees.
Cheers,
~Steve
Hi Steve,
My credit card has the same feature. It’s great for travelling, but I don’t get any benefits from my spending. Ideally, I need one for travelling with low exchange rates and another than gives me rewards for my purchases.
Though the big issue remains receiving international payments. The rates are huge. Though there are few alternatives that tick all the boxes. The problem is that PayPal is the defacto payment system for so many people; myself included. So people will always use it as they have cash in their account.
Kevin
That is a shame, I get 2% back on Amazon Canada puchases and 1% back on EVERYTHING ELSE, so I usually put my bills through on my card too and get 1% off them, like internet, TV and landline.
I always withdraw my money from Paypal into my account as soon as it’s above the $0.50 fee threshold they do here, so I rarely have money in my account and prefer to get the 1% cashback by paying through my Amazon VISA. Guess more people need to smarten up and make their cards work for them!
But yes, I realize now I’m totally talking about a different issue and there is no way around receiving payments…whatever the workaround for Canadians used to be using a different routing number with a Royal Bank of Canada now apparently doesn’t work either for getting US payments. I’ve started to see a few US retailers now accepting Amazon as payment option so hopefully that might start catching on and work out better for sellers.
IN light of this I see my post was pretty irrelevant, ha, so apologies!
haha no need to apologise.
I need to cancel my card and get a better one that gives me cashback.
When you think about it, there is no real reason for charging so much for international payments. These banks are operating all across the globe. So why are they are charging fees onto of a 2.5% commission. They’re simply moving cash electronically from one currency to another.
Why is every body complaining about paypal, most accusation here are false and not true, some people want paypal to baby feed them, paypal conversion rate is best compare to all banks, the best way to convert is to keep checking daily conversion rate and convert all your money when is favorably, from people making payment from debit/credit card paypal always charge fee to avoid this fee, set your account to make payment directly from your bank account it is free. To prevent paypal e-check, always have funds reserve in paypal balance.
So in order to cover high fees, we should keep thousands on PayPal and hope that the currency we are holding becomes stronger so that we make a small profit when we deposit it later?
Very good article, Kevin – thanks for it.
I loathe the “new” PayPal. As a PayPal user since the late 1990s, I am amazed to see how the fees kept increasing.
I have no solution for this, as most of my purchases (or small sales) are in USD, and now it is even worse than before, but thanks for writing… 🙁
Thanks Claudio. Yeah the fees can be frustrating at times. Unfortunately, that’s the price of doing business through them.
Since I wrote I registered at Stripe, which I understand is a more business-oriented solution, but they have an Italian version in private beta so I will check it. The site surely looks more professional than the new PayPal one.
I’ve heard good things about Stripe but haven’t used them myself because it is not commonly used.