February 03, 2011

How Changes to PayPal User Agreement for India will affect you!

This morning like all other hundred thousand Paypal users in India, I woke with an email notice from PayPal regarding upcoming changes to User Agreement in India. Like on the previous occasion, this time as well, all inconvenience is sponsored by the Reserve Bank of India (RBI).
As expected, this announcement rose many questions and I guess I can answer some of them correctly. As I am no legal or economic expert, it will be unwise to count on my conclusions which I have drawn after reading this official announcement page from PayPal.

Things that will change:

#1. You won’t be able to accept a single transaction of more than $500

You need to ask client to break a bigger transaction into multiple transaction not exceeding $500 each. This will add communication overhead plus will cause inconvenience to your client. “inconvenience to end client” is the worst part I feel.
Another downside is, paypal payments that we receive by automated means like from ad-networks, affiliate networks, how will you ask them (machines) to break bigger payments into multiple ones? No answer yet!
If you are running an e-commerce site with PayPal payment gateway integration, then your customers won’t be able to “checkout via Paypal” if total payable amount exceeds $500. This can be solved by using alternate payment gateway like 2Checkout. 2Checkout allows end-customers to pay via Paypal. I hope this solves the problem as 2Checkout will act as (American) middleman between PayPal and You (Indian users/merchant) 

#2. You must withdraw Paypal balance to Indian bank account within 7-days

As changes to PayPal user agreement for India will also ban Indian users from using PayPal balance to buy goods & services online, you anyway do not have any reason to keep Paypal balance in PayPal account itself. So keep withdrawing!
Two things that are unclear about this 7-days limit are:
  1. What will happen if for some reason you cannot access your account for 7-days? Will Paypal do automatic withdrawal to Indian bank account OR return payments to original senders? Or just forfeit the pending PayPal balance!
  2. PayPal charges INR 50 if you are withdrawing less than INR 7000. This 7-days limit may force you to withdraw smaller amounts even if you don’t need them in India.

#3. You cannot use Paypal “balance” to buy goods & services online

Please note the quotes word – “balance”. New changes doesn’t mean buying through PayPal option has gone forever for you. It only means, you cannot use PayPal balance.
If you have any credit card linked to your PayPal account, you will be able to buy stuff online via PayPal. Only thing, purchase amount will be deducted through your CreditCard and not PayPal balance.
This only means – you will loose money in currency-conversion twice! This also means banks will make earn more from their foreign currency conversion service. Refer to law of conservation of energy in case you are wondering how banks will make earn more in this case!
Practically, this will affect all PayPal users without any credit card on their account. You may try using Virtual Credit Card to overcome this problem!

Why is this happening?

Reserve Bank of India (RBI), is a kind of a parent to all banks in India. So they need to find ways which will help Indian banks earn more. This time they came up with the idea to generate more revenue from currency conversions! 
Jokes apart, point #3 is the only fair point I find. PayPal allows you to use PayPal balance to buy goods & services online directly which might be affecting India’s revenue from import/export.
As an example, consider following common scenario:
  1. An Indian provides goods/services to a US client worth $100 and receives payment of $100 (minus paypal fees) in PayPal account.
  2. After few days, above Indian provider spends $40 from PayPal balance to buy webhosting.
  3. Towards month end, same Indian provider withdraws amount of $60 (minus paypal fees) to Indian bank account.
In the above scenario – India as a county should do export worth of $100 and import worth of $60. But because users can pay via paypal balance, India will see only export of $40 (minus paypal fees).
While net effect remains the same (keep currency conversion charges aside), it will affect India’s turnover from import/export. This in turn might be affecting many things on which I cannot comment.
One thing is for sure, the way PayPal works has always been a matter of debate. I always have a hard time explaining local banks/charted accounts/legal experts about how and why we use Paypal. But none of them are ever fully convinced. I guess in India, there are different norms for Payment gateways (like CCAvenue, EBS, etc) and Banks (like HDFC, ICICI, etc).
I already sent a few queries to my experts friends from various fields. I hope they will be able to give us more insight over time. I will keep this post updated. Being an Indian I am sure PayPal will figure it out how Indian system works soon and do necessary off-the-record “magic” to save its business in India!

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