The Bundeskartellamt (German Federal Cartel Office) has sent PayPal its preliminary legal assessment of certain contractual terms governing payments in e-commerce. The review concerns the prohibition on charging customers a separate fee for using PayPal. According to the authority’s preliminary view, this provision could restrict competition between payment services and violate competition law requirements.
No final decision has yet been issued. PayPal may submit comments on the Bundeskartellamt’s assessment.
PayPal’s Contractual Terms Under Scrutiny
The proceedings are directed against PayPal Holdings, Inc., PayPal (Europe) S.à.r.l. et Cie, S.C.A. and PayPal Limited, which the authority collectively refers to as PayPal. The investigation concerns contractual provisions under which merchants have been prohibited since 2018 from charging a separate surcharge when customers pay with PayPal in their online stores.
The prohibition applies even if processing a payment through PayPal entails higher costs for a merchant than using other payment methods. According to the Bundeskartellamt’s investigations to date, PayPal has also enforced this requirement. In the event of a breach, PayPal may terminate its business relationship with the merchant concerned.
Separate Charges Are Not Generally Prohibited
In Germany, merchants are generally permitted to levy a separate charge for payments made with PayPal. In particular, this charge may not exceed the costs actually incurred by the merchant.
The legal position differs for certain other payment methods. The law prohibits such charges for payments made using consumer credit cards, as well as for SEPA credit transfers and SEPA direct debits.
PayPal’s Importance in E-Commerce
PayPal is one of the most important payment services in German e-commerce. Payments can be made through a PayPal account linked, for example, to a bank account or credit card as the funding source. PayPal processes payments for merchants and charges them a fee for doing so.
Merchant fees can vary considerably depending on the payment method concerned. Larger merchants also negotiate their terms individually. According to the Bundeskartellamt’s findings to date, the fees charged by PayPal are above average compared with other payment methods.
Competition Between Different Online Payment Methods
Payment methods that can be integrated into an online store’s ordering process have emerged in e-commerce. They can protect users against the misuse of their authentication credentials and protect merchants against payment defaults. Some also enable refunds, for example if ordered goods are not delivered, or allow the purchase price to be financed.
These services include, in particular:
- PayPal enables payments through a user account linked to a funding source.
- Mastercard and Visa cards can also be used for payments in e-commerce.
- Klarna is another payment method used in e-commerce.
- Wero, a payment service backed by banks, has recently entered the market.
According to the Bundeskartellamt, PayPal has a very high market share compared with other online payment methods. The authority also takes into account that, because PayPal is so widely used, many merchants may find it difficult not to offer it.
Potential Effects on Prices and Competition
The frequent use of PayPal may increase payment processing costs due to its comparatively high merchant fees. However, because of the contractual prohibition on separate charges, merchants may not allocate these costs directly to the customers who use PayPal.
Instead, these expenses are incorporated into the prices of the goods and services offered. As a result, people who choose another payment method may also bear part of the costs. At the same time, PayPal users cannot immediately see what costs their choice of payment method causes the merchant to incur.
Limited Pass-Through of Cost Advantages
According to the Bundeskartellamt’s preliminary assessment, the prohibition on separate charges deprives merchants of the ability to make the differing costs of individual payment methods visible to their customers. This could also eliminate incentives to choose a less expensive payment service.
This could make market entry and competition more difficult, particularly for other or new providers. Even if a payment service offers merchants lower fees, they can pass the resulting cost advantage on to their customers only to a limited extent.
As long as PayPal must be offered without a separate charge, consumers may have less incentive to switch to another payment method. In the authority’s assessment, this could also reduce competitive pressure on the merchant fees charged by PayPal.
Competition Law Assessment Remains Preliminary
The Bundeskartellamt considers the prohibition on separate charges a potential infringement of the prohibition on anticompetitive agreements and of the competition law prohibitions on abuse. In its notice, the authority cites § 1 GWB (German Act against Restraints of Competition) and Art. 101(1) AEUV (Treaty on the Functioning of the European Union), as well as §§ 19, 20 GWB and Art. 102 AEUV.
The review therefore concerns both German and European competition law. According to the preliminary assessment, the contractual arrangement under review could impair competition between payment services by making price differences less visible to customers and making it more difficult to pass on more favorable terms.
In a statement dated August 2, 2022, concerning the review of the Payment Services Directive, the Bundeskartellamt had already advocated abolishing the prohibition on separate charges for certain card-based payments.
Proceedings Ongoing Since January 2023
The Bundeskartellamt initiated the proceedings on January 23, 2023. The preliminary assessment now communicated does not constitute a binding finding of a competition law infringement.
PayPal will first be given an opportunity to submit comments. According to the authority’s notice, it may also require the practice under review to be discontinued in the further course of the proceedings. In addition, the Bundeskartellamt is considering disgorging any economic benefit obtained through a possible competition law infringement pursuant to § 34 GWB.
It therefore remains undecided whether the contractual terms under review actually violate competition law and what measures, if any, will be taken.
Competition Law Considerations for Businesses
Contractual terms governing payment methods may affect pricing, transparency toward customers and the market position of the companies involved. For an individual assessment of such matters, MTR Legal Rechtsanwälte offers competition law advice.
