Alternative payments are getting greater scrutiny

Posted on Thursday, January 10, 2008 by Bryan Johnson

For the past few years there has been nothing but positive buzz about alternative payment types PayPal and Bill Me Later in the payment processing industry. By all measures their market penetration has been disruptive and impressive. Today for the first time that I've seen, Kelli Grant of the Wall Street Journal has a piece out Beware of Web-Pay Alternatives that focuses on some of the more potentially unappealing aspects of these payment types for consumers. Note, for PayPal, Kelli is highlighting PayPal Pay Later which is different from their standard offering.

Here are three reasons you may want to think twice before using one of these services:

Your Credit Score Could Take a Hit. If your goal is to get away from paying with plastic, be especially cautious about services like PayPal's Pay Later and Bill Me Later, which function as a line of credit. "Any new account, especially one that immediately carries a balance, is considered a risk on your credit report," said Gerri Detweiler, a credit adviser at Credit.com. Opening one new account could push a credit score of 707 down to 697 for six months, according to Fair Isaac Corp.'s FICO Score Simulator. Even worse: Your score could drop by as much as 100 points if you come close to maxing out the line of credit, said Ms. Detweiler. For someone planning to shop for a mortgage, home equity line of credit or other loan, the difference could lead to higher interest rates and thousands of dollars more in payments. Even if you aren't planning to make a big purchase, a drop in your credit score could prompt your creditors to raise the rates on your existing accounts. PayPal clearly discloses its line of credit as a credit product, as well as the terms and conditions before consumers apply, said spokeswoman Amanda Pires. Bill Me Later didn't respond to requests for comment.

You Will Pay High Interest Rates. If you carry a balance with alternate-payment services, you face exorbitant interest rates. PayPal's buyer-credit option charges a variable 22.75% annual rate, while Bill Me Later has a variable interest rate of 19.99%. For comparison's sake, standard credit cards carry an average variable rate of 13.89%, according to Bankrate.com. (For consumers with great credit, those rates could be much lower.)

You'll Get Weaker Protections. Security is frequently touted as one of the upsides to alternate-payment programs. After all, there is no credit-card number to steal. "But that means you won't have the same protections as if you were paying with a credit card," said Consumer Federation's Ms. Grant. "[Fraud] coverage is extremely limited, and whatever protections the service does give you are voluntary." When it comes to your credit card, federal law dictates what your liability will be if someone makes an unauthorized purchase. (At most, you will pay $50.) The law also protects a consumer's right to dispute charges on their account for incorrect billing and defective items, among other problems. Bill Me Later, eBillme and PayPal have zero-liability policies for unauthorized charges (no matter what method you use to pay), but their policies are somewhat weaker when it comes to disputes.