Germany Warns PayPal Its Payment Restrictions May Violate Competition Law

Key Takeaways

• Preliminary Competition Assessment: Germany's Bundeskartellamt has warned PayPal that its restrictions on merchant surcharges may violate German and EU competition law.
• Higher Processing Costs: The authority found that PayPal charges above-average merchant fees while prohibiting retailers from passing those costs directly to customers using its service.
• Competition Concerns: The restrictions could disadvantage cheaper payment providers by preventing merchants from using surcharges to encourage customers to select lower-cost alternatives.
• Potential Consumer Impact: The authority believes the restrictions could contribute to higher retail prices because merchants recover PayPal's processing costs through prices charged to all customers.
• Possible Financial Remedies: The Bundeskartellamt is considering recovering economic benefits obtained through any infringement, although its assessment remains preliminary and PayPal has an opportunity to respond.

Deep Dive

Germany's Federal Cartel Office has issued a preliminary competition law assessment against PayPal, raising concerns that the company's restrictions on merchant surcharges may protect it from cheaper payment services and contribute to higher retail prices.

The Bundeskartellamt announced its findings on November 11, following an investigation into contractual provisions that have prohibited online merchants from charging customers additional fees for using PayPal since 2018. The authority found that PayPal's processing fees are above average compared with other payment methods, yet merchants are prevented from passing those higher costs directly to customers who choose the service.

Instead, retailers must recover the expenses through their general prices, meaning customers who use less expensive payment methods also bear the costs associated with PayPal transactions.

The authority believes the arrangement could weaken competition by preventing merchants from encouraging customers to use cheaper alternatives. It is examining whether the restrictions violate German and European Union competition law and is considering whether PayPal should be required to surrender economic benefits obtained through any infringement.

"For many people, PayPal is a natural way to pay for their online purchases," said Andreas Mundt, president of the Bundeskartellamt. "Many online merchants therefore find it difficult to refrain from offering PayPal as a payment method."

PayPal holds a very high market share among online payment methods in Germany, according to the authority. Its widespread use makes the service difficult for retailers to exclude, even when other providers offer more favorable processing fees.

The company's merchant agreements prohibit retailers from imposing additional charges on customers who pay through PayPal, regardless of whether the transaction costs more to process than payments made through competing services.

According to the Bundeskartellamt's investigation, PayPal has enforced the restriction and reserves the right to terminate its relationship with merchants that breach it.

Merchant fees vary considerably between payment services, with larger retailers sometimes negotiating individual rates. The authority's current findings indicate that PayPal charges above-average fees compared with other payment methods.

Those costs become more significant for merchants as the proportion of transactions processed through PayPal increases. Without the ability to impose a surcharge, retailers must account for the expenses in their broader pricing.

The Bundeskartellamt believes this practice may leave customers with little incentive to choose a cheaper payment service, even when doing so would reduce the merchant's costs.

"Competition between payment services could be affected if merchants cannot take the costs of the various payment methods into consideration for pricing," Mundt said. "Other, cheaper providers would find it more difficult to gain an edge over PayPal. Ultimately, this could also lead to higher prices for consumers."

The authority's concerns extend to the competitive position of other payment providers, particularly newer entrants seeking to attract merchants through lower processing fees.

PayPal competes with online payment methods offered through Mastercard and Visa, as well as Klarna. Wero, a payment service offered by banks, has also recently entered the German market. These services offer different combinations of payment convenience, security protections, safeguards against nonpayment, refund options and financing arrangements. Their processing fees can also differ substantially.

The Bundeskartellamt argues that merchants should be able to make those cost differences visible to customers where the law permits. PayPal's restrictions prevent retailers from using surcharges to encourage customers to select less expensive alternatives.

Even when competing providers charge lower merchant fees, retailers have limited ability to translate those savings into a direct price incentive at checkout. The authority believes this could make it harder for competing services to gain market share and reduce pressure on PayPal to lower its own fees.

"Our aim is to achieve effective competition between the various providers of payment services," Mundt said. "Cheaper providers attracting merchants with lower charges should be able to reap the benefits of these cost advantages when competing for customers."

German law generally permits merchants to charge customers additional fees for using PayPal, subject to certain conditions. In particular, any surcharge must not exceed the actual costs incurred by the merchant. The law prohibits surcharges for certain other payment methods, including consumer credit card payments, SEPA transfers and direct debits.

The Bundeskartellamt's preliminary assessment identifies possible violations of Section 1 of Germany's Competition Act and Article 101(1) of the Treaty on the Functioning of the European Union, which prohibit anticompetitive agreements.

The authority is also examining whether the restrictions constitute abusive practices under Sections 19 and 20 of Germany's Competition Act and Article 102 of the EU treaty.

In addition to potential competition law remedies, the Bundeskartellamt is considering whether to seek the disgorgement of economic benefits obtained through any infringement under Section 34 of Germany's Competition Act.

The authority has not announced a financial amount associated with that possibility. The assessment does not constitute a final decision, and no infringement has yet been established. The authority will consider PayPal's response before determining how to proceed.

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