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EBay's PayPal to collect fee on deposits

eBay Inc. , the online auction house, will start collecting a fee to manage money that customers have on deposit in its PayPal Money Market Fund, the company said in a letter to customers.
/ Source: Reuters

EBay Inc., the online auction house, will start collecting a fee to manage money deposited in its PayPal Money Market Fund, the company said.

PayPal, an electronic payment service with some 87 million customers in more than 40 countries, sweeps funds that customers keep in their accounts into the money market fund.

The company currently pays a 7-day average yield of 4.38 percent on money in those accounts. That is the highest rate of any money-market fund in the United States, according to Peter Crane, managing editor of IBC’s Money Fund Report.

The move will have no material impact on the financial results of PayPal’s parent, eBay, a PayPal spokeswoman said.

Starting March 1, PayPal will cut the fund’s yield by one-quarter of a percentage point to help cover the costs of managing the money, the company said in letters sent to customers via e-mail on Monday. A copy was obtained by Reuters on Tuesday.

The change will make rival mutual funds more competitive with PayPal. The Fidelity Money Market Fund, for example, has a seven-day yield of 4.12 percent, according to the investment firm’s Web site.

“PayPal’s number one ranking might be in jeopardy,” Crane said.

PayPal declined to say how much money is in the fund, but Crane estimates that it has roughly $500 million. That is more than double the $221 million it had as of Dec. 31, 2004, according to a fund prospectus.

“As the fund has grown, PayPal has continued to pay the costs of administering the fund without any reimbursement,” the company said in its e-mail. “The fund will start to reimburse PayPal for a portion of its expenses -- which include legal, technical, compliance and advisory services and related charges that are customary for mutual funds.”

The yield cut will not completely offset PayPal’s costs for running the fund, PayPal spokeswoman Amanda Pires told Reuters. She said she couldn’t elaborate on the details of the expense structure.

Earlier this month eBay announced changes in the fees it charges to sell items on the Web site. It raised transaction fees on goods sold for between $25 and $975. At the same time, it cut fees on lower-priced items and some optional features available to eBay merchants.

The changes in auction pricing are likely to add to earnings, eBay Chief Financial Officer Rajiv Dutta said when they were unveiled on Jan. 18.

But PayPal spokeswoman Pires said on Tuesday that the mutual fund’s yield cut will not have a material impact on eBay’s financial results.

The PayPal Mutual Fund was launched in November 1999, the same year that the online payment processing service went live. eBay bought the company in October 2002 for about $1.5 billion.

PayPal Asset Management invests all its assets into another fund that is run by Barclays Global Fund Advisors.