NEW YORK (CNN/Money) -
A new rule by MasterCard blocking merchants from accepting credit card payments through third parties could hurt Internet merchants, according to a network document.
MasterCard is changing the rule that allows online retailers to accept credit card payments through such popular services as PayPal (PYPL: down $0.75 to $23.71, Research, Estimates), to protect financial institutions and card holders from fraud and identity theft, Gartner analyst Avivah Litan said.
Unless a settlement is reached, on May 1 retailers and other mom-and-pop operations that could not otherwise afford to participate directly in MasterCard's network could miss out on sales from the nation's No. 2 online credit card. Additionally, MasterCard holders could have a harder time using their cards at sites that use PayPal and similar services.
PayPal's (PYPL: down $0.75 to $23.71, Research, Estimates) shares fell 6 percent in Friday trading following news of the rule change.
"Effective 1 May 2002, MasterCard will clarify its rules to prohibit members from accepting or submitting into interchange a transaction that was submitted to the member directly or indirectly from a commercial entity that does not have a valid merchant agreement with the member," said the introduction of a MasterCard document entitled "Clarification of Rules for MasterCard Merchant Agreements."
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A MasterCard spokeswoman declined to comment on the document, but instead referred reporters to the following statement:
"MasterCard rules are designed to protect its cardholders, merchants and member financial institutions by ensuring, among other things, that all companies who hold themselves as a participant in the MasterCard system are entitled to do so. This requires that all MasterCard merchants have a valid agreement in place. It is MasterCard's policy not to comment publicly on specific rules and requirements."
Litan said credit card issuers like PayPal because it allows smaller, less well-established merchants to accept card payments by charging lower user fees than the networks. PayPal might charge a retailer 3 percent of its card payment revenue whereas MasterCard would charge double that.
However, once a company is on its feet and has been in business more than a year, MasterCard would prefer they drop PayPal and pay the higher fees that MasterCard charges, Litan said, adding that MasterCard has not made specific statements to that effect.
The rule change would force PayPal clients to contract directly with MasterCard.
"MasterCard banks are saying we don't mind companies going through PayPal, but once they build up a credit history...now is the time when they (MasterCard) want them to start moving into the banks," Litan said.
The biggest third-party system is PayPal, with about 13 million registered users, most of which are small Internet merchants or people who frequent auction sites, according to a report Friday in USA Today.
The change could also affect similar services such as Yahoo!'s Pay Direct and eBay Payments, Gartner's Litan said. The paper could not reach Yahoo! for comment. eBay said it would probably not be affected since its services work through Wells Fargo. PayPal said it is working to get an exemption.
PayPal spokesman Vince Sollitto told USA Today the company is "hopeful and confident" it will come to new terms with MasterCard.
Both Visa and American Express said they still accept PayPal. Amex also accepts one other service.
American Express spokeswoman Judy Tenzer said the firm plans to continue its relationship with PayPal because it allows card holders more flexibility and because Amex already has policies in place that limit exposure to risky ventures.
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