Antitrust Suit Claims PayPal Agreements Prevent Online Retailers from ‘Steering’ Consumers Toward Other Payment Methods [UPDATE]

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A proposed class action alleges PayPal has illegally wielded agreements with e-commerce retailers, including Home Depot, Best Buy and Kohl’s, to prevent the sellers from offering discounts or other price incentives to steer consumers away from the online payment platform and toward “more cost-effective payment solutions.”

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The 34-page antitrust lawsuit states that to accept PayPal, an online retailer enters into a contract with the platform that strictly prohibits offering price discounts when a consumer uses a non-PayPal method of payment. The case claims that PayPal, since at least 2017, has used its merchant agreements to effectively keep merchants locked into using the service, including by preventing them from so much as expressing any preference for other payment options in their online storefronts. 

“Merchants must present PayPal as an entirely neutral option when, in fact, the economic consequences of clicking PayPal at checkout are significant and adverse,” the filing asserts, noting that Visa, American Express and MasterCard were once sued by the Justice Department for imposing similar “anti-steering” rules on merchants. 

Without PayPal’s anti-steering rules, the suit says, a merchant could competitively price transactions by the cost of a selected payment platform, thereby allowing a customer to secure a discount at checkout when using a platform that charges lower fees. Such discounts are “foreclosed” by PayPal’s merchant agreements, which essentially set a price floor for millions of products consumers can buy with payment methods other than PayPal, the lawsuit says.  

Per the suit, a merchant who violates PayPal’s anti-steering rules will be penalized by the platform. 

“If a merchant lists a price of $50 for a product purchased with PayPal, that merchant can charge no less when the consumer uses an alternative means of payment. The merchant could not, for example, reduce the list price of products purchased with other payment methods, or provide a rebate at checkout when non-PayPal means of payment are selected. Any such discount would be treated as a ‘surcharge’ on PayPal transactions and forbidden as such under the Anti-Steering Rules.” 

According to the lawsuit, PayPal’s anti-steering provisions also “substantially insulate” the company from normal price competition on the transaction fees they charge merchants. Without the rules in place, the suit explains, online sellers would be “incentivized” to steer shoppers toward PayPal alternatives that offer more competitive pricing. Without the threat of steering, the case says, payment platforms lack incentives to compete with one another. 

“Protected by the Anti-Steering Rules, PayPal, as the dominant platform is incentivized to raise transaction fees above a competitive level, and competing platforms can gain little from undercutting PayPal,” the suit expands. “After all, if you are a platform competing with PayPal, why charge significantly less if merchants cannot reward you by steering transactions in your direction.” 

An effect of the foregoing is higher merchant transaction fees industry-wide, yet average consumers ultimately pay the price, the lawsuit says.

“In short, merchants do not pay the cost of PayPal’s Anti-Steering rules—consumers do,” the complaint reads, noting that when payment processing fees go up, merchants raise prices to remain profitable. 

Another “antitrust injury” stemming from PayPal’s alleged conduct is the inability of merchants to convey pricing information consumers need in order to make “a free and informed choice between payment alternatives,” the case goes on. Under PayPal’s no-steering rules, a PayPal merchant cannot nudge consumers away from the service by “conveying simple economic facts,” e.g., that PayPal charges “industry-high fees that inflate prices,” the suit shares. 

As a result, consumers are left to choose between payment alternatives with little knowledge as to the economic consequences of their selection, the filing states. 

Overall, the lawsuit calls PayPal’s anti-steering rules “a naked restraint on price that serve only to reduce competition,” and a prime reason why consumers have been overcharged for more than a decade. 

The lawsuit looks to cover all persons who, at any time since October 5, 2019, used a payment method other than PayPal to make a purchase in the United States from a U.S. e-commerce merchant that accepted PayPal as one means of payment. 

According to the complaint, more than 400 million consumers have a PayPal account, and nearly one million e-commerce websites in the U.S. accept PayPal as a payment method. 

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