PayPal (NASDAQ:PYPL), just announced that it will increase its processing fees for U.S.-based merchants. Beginning Aug. 2, the rate per online PayPal or Venmo transaction is going up to 3.49% plus $0.49, compared to its current rate at 2.9% plus $0.30 for most transactions.PayPal's fees for Venmo QR codes and PayPal in-person transactions will not change. They will be 1.9% + $0.10 for transactions above $10 and 2.4% plus $0.05 if transactions below $10.PayPal stock rose after the announcement. Analysts praised the decision as an indicator of its pricing power. However, could this be a backfire? Could it make PayPal more vulnerable to competition?PayPal raised its processing fees.PayPal is the largest online payment network in the world. It is present in 202 countries, and can process payments in 25 currencies. Its active accounts increased 21% to 392million last quarter while its total payments volume soared 50%.PayPal believes its market dominance and the stickiness of its services to merchants gives it pricing power over competitors like Square (NYSE.SQ), Stripe, Apple Pay (NASDAQ.AAPL) Pay and Alphabet's Pay (NASDAQ.GOOG) Google Pay.PayPal also claims that PayPal users who choose PayPal to pay for their purchases are 60% more likely than those who don't choose PayPal. PayPal claims that consumers are three times more likely than others to make a purchase when PayPal is available at checkout.These claims are supported by PayPal's growth rates. As consumers and merchants used digital payments more throughout the pandemic, PayPal's adjusted earnings and revenue grew by 21% and 31% respectively in 2020.PayPal doesn't expect a significant slowdown once the pandemic is over. It anticipates that its adjusted earnings and revenue will grow by 20% and 21% respectively this year and that its active accounts will reach 430 million. PayPal is looking to increase its rates even though it's still firing on all cylinders.Could it backfire?PayPal's new rate, 3.49% plus $0.49 per online transaction, is the most expensive option for merchants. Square's Square e-commerce API allows businesses to integrate Square's payment services into their websites. However, it still charges 2.9% plus $0.30 for each transaction. Stripe charges the same rate.Apple Pay and Google Pay don’t charge merchant fees because they are "card present" transactions. However, merchants still have to pay the underlying credit cards swipe fee of approximately 1.3%-3.5%.These swipe fees are covered by Stripe, Square, and PayPal. This solution is simpler and cheaper than paying various swipe fees. Each of these competitors has its own strengths. Although Square is able to serve fewer merchants and countries than PayPal, its Cash App has grown faster than PayPal's Venmo market share in peer-to-peer payments. This is probably why PayPal did not raise its Venmo fees to pay in-person payments. These fees are comparable or lower than Square Cash App's. Stripe's code can be easily customized to individual apps, making them a popular choice for companies such as Lyft or Pinterest.Apple and Google can, however, both use their dominant position in the smartphone OS market to promote payment solutions. Loup Ventures reports that Apple Pay's activated users increased from 441 million in September 2019 to 507 millions in September 2020. Google Pay has 150 million users in 30 countries and recently launched new peer-to–peer payment tools.PayPal is the market leader in this area, but it does not have unlimited pricing power. PayPal might make some merchants switch to Square or Stripe or pay swipe fees for Apple Pay or Google Pay.The main takeawayPayPal is still a great long-term investment in the fintech market. However, investors should not automatically praise its price rise and assume that it will immediately boost its revenue or margins.They should instead keep an eye on the churn rate to determine if it was the right decision. PayPal stock could fall if it isn't. Its high forward P/E ratio, which is nearly 50, may be a sign that PayPal doesn't have the right business model.
