Amazon.com has, as expected, revealed the details of its new payment service in a lengthy, meandering blog post. Don't bother reading it: The geeks in Seattle take forever to get to the very sharp point. The short version? Jeff Bezos is planning to plunge a long knife right into the heart of eBay CEO Meg Whitman's most important growth business, PayPal. Here's the secret of how the eBay-owned payments service mints money — and how Amazon.com's founder is crafting a boldly savage plan to gut it.
PayPal, the eBay-owned payment service, makes money in various ways, but the core of its profitability lies in this trick: It charges merchants the same fees to process credit-card transactions as it does bank-account debits. Bank-account debits cost a fraction of a penny to process, while credit-card networks like Visa and MasterCard charge vastly higher fees. And PayPal's website is designed to make bank-account debits the default choice.
Amazon's new Flexible Payments Service is not a PayPal clone, like Google Checkout. Instead, it's a back-end service that programmers might embed in their websites. But they key difference between FPS and PayPal is that Amazon plans to pass on the true costs of each type of transaction. That would let clever merchants save 2 to 3 percent on each transaction by copying PayPal's trick of charging full freight for a cheaper money transfer. The difference would be that they'd capture the savings, instead of handing them over to Whitman and Co.
Passing the savings on to merchants won't make much money for Jeff Bezos. But with no payments business to protect, he's got nothing to lose. And weakening eBay in online payments makes it harder for eBay's auctions to compete with Amazon.com's online stores. Despite being seven years late to the payments fight, Jeff Bezos may still get the last laugh.