Ars Technica reported yesterday that PayPal increased their fees in June as part of a routine upgrade and failed to make this change transparent to its users.  What is interesting about PayPal’s fee change is that it affects all personal account users. You’d think a sweeping change would be clearly communicated to these users, but it apparently was not. In fact, as Ars Technica reports, the announcement was made via a “formal notice” that was really legalese buried behind the login wall at PayPal.com.

PayPal responded to the customer backlash by sending out their PR manager Charlotte Hill. Hill told PC World, “We didn’t want to make a huge formal communication out of this pricing change, because we weren’t really adding any fees, and we were hoping it would be a more useful experience for people.” As you can imagine, that comment only fanned the flames especially since fees were actually added.

You might be thinking to yourself; What was the change PayPal wasn’t entirely forthcoming about? That is a good question.

Under PayPal’s previous system the account type and where the payment was coming from played a big role in determining the fees charged and who they were charged to. Premium and business account owners were charged 30¢ plus 2.9 percent of the transaction. This fee applied to all accounts. It didn’t matter whether the money was coming from a credit or debit card instead of a PayPal balance or directly from a bank account.

Personal account holders, on the other hands, could make all of these payments to anyone else for free. In that sense, PayPal was just like Mastercard, Visa, AMEX and others where the merchant pays a fee to accept credit cards and credit card users do not pay any per transaction fees to transact on their cards.

PayPal amended their user agreement in June to allow premium and business account holders to make personal transfers to friends and family for free.  That was welcome news for all of PayPal’s premium and business users that also use their PayPal accounts for personal payments.  However, PayPal failed to clearly mention that any transfer having to do with goods or services would be charged the 3o¢ + 2.9 percent fee no matter who or where it is coming from.

So what does this really mean?

Well, it really just means that sending money to friends and family is free (to settle meal tabs, etc.), as it has always been, but personal account holders who do sell goods and services on occasion will be charged the same per transaction fee that business and premium account holders are charged for those transactions.

This really isn’t all that bad of a change.  Sure, personal account holders will now incur some fees they hadn’t incurred before but they will only incur these fees if they sell goods or services (money transfers that don’t involve any “commercial” elements are still free).

What is bad about this situation is the way PayPal (didn’t) inform users.  Had PayPal been transparent about this change they still would have received flak. After all, anytime anyone starts charging for something that was once free, backlash soon follows.  However, if PayPal chose to be more open about the change and to explain it clearly to all its users the backlash would have been much less severe.

The payments industry needs to start becoming more transparent and forthcoming if it expects to satisfy its users. PayPal, being the innovator that it is, really should be one of the leading firms in the move to openness and transparency.