While we predominantly focus on the feedback aspect of online auctions, eBay’s recent feedback/fee structure announcement had buried in it one nugget that we just couldn’t stop talking about:

“In a small number of cases (fewer than 5% of all payments on eBay), PayPal will hold payment funds until either the buyer has left positive Feedback or 21 days have passed without a claim.”

This essentially creates an escrow account in which funds will be held until eBay (or more specifically PayPal) decides to release them.

Let’s put that in perspective. Based on a few assumptions:

1. EBay moves approximately $90M merchandise per day
2. Three quarters of all payments that eBay puts a hold on go the entire 21 days, due to buyers not leaving feedback in a timely manner (which happens all the time)
3. The weighted average interest rate on eBay’s investment portfolio is approximately 4.3% (from 3Q07 10Q)
4. Per the PayPal user agreement, eBay, and not the receiving party, is privy to any and all interest generated on monies in a given PayPal account

With these assumptions in mind, this “small” percentage of payments being held has the potential to be, on average, somewhere around $4.5M dollars/day. After the initial 21 day period, eBay will have a steady $70M in perpetual escrow. Applying the non-recoverable investment interest (that pathetic 4.3%) that eBay generates, on hijacked money mind you, over the course of a year eBay will have bilked sellers out of well over $3M in aggregate. Considering that eBay made somewhere in the neighborhood of $130-140M in interest income last year, the 2% increase that this $3M represents seems like this is going to hurt sellers a whole lot more than it will help eBay.

All in the name of making eBay a safer place…?

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