Sending money through telegraphic transfer (T/T), or paying by letter of credit (L/C), is slow and relatively complicated.
The wrong beneficiary name, or even address, can delay the payment for weeks, and there is no effective way to request a refund in case you get scammed by a supplier.
So, why aren’t more importers using payment services such as PayPal, that can send money instantly to suppliers – while also offering the chance of getting the money back if the products are not matching the specifications?
Keep reading, and learn why many suppliers refuse to accept PayPal payments, and what you can do to change their mind.
1. Most suppliers only accept PayPal payments when ordering product samples
PayPal is available to both businesses and individuals in both Mainland China and Hong Kong. Opening an account only takes minutes, and is as easy as anywhere else on the planet.
Yet, many Chinese suppliers, both factories and trading companies, don’t accept payments via PayPal.
Why is that?
First, it’s a matter of old habits.
Most suppliers are accustomed to the established payment methods, such as telegraphic transfer and letter of credit – while they are quick to dismiss newer payment methods.
The suppliers that do accept PayPal payments tend to restrict it to sample invoice payments only. As such, most suppliers don’t accept PayPal payments for larger orders.
2. The transaction fee and currency exchange rate is considerably more expensive (compared to wire transfers)
There’s a reason why suppliers think twice before accepting PayPal payments from their overseas customers.
Actually, there are three reasons:
a. The transaction fees are relatively high, normally at around 2.4 to 3.4%
b. The supplier must pay a 2nd currency exchange rate fee (2 – 3%), when converting the money from USD to Chinese Yuan (RMB). While they must pay a currency exchange fee to their bank as well (in case they take payment by T/T), it’s lower compared to the one charged by PayPal
c. And last, the supplier must pay US$35 each time they send money from the PayPal account, to their bank account.
For a transaction of US$1000, or less, the fee only amounts to US$40 or 50.
However, the fees quickly add up, when the order value is counted in the thousands of tens of thousands of dollars.
As a matter of fact, the PayPal fees are often higher than the average supplier profit margin.
With this in mind, it’s not hard to understand why suppliers refuse to accept PayPal payments.
If you still insist on paying through PayPal, you should accept to cover all transaction and currency exchange fees – counted at around 7% per order.
3. On the flipside, PayPal offers more protection than wire transfer (T/T) payments
If you do a standard wire transfer (T/T) to your supplier, there’s no way you can get your money back – unless you take your supplier to court. And win.
There is no way for your bank to order a refund from the Chinese supplier, and there’s no way the supplier’s bank can make a forced withdrawal of the funds.
This is not limited to China. This is a risk you face regardless of where in the world your supplier is located.
PayPal, on the other hand, controls both ends of the transaction.
If a supplier sends you damaged or defective products, or no products at all, you can open a dispute with the supplier.
If the supplier fails to provide evidence to prove that your claim is wrong, PayPal will review the case – and move the funds back to your account.
Hence, PayPal offers an extra layer of security, not offered by the established wire transfer network.
That said, PayPal can only issue a refund from the suppliers account, if you can prove that your claim is correct.
This requires planning, as PayPal cannot make an arbitrary decision.
For example, a refund cannot be based on your perception of good quality. Instead, you need to prove that the supplier failed to send the correct products.
4. So, how do I make sure that I get the order terms right?
Your supplier can create a PayPal invoice, and add all necessary information, and even add document attachments).
A few examples follow:
a. Provide images that show defects and/ or damages
b. Add product information, attachments and order terms to the invoice (or, well, instruct your supplier to do so).
PayPal cannot make a decision based on information outside of their own system. As such, you need to make sure it’s all covered on the PayPal invoice.
PayPal may review emails and other documents, but what will happen if your supplier claims that those are fabricated?
I doubt that PayPal has the resources to dig that deep into each case.
5. What kind of information do I need to include on the invoice?
The following must be specified on the invoice, or an attachment to the invoice.
- Product name
- Product description
- Quantity
- Material
- Labels
- Safety standards
- Packaging requirements
- Photos
- Production time
- Shipping terms
- Incoterms
Keep in mind that PayPal was initially created as a payment platform for Ebay auctions, and then evolving into a payment gateway for B2C ecommerce.
PayPal can simply review the supplier’s product listings, and check if the product was delivered – when they resolve disputes.
However, business transactions, especially when involving manufacturers and buyers in different countries, are far more complicated.
Hence, PayPal cannot simply review a website or check a tracking ID when making a decision.
Notice that such terms can only be added to a PayPal invoice. Hence, the supplier must create the invoice inside their PayPal account, rather than requesting a standard transaction, only based on an email address.
Good helpful info to have Fredrik, thanks.