The days of eBay's (NASDAQ:EBAY) PayPal reigning supreme as the top-yielding money market fund in the country are numbered. Just 29 days remain before PayPal will stop absorbing expenses to its popular short-term savings vehicle, dropping its yield by 25 basis points.
Going from 4.3% to 4.05% -- based on this morning's prevailing PayPal rate -- may not seem like much, but it means that other online rivals such as EmigrantDirect, FedFirstDirect, and HSBC will lap it to claim the top yield.
According to yield rate monitor Bankrate.com (NASDAQ:RATE) -- a Motley Fool Rule Breakers stock pick, incidentally -- all of those funds offer yields better than 4.05%. Like PayPal, there is no minimum requirement to open a fund.
I'm still amazed that folks with any kind of significant liquidity rely on their banks to grow their money market balances. My neighborhood Wachovia Bank (NYSE:WB) pays a pitiful 0.25% interest rate, despite the countless Fed rate hikes that have taken place over the past two years. To be fair, that's the yield on a Wachovia account with check-writing ability -- something most of these high-yielding vehicles don't offer -- but it's still a wide divide.
According to Bankrate, the average money market fund yielded 2.91% this past week. The yield on interest-bearing checking accounts averages a significantly weaker 1.18% return on idle funds.
This couldn't have been an easy decision for eBay to make. Yes, the company had been swallowing the administrative costs, but PayPal also takes a cut on its more active accounts as money gets swapped all over the Internet. That's gravy for PayPal; it charges an average of 3.67% on its PayPal-related transactions, even though its transaction processing expense is just 1.09% of the virtual monetary swap.
PayPal is growing faster than eBay's auction business. It's also commanding an imposing headcount. eBay had 71.8 million active accounts at the end of 2005, while PayPal watched over 96.2 million accountholders (with 28.1 million of those active this past quarter). Come March, it won't be commanding the sweet spot on top of the money market fund rankings, and while 25 basis points isn't going to send anyone scurrying away, PayPal may find prospective short-term investors hooking up with the higher-yielding alternatives.
eBay has been the quintessential Motley Fool Stock Advisor newsletter recommendation. I'm sure it thought this decision through, and the rate hike certainly won't be greeted with the same kind of rebellious rumble eBay gets when it raises its rates for marketplace listings. However, it's still a gamble for PayPal, even if I seem to be the only one shaking my head at the moment. The silence can be deafening.
Interested in short-term interest investments? Our Savings Center may be just the ticket for you.
Longtime Fool contributor Rick Munarriz is a satisfied eBay user with 159 positive feedbacks to show for it. He does not own shares in any of the companies mentioned in this story, and he is a member of the Rule Breakers analytical team, seeking out the next great growth stock before it takes off.
