• Jun 24, 2011, 3:27 PM

Why It's Time to Move Your PayPal Balance

Investors in online payment site PayPal's money market fund will soon have to find somewhere else to stash their cash.

PayPal, a unit of eBay, filed forms with the Securities and Exchange Commission Thursday announcing its intention to shut down the fund, which allowed PayPal accountholders to invest money from their accounts at a rate of $1 per share. As of Thursday, the fund held a collective $471 million and had returned 0.04% to investors so far this year. PayPal is no longer taking new shareholders for the fund, and will redeem all shares to current shareholders' regular site accounts by Aug. 1 if they don't cash out sooner.

"Due to market conditions, financial advantages of the money market fund have diminished for our customers," said a PayPal spokeswoman. Advantages for the company have diminished, too. Although the fund's 0.04% return placed it among the top retail money funds, according to iMoneyNet, PayPal was running the fund at a loss to maintain positive returns for its investors. (While the fund shows a 0.22% expense ratio, its expense ratio before the waivers was actually 0.87% last year.) It's a problem plaguing the entire money market industry amid low interest rates that rarely eclipse fees, and declining assets as consumers move money out of such funds and into FDIC-insured accounts.

PayPal's fund closure is beneficial for shareholders, who weren't getting the best deal anyway, says Greg McBride, the senior financial analyst for Bankrate.com. "Now you can go put it somewhere where it can earn something," he says. "You're giving up more than a full percentage point [in interest] relative to a bank savings account." The top online savings and money market accounts are offering upwards of 1.10%, and some high-yield checking accounts up to 6% interest for consumers who can meet requirements such as a regular direct deposit and a set number of debit card purchases each month.

PayPal account users who didn't invest in the fund aren't affected, but it's a good nudge for them as well. At the end of the first quarter, consumers kept roughly $2.6 billion in interest-free bank accounts with the site. (The customer agreement you sign lets PayPal pool your funds to place in FDIC-insured accounts and collect the interest.) With quick transfers from a linked bank account, there's little reason to keep much more in your zero-interest site account than you need for planned purchases, McBride says.

Ari Weinberg contributed to this article.