One of my colleagues recommends me to take a look at PayPal debit card, which boasts a generous 1.5% cash back on signature-based purchases. Is it too good to be true? I have been using PayPal for a while for my eBay purchases so I am more than eager to see if my PayPal account can drive some additional benefit for me.

I dig into the PayPal site to get some more details, only to find out that one needs to pass out a number of criteria before he can taste the 1.5% juicy cash back.

First, one needs to be US-based, verified PayPal Premier member and be with PayPal for at least 60 days to be able to get a PayPal debit card. It does not seem to be difficult -- Premier member upgrade is free and there is no annual fee; the only catch is for Premier members, receiving funds from someone else is subject to a service fee of 2.2% - 2.9% + $0.30 per transaction.

Second, getting a PayPal debit card does not automatically qualify you for the 1.5% cash back. In addition, one needs to be "PayPal Preferred" before the 1.5% cash back will kick in. And in order to become "Preferred," there are another bunch of criteria, like to maintain an eBay account, to list an item in eBay every three weeks, and to advertise PayPal as the only online payment service on eBay listings.

Apparently I will not benefit from the deal because I am not an active eBay seller. If someone is a frequent seller, read on for more warnings:

First things first, credit card transactions provide more benefits than debit card transactions. Most importantly, transaction dispute, interest-free spending for a month (good to responsible spenders) and additional insurance protection. (See a detailed discussion in my previous post.)

Second, although PayPal provides transaction dispute too. PayPal is not a financial instituion and is therefore not regulated. I noticed the site PayPalSucks.com offering the most comprehensive information as of why transaction thru PayPal is risky.

I have to admit the 1.5% is a marketing coup to increase eBay profitability. In summary, eBay is profiting from a number of ways:

1) By requiring Preferred members to list at least one item every three weeks, eBay is essentially assured of an annuity-like income.

2) By assessing service fee on all receipts of Premier members, it earns 2.0+% fee on even the debit card/checking account payments. (This echoed my observation that when I used PayPal to pay for eBay bids, by default the money will come from my linked checking accounts unless I manually change to credit card every time.)

3) 1.5% cash back is better than the commonplace 1.0% cash back from most credit card offers, but PayPal offers less protection in dispute and users lose the protection from regulations on banking industry.

4) For users to effectively use the debit card functions, he/she needs to deposit to PayPal first and keep a meaningful balance. PayPal only pays at 1.0% interest compared to much better offers like 2.15% from VirtualBank (which I am a member). PayPal then earns interest on the free float.

So in conclusion, for me, PayPal Debit Card is definitely a no-go.