PayPal Shuts Down Merchant Money Market Fund

PayPal announced today that on July 29, 2011 it will be shutting down its money market fund for balances held by its merchants. The money market fund currently holds approximately $471 million and has returned a whopping .05% so far this year. That's down from over 5% in 2006-2007. I remember that PayPal had one of the highest money market fund rates in the country.

Here is the message sent to PayPal customers who have money in the fund:

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Email

Hello XXX,

Thanks for using PayPal and the PayPal Money Market Fund. Unfortunately, we’ve decided to close the Money Market Fund, effective 7/29/11.

What does this mean for you? PayPal will transfer any undisbursed dividends you’ve earned into your PayPal account within 7 business days after we close the fund. Don’t worry; you don’t have to do a thing.

Your 2011 tax documents will continue to be available on the Fund Summary page in your PayPal account throughout 2012. You’ll receive a tax statement from PayPal only if you’ve earned $10 or more in dividends in 2011.

Money market funds are different from money market accounts. Fund are not insured by the FDIC and invest in mainly short term Treasuries and other highly liquid, generally stable notes. They received some noteriety during the financial crisis when several ran into trouble because of investments in Lehman Brothers and broke the buck. That essentially means they lost money and investors were short cash they thought was safe.