PayPal Closing Its Money Market Fund

PayPal will be closing its money market fund. I just noticed yesterday that it's closed to new customers. On PayPal's website they state "enrollment is closed". PayPal customers have also reported receiving a PayPal email saying that the MMF will be closed for existing customers effective July 29, 2011. I sent PayPal an email asking about their money market fund, and I received this confirmation:

We are ending the money market fund. The Money Market Fund will be closed, effective July 29, 2011. No one will earn any dividends after 7/29.

More details on this closure are provided in this AuctionBytes blog post.

PayPal has long offered a money market fund where customers could keep their cash and earn some interest. Back in 2007 and before, money market funds were reasonable alternatives to savings accounts with yields comparable to internet savings accounts. However, in the last few years, money market fund yields have fallen even more than saving account rates. Below is a comparison of yields between PayPal MMF and ING Direct Orange Savings account. With a current yield of only 0.05%, this change at PayPal isn't going to have much effect on customers.

Date    PayPal MMF ING Direct Svg
6/2011:    0.05%     1.00%
1/2011:    0.12%     1.10%
6/2010:    0.14%     1.10%
1/2010:    0.08%     1.30%
6/2009:    0.12%     1.50%
1/2009:    1.39%     2.50%
6/2008:    2.33%     3.00%
1/2008:    4.64%     4.10%
6/2007:    5.04%     4.50%
1/2007:    5.03%     4.50%

These PayPal MMF yields are inline with yields of other money market funds. For example, Vanguard Prime Money Market Fund has a yield of only 0.04%.

Safety of Money Market Funds?

Unless you're using the money market fund as a temporary holding account for your trading, it makes more sense to have that money in a savings account or money market account instead. Not only will it be earning much more interest, it will also be covered by FDIC deposit insurance (NCUA if it's at a credit union). Note, money market funds are different than money market accounts.

There were growing concerns on the safety of money market funds back in 2007, and in 2008 during the financial crisis, a money market fund did "break the buck".

There are renewed concerns about money market funds due to the Greek debt crisis. Investors have been removing money from "prime" or non-Treasury money market funds which have exposure to foreign banks. The worry is that a Greece default could have the same effect that Lehman Brothers' bankruptcy did.