"We will now examine what market power PayPal has and to what extent online retailers are dependent on offering PayPal as a payment method," FCO president Andreas Mundt said in a statement.
Paypal is Germany's leading online payments service but also its most expensive, the regulator said.
The charges paid by sellers to use PayPal's service start at 2.49 percent of the payment amount plus 0.35 euros per transaction.
According to the FCO, traders are not allowed to offer their goods and services at lower prices if customers choose a cheaper payment service, nor may they express a preference for payment methods other than PayPal.
This could prevent rival services from entering the market, keeping the surcharges high.
In the end customers lose out, Mundt said, because "ultimately they pay for these higher fees indirectly through the product price."
New legislation in 2021 gave Germany's antitrust watchdog sweeping powers to take action against tech companies suspected of abusing their dominant market positions.
The FCO has also opened proceedings against Google, Amazon and Facebook.