EcommerceBytes-NewsFlash, Number 275 - March 13, 2002     3 of 3

FDIC Tells PayPal It Is Not Covered under FDIC Act, PayPal Is Not a Bank

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Online payment service PayPal Inc., which recently went public, said that the U.S. independent deposit insurance agency that oversees the nation's financial system declared that PayPal is not a bank or savings association for purposes of the Federal Deposit Insurance Act. The FDIC said that when PayPal acts as an agent for its customers and places funds into an FDIC-insured institution, those funds would be insured up to FDIC limits. However, the PayPal Money Market Fund is not covered by FDIC insurance and is not guaranteed by any bank. (Investors should also understand that the fund may lose value.)

According to PayPal, the company had requested an opinion from the FDIC that it is not taking deposits for purposes of the Federal Deposit Insurance Act. The FDIC Legal Department noted that because PayPal is not a bank or savings association for purposes of the Federal Deposit Insurance Act, it would not address the request. PayPal does not want banking status because it would mean additional regulation by each state in the union.

The FDIC Legal Department did say that, in effect, when PayPal acts as agent for customers and places PayPal customer funds with well-capitalized FDIC member banks, those funds will qualify for federal deposit insurance up to $100,000 per customer, per bank, in the event of a failure of a bank at which the funds were placed. (Note that PayPal funds may be aggregated with other funds held by a customer at the same bank.) This "pass-through" insurance for customers does not apply to funds that PayPal customers choose to invest in the PayPal Money Market Fund, to liabilities of PayPal itself, nor if PayPal was deemed by the FDIC not to be acting as an agent for its customers. PayPal said it will continue its applications for state money services licenses where appropriate.

The Federal Deposit Insurance Corporation's mission is to maintain the stability of and public confidence in the nation's financial system. To achieve this goal, the FDIC has insured deposits and promoted safe and sound banking practices since 1933. More information about the agency may be found at

PayPal has more than 14 million member accounts, including more than 3 million business accounts. In 2001, PayPal processed over $3.5 billion in payments. Based in Palo Alto, California, PayPal is available to users in 37 countries including the United States. Further information about the company can be found at

About the author:

Ina Steiner is co-founder and Editor of EcommerceBytes and has been reporting on ecommerce since 1999. She's a widely cited authority on marketplace selling and is author of "Turn eBay Data Into Dollars" (McGraw-Hill 2006). Her blog was featured in the book, "Blogging Heroes" (Wiley 2008). Follow her on Twitter at @ecommercebytes and send news tips to

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