EcommerceBytes-Update, Number 53 - November 03, 2001 - ISSN 1528-6703     3 of 6

PayPal: Not What It Used to Be

By Yisroel (Izzy) Goodman

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There are many payment services on the Net. Post a question about Billpoint, Paydirect or C2it, and you will get a few replies, some positive and some negative. Post a question about PayPal and you will get several pages of replies, with arguments that explode into personal attacks. What is it about this company that engenders such emotion?

PayPal was a pioneering company with a breakthrough idea: allow small-time sellers to pay for auction purchases using their credit cards. Because it was a much-needed service, millions of users quickly signed up. The $10 and $5 referral bonuses didn't hurt either. It became the single most widely-used service on the Internet.

However, many buyers have been brainwashed into thinking that a seller who accepts PayPal is safe to deal with, while a seller who does not accept PayPal is somehow suspect. Well, if PayPal is so fast, easy and safe, why don't some sellers accept PayPal payments?

PayPal was started by some young partners, inexperienced with the realities of credit card processing and too arrogant to listen to their customers. First they thought they could get away with stating that charge backs would not be allowed. When that didn't work, they came up with a buyer/seller protection plan that set up some ground rules to prevent abuse. When that didn't work, they decided to just pretend that it did and hope that no one would notice.

Newsflash: the thousands of folks scammed by abusers of this service did notice.

There were the buyers who paid using stolen credit cards. With a real merchant account, seller can validate the card and decide if it passes. Here, PayPal validates the card. The seller has no way to know if the card is fraudulent. If PayPal does a bad job, the seller pays the price. And if buyers contact their credit card company and dispute charges, again the seller loses.

But isn't this the same way that Billpoint and Paydirect work? Why do I consider PayPal worse?

Only PayPal gave a PROMISE of seller protection. PayPal terms state that if sellers followed a set of rules, they would be protected against charge backs. As PayPal failed time and again to keep this promise, they went back to their terms and added another loophole. Among the loopholes: Seller must prove shipping to the confirmed address.

But delivery confirmation does not show an address, and this argument was used to deny sellers their protection. Many buyers do not even show a confirmed address. The seller protection only covers fraudulent payments and buyer claims of non-delivery. And scammers quickly learned to make a claim of "quality of item" against which sellers are not protected.

But even after all this was publicly acknowledged by PayPal's representative on the forums, PayPal continued to send out letters stating, "Only PayPal protects you against charge backs."

While Billpoint and Paydirect will only take back a payment made from a fraudulent credit card or after a customer dispute, PayPal goes one better (or worse). If customer A pays customer B with a stolen card and customer B pays seller C with funds from their PayPal account, PayPal will take the money back from seller C. Seller C is not even aware that a credit card was used. He is completely unaware that there is any risk. Imagine your bank taking back a cash deposit you made because the person who gave you the cash received a bad check from a third party!

For buyers, the news is even worse. Unless they pay with a credit card and maintain their charge back rights, the buyer protection plan is useless. Among the loopholes: if the seller sends an empty box, buyer loses. If the seller empties their PayPal account (and any scammer would), buyer loses.

Then there is the growing problem of restricted accounts. PayPal used to restrict accounts as soon as a buyer reported one problem. After much protest, they began restricting only the specific transaction. Then they put in fraud detection software. Now the program restricts accounts that it flags as possibly fraudulent.

This wouldn't be a problem if PayPal emailed the account holder with the reason for the restriction and a phone number to call to straighten out the problem (as they promised me they would do about a year ago). There are reports of accounts that remained restricted for months. When an account is restricted, payments are still accepted into the account, which the seller can not claim or refund.

One problem with PayPal is its arrogance - only PayPal is arrogant enough to assert that it never makes a mistake. Every complaint I see on message boards gets a response from the rep that the problem is the poster's bank, credit card or ISP. It is never PayPal's fault. Just once I'd like to see PayPal admit they made a mistake and will fix it. But as long as they never admit to a mistake, nothing will get fixed.

The other big problem is false promises.

PayPal attracted folks with their promise of "always free." Their definition of "always" is not the same as the dictionary. Then they started a two-tier program of personal and business accounts, with personal accounts being able to accept $500 in credit card charges for free. When that didn't work, it became $100 a month.

PayPal's next promise, "We will never force you to upgrade." "Never" in PayPal-speak means until November, when even the $100 limit goes away.

Another re-definition of "never" is found in this statement: "We will never access your bank account without permission." As of this month, PayPal has now changed their terms to allow them to access your bank account to collect funds they believe you owe them. Though this currently only affects business and premiere accounts opened after October 11, the question has been raised repeatedly on the boards (and not yet answered): What about personal accountswhich convert to business or premiere? In any case, given PayPal's history of constantly revising their terms, who knows what terms they will change next?

Everyone has a different opinion about PayPal. If you have a PayPal story, or if you disagree with me, post a message in the AuctionBytes Services forum But I don't promise I'll agree with you.

NOTE: PayPal lacks FDIC protection. Here's an article that brings up the question, should PayPal be regulated as a bank?

About the author:

Yisroel (Izzy) Goodman owns Complete Computer Services Inc. and sells electronics and ink cartridges online. His Web site contains articles about creating web sites, using HTML and ASP, obtaining a merchant account, payment service ratings, and avoiding fraud. His informed opinions are based on his own experience and from reading about others' experiences with payment services as well as discussions with users, representatives of the services and experts in the field. (Note: He is not affiliated in any way, directly or indirectly, with any payment service.) He can be reached by email at

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