EcommerceBytes-NewsFlash, Number 2697 - December 16, 2011     1 of 5

PayPal Holding Your Funds? State Regulators Want to Know

By Kenneth Corbin

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For many eBay sellers who use PayPal to process payments, holds of up to three weeks (or in some cases, even longer) are simply a reality of doing business.

PayPal generally explains the policy of holding funds as a response to transactions that are associated with risk or buyer disputes, though sellers often complain that the holds occur in situations where neither condition is in play. Moreover, critics of the policy have maintained that the holds are commonplace to the point of routine, occurring far too often to be explained by suspicions of fraud.

What many sellers may not know is that they can seek redress from state regulators if they feel the holds are unfair.

"If people feel that they have undue delays the best and the quickest way to find out why or how is to write a letter to their state regulator," said Joseph Rooney, assistant commissioner with Maryland's Office of the Commissioner of Financial Regulation.

According to Rooney, every state but two - South Carolina and New Mexico - has a law governing money transmitters, a broad classification that includes financial institutions such as money order and travelers check services, as well as online payment outfits like PayPal.

Many of those statutes cap the period of time that money transmitters can hold onto payments before releasing them to the recipient.

In California, for instance, where PayPal is headquartered and registered as a money transmitter, section 1841 of the state's Money Transmission Act reads:

"Every licensee or its agent shall forward all money received for transmission or give instructions committing equivalent money to the person designated by the customer within 10 days after receiving that money, unless otherwise ordered by his or her customer."

Alana Golden, public information officer at the California Department of Financial Institutions, explained that the hold period provided in the statute is "meant to protect the consumer against non-delivery by sellers."

Other states have similar provisions. In Florida, for example, the law requires that licensed money transmitters "shall, in the normal course of business, ensure that money transmitted is available to the designated recipient within 10 business days after receipt."

An eBay seller in that state shared his experience with Ecommerce Bytes. The seller, who claims a 100 percent feedback rating with no history of major complaints, received word from PayPal in October that funds owed him would be held for 21 days. In response, the seller appealed to the state attorney general's office. About two weeks later, PayPal contacted the seller, saying that it had conducted a "second review" of his account, and the funds were released.

"Bottom line: anyone that has a hold placed on their account, should take a few minutes to do some research, see if they have a leg to stand on, and complain to their state agency/agencies. It does work," the seller wrote.

The relevant portion of PayPal's user agreement is section 10.4, in which the company stipulates its right to place holds on funds linked to transactions that have been deemed risky or disputed by the buyer:

"If PayPal places a hold on any or all of the payments you receive PayPal will provide you with notice of our actions. PayPal will release the hold on any payment after 21 Days from the date the payment was received into your Account unless you receive a Dispute, Claim, Chargeback, or Reversal or PayPal has taken another action permitted under this Section 10. PayPal, in its sole discretion, may release the hold earlier under certain circumstances, for example PayPal may release the hold earlier if you have uploaded tracking information. If you receive a Dispute, Claim, Chargeback, or Reversal, PayPal may continue holding the payment in your Account until the matter is resolved pursuant to this Agreement."

PayPal gives itself a wide berth in its terms with language such as "in its sole discretion," terminology that the company has used to defend itself against legal challenges, including a pending class-action suit in California.

Jennifer Hakes, PayPal's senior manager of corporate communications, declined specifically to address the potential conflict with relevant state laws. "PayPal works closely with state regulators to ensure that it satisfies consumer protection requirements, including the timing required to transmit payments," Hakes wrote in an email.

Rooney, the Maryland assistant commissioner, said that complaints against money transmitters are exceedingly rare - his office received just one in all last year. He also had not heard of the issue of 21-day PayPal holds.

"We wish we knew of more problems," he said. "We want people to file complaints but we don't get any."

The state laws governing money transmitters are in place to protect consumers, rather than businesses, he explained. That means that businesses struggling to win prompt release of their funds might not find recourse with state authorities.

It's a different story with small sellers, however, whom sympathetic regulators might be inclined to assist just as they would consumers. For Rooney, the breaking point would be whether the aggrieved party was an LLC.

"Any customer or the recipient can file a complaint with its state. What we would do with that complaint is send it PayPal and say, 'Can you give us the specifics on this?'" he said. "If they didn't we would question why did they put the hold on this."

The extent of state authority over PayPal varies by statute, and is further complicated by matters of interstate commerce, where the federal government holds jurisdiction. Moreover, since the money transmitter laws are intended as consumer protections, not all of PayPal's practices are subject to state regulation.

However, in matters where state authorities have standing, regulators have several tools at their disposal to pressure companies to resolve complaints. In Maryland, for instance, Rooney's office has subpoena power and the authority to levy fines ($1,000 for the first offense, $5,000 for each subsequent infraction). Additionally, violations of the state's money transmission law can be prosecuted as criminal offenses, potentially resulting in jail time for a guilty party, though Rooney acknowledged that such cases are exceedingly rare. If the subject of a complaint does not cooperate with an investigation, it runs the risk of losing its money transmitter license.

Rooney was the immediate past president of the Money Transmitter Regulators Association, a group representing state regulatory authorities, and currently serves as the organization's treasurer and sits on the board of directors. The MTRA maintains a list of links and contact information for the departments of financial regulation of its 44 member states and the District of Columbia.

Each year, the MTRA's Joint Examination Committee, in partnership with the Conference of State Bank Supervisors, subjects every registered money transmitter to a review.

"We examine PayPal every year," Rooney said, adding that he would raise the question of the extended holds to Maryland's delegate to the committee when the company next comes up for review.

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About the Author
Kenneth Corbin is a freelance writer based in Washington, D.C. He has written on politics, technology and other subjects for more than four years, most recently as the Washington correspondent for, covering Congress, the White House, the FCC and other regulatory affairs. He can be found on LinkedIn here .

About the author:

Kenneth Corbin is a freelance writer based in Washington, D.C. He has written on politics, technology and other subjects since 2007, most recently as the Washington correspondent for, covering Congress, the White House, the FCC and other regulatory affairs. He can be found on LinkedIn here.

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