PayPalWatch

A number of international PayPal account holders have been reporting glitches in which they have been unable to accept or deny payments without first obtaining a US-based bank account. Account holders have expressed confusion regarding new web pages which contain this recently added requirement in order to complete transactions.

In a recent post on an eBay thread one frustrated PayPal user based in Malaysia complained, “This is new…this page ask(s) me to add a US bank account for protection????…Why can this suddenly appear?? I obviously don’t have a US bank account so how am I gonna skip this and receive the payment??”

If the number of question marks used in a query can be used as a gauge of the presence hypertension, it certainly appears that at least the above Malaysian PayPal user deserves a good backrub, courtesy of PayPal staffers. Wasn’t the whole point of PayPal to provide easy money transfers to clients anywhere in the world? How come globalization always seems to get reduced to spreading US interests around the globe?

It may be worthwhile to note that PayPal is owned by Internet giant eBay. eBay purchased PayPal in 2002 for $1.5 Billion. Since becoming a part of eBay, PayPal has experienced significant growth. It’s user base has expanded 36% and the company now has 143 million accounts. The name PayPal may sound cute, but it’s evolved into the big kid on the block in Internet payment processing. If you thought that by using PayPal to process your Internet payments for that funky t-shirt you were somehow aiding the growth of some young scrappy start-up company, think again.

So, shouldn’t increased responsibility come with increased influence?
PayPalSucks.com thinks so.

Besides offering various moans and groans regarding eBay’s acquistion of PayPal and other companies, PayPalSucks.com offers all sorts of details regarding a 2002 Class Action law suit against PayPal by disenchanted PayPal users. PayPalSucks.com suggests that by using PayPal you expose yourself to assorted unnecessary risks, including losing your money unjustly.

Great. It’s always good to have this type of useful consumer information available on the Internet. However, it’s old news. From 2002, mostly, with mild reoccurances in 2004. What would be useful, in 2007, are practical alternatives to using PayPal.

And what does PayPalSucks.com offer as its “Readers Choice Top PayPal Alternative”? Click on it and you are taken to what appears to be a paid link for big name credit cards. Some alternative.

Close to two years ago, one of our corporate PayPal accounts was frozen. It was of course a very frustrating experience. In this post, however, I’d like to take a look at the issue from both the business-owner side of things, and from PayPal’s side.

PayPal’s Side - Risk Algorithms
Scam artists can take advantage of the PayPal system in the following way: One partner opens an account and receives a payment of $20,000 from his partner. He immediately withdraws that money from his PayPal account, the partner then does a chargeback on the payment. The money is no longer in the first partner’s account, by now he has taken it out and given half to the second partner. They are now $20,000 up and PayPal is $20,000 out of pocket. This is the hidden danger in PayPal’s system. To defend against this possibility PayPal institutes what they call risk algorithms. What the risk algorithm does is flag any accounts, especially new ones, that have large amounts paid into them over a short period of time. Unless these accounts have a proven record of being reputable, the money in these accounts is liable to be withdrawn in the way stated above. Therefore, we can see that to protect itself PayPal needs to institute some kind of system for limiting damage caused by such scams.

Business Owners Side - Frozen Accounts Lose Business

If a business owner deals in tangible goods, he will need access to payments coming in to cover the initial costs of those items. Anything which prevents the business owner from accessing those funds will cause trouble all the way up the supply line and fairly quickly he can find himself in deep trouble. There is a real danger of business failure from a suddenly frozen account. People have lost businesses and even their homes due to frozen PayPal accounts. Even if the consequences are not as severe as that, a customer trying to pay for a product via PayPal and greeted by a frozen account warning is not likely to do business with that company again. Frozen accounts cause customers to lose trust, even in the business’s only fault is having a successful company. Thus, the mechanism PayPal uses to protect itself can have drastic consequences for PayPal customers.

Solution:

I’d like to offer two possible solutions to this dilemma that would offer protection for both PayPal and business owners.

1. PayPal needs to keep on top of chargebacks themselves. Instead of punishing their clients for customer fraud, if PayPal hired the extra staff required to watch chargebacks and prevent the above mentioned scams, business owners who’ve done nothing wrong would be protected. This can only increase loyalty to PayPal.

2. Implement a system similar to that used by 2checkout. Hold a percentage of all funds in reserve for 90 days or longer. This offers protection both to PayPal and the business, in that the business owner still has access to funds required to keep the business running and PayPal would be protected against the chargeback scam.

Implementing either or both of these suggestions would offer protection to all parties involved and make it more difficult to scam the system. Why hasn’t PayPal instituted something similar already?

Hat tip to v7n.

Wikipedia’s current PayPal page reads like an advertisement!

I recently paid a visit to the PayPal page of Wikipedia. Looking at the bottom of the page, I was surprised to see that there are no longer links to either PayPalSucks, PayPal Warning or About PayPal. According to the discussion page, the rationale for removing these sites is that they are classified as ‘attack sites’. Now, according to Wikipedia’s Requests for Arbitration page, an attack site is one that “… engages in the practice of publishing private information concerning the identities of Wikipedia participants…” it is not one that criticizes private corporations for unethical practices. Especially one who’s ethical and legal inadequacies have been well documented in US courts of Law.

Take for example PayPal’s user agreement. U.S. District Judge Jeremy Fogel had this to say about it when offering his ruling on it’s legality, “Having considered the terms of the User Agreement generally and the arbitration clause in particular, as well as the totality of the circumstances, the Court concludes that the User Agreement and arbitration clause are substantively unconscionable under California law …”.

“Substantively unconscionable under California law “, this is a judge talking here, not a disgruntled customer out to take revenge. There are legitimate complaints to be made against PayPal. Websites that gather these complaints and keep watch over practices deemed unconscionable are not attack sites. PayPalSucks.com describes itself as ‘…an anti paypal site to expose the nightmare of doing business “the paypal way.”‘ Comparing sites like PayPalSucks or AboutPayPal to websites which give out personal information in attempts to terroize individuals is unconscionable.

To make matters worse let’s take a look at how these links were removed from the Wikipedia page in the first place. Former eBay “code cop” JP Gordon took it upon himself to claim that these sites were “attack sites” and delete them from the page. His justification seems to be that these sites cross the line from criticism into insubstantiated defamation. I would argue conversely that by removing these links he is contravening Wikipedia’s guidelines on undue weight. Sure, PayPal supporters should be free to catalog the companies good points, but by the same token the company’s short comings merit just as much space on the page.

Hat tip to John Scott

Emails which lead unwitting users to fake PayPal and eBay sites then entice users to enter credit card data are threatening consumer trust says eBay CEO Meg Whitman. Security expert Michael Sutton reports that more than 50% of all phishing activity is targeted at either eBay or PayPal.

In an effort to combat this epidemic eBay has teamed up with Microsoft to create blacklists of sites which mimic the look and feel of PayPal and Ebay. Microsoft’s newest version of their web browser Internet Explorer 7, includes new functionality which enables it to filter out phishing sites. Whitman has urged other browser makers to add similar functionality to their products.

Other efforts being made by eBay and PayPal to combat phishers are the use of ‘domain keys’ on all emails which act like digital signatures, as well as introducing a new PayPal key fob which generates security codes which are then used along with customers passwords. These new efforts are hoped to stem fears of distrust which are created through phishing scams.

PayPal today announced details of a new partnership with ecommerce platform provider Warp 9.  With this deal PayPal is added to the roster of eccommerce sites powered by Warp 9’s services including www.magellans.com and www.wolfermans.com among others. The deal will also see Warp 9 receiving residual revenues from transactions conducted through PayPal.

Warp 9 will be integrated into all of PayPal’s online products including their most popular service Express Checkout, as well as Website Payments and Payflow Gateway. Warp 9 will also be added to PayPal’s partner directory upon full integration of their technology.

Warp 9’s current services include an Internet Commerce System, Virtual Catalogue System, Email Marketing System and Virtual Magazine System. The company’s CEO says he is excited about the new partnership which will offer new payment options to their clients, who currently transact around $100 million in online sales.

eBay and PayPal have recently been in talks discussing a possible limited bank charter signing which would allow the company to take on some of the properties and responsibilities of a commercial bank.  Such a move would free both companies from the necessity of creating partnerships with banks.

The possibility of such a move though has run into some heavy obstacles following similar applications recently made by both Wal Mart Stores Inc. and Home Depot Inc.  There has been fierce opposition to the ownership of private banks by commercial businesses making the topic politically unpopular.

PayPal’s current status is a deposit broker,  which means they must hold their deposits in an actual bank, which means banks are making money which PayPal hopes to keep for itself.  As the FDIC has yet to receive an application from PayPal the matter remains undecided.