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Scary PayPal Happenings

By June Campbell

“Sometimes, the money giant doesn't play well with others.”

"What's up with PayPal?" as Seinfeld would say.

Since its founding in 1999, PayPal has emerged as the largest and best-known "e-payment system," providing online money transfers and processing payment transactions for online sales. Some claim its goal is "world domination."

Despite its success, the money giant doesn't play well with others.

For those unfamiliar with the company, PayPal is a service that allows consumers to transfer money from a banking account, a PayPal money account or a credit card to anyone with an e-mail address—or to receive money from anyone with a PayPal account. The company also has agreements with credit card issuers to process online transactions for merchants selling goods and services online. Lastly, PayPal is a well-promoted payment option for eBay auctions and stores. (eBay bought controlling interest in PayPal in 2002.)

Before I move on to discuss the litany of PayPal complaints, I want to clarify that I have used PayPal intermittently for years, and I have never had a problem with the service. To date, everything has worked smoothly and as it should.

Not everyone shares my positive experiences.

EFTA Concerns

PayPal's legal problems started in March 2002, when two PayPal customers individually sued the company, alleging violations of the Electronic Funds Transfer Act (EFTA) and California law. Complaints revolved around PayPal's dispute-resolution policies, which committed the consumer to binding arbitration and forced them to file legal claims individually, foregoing the option of a class-action lawsuit.

The two lawsuits merged into a class-action lawsuit, settled in 2004. Although PayPal denied any wrongdoing, the settlement required the company to make its business practices EFTA-compliant and to pay $9.25 million to members of the class-action suit.

Consumer-Protection Laws

The dispute-resolution issue was far from being the only consumer complaint. In 2004, according to ConsumerAffairs.com, eBay's annual report confirmed that federal and state investigators were considering whether PayPal had violated consumer-protection laws. You can only imagine the scene at the annual general meeting, when shareholders were made aware of the legal issues facing their new acquisition!

After investigating, New York's Attorney General Eliot Spitzer found that PayPal misrepresented the degree of protection it provided its customers. The user agreement at the time stated that consumers had the same rights and privileges that they had in any credit card transaction. In reality, said Spitzer, PayPal and two credit card issuers (American Express and Discover) acted to deny consumers those rights.

Spitzer's office found that PayPal provided no recourse for customers attempting to process a "chargeback," or asking for billing credits against PayPal merchants who did not deliver the product or service that the customer paid for.

Although the federal Fair Credit Billing Act, as well as similar state laws, affords that protection for consumers using standard credit card transactions, a loophole allowed e-payment systems such as PayPal to slip through the cracks. Despite the user agreement's assurance of protection, when faced with a chargeback request against a non-delivering merchant, PayPal merely responded that it was a money-transfer system, and not a bank or an escrow company. "In other words, 'tough,'" wrote ConsumerAffairs.com.

Later, Spitzer's office reached an agreement with American Express and Discover in which both card issuers agreed to process chargeback credits to consumers who did not receive goods and services purchased through a PayPal merchant.

The state of New York wasn't alone in its concerns. In September 2006, PayPal settled a four-year class-action suit with the attorneys general of 28 states. The states were acting on a multitude of consumer complaints regarding PayPal's customer service policies. The complaints included accounts being frozen without notice, bank accounts being debited instead of charges going on credit cards as requested, and, as above, more complaints about the lack of refunds for items purchased online but not received.

Consumers also complained that the Web site was difficult to navigate, and that obtaining information about financial transactions was cumbersome and required clicking through numerous levels of hyperlinks.

In the settlement, PayPal agreed to pay $5.2 million to the customers and states to cover the costs of their investigation, to simplify its user agreement, and to provide more information about its protection programs.

Miffed consumers are not shy about speaking up. Anti-PayPal Web sites abound, including NoPayPal , AboutPayPal.org , and PayPal Warning . Posts at these sites allege, among other things, that PayPal is reneging on the terms agreed upon in the class-action settlement. One disgruntled PayPal consumer, Paul Bezaire, successfully sued PayPal in small claims court. His book, How I Sued PayPal (and Won) , is sold at Amazon. Bezaire makes his book freely available to any judicial officer upon request .

Although many of PayPal's competitors have closed up shop, various companies provide at least some of PayPal's services. I have not used any of these services, so I can neither endorse nor oppose them. BidPay is an alternative auction payment system, and is fully eBay-compatible. Wirecard offers various services, including the ability for customers to send money to each other in real time.

Moneybookers processes payments and money transfers via the Internet. 2Checkout is an authorized online reseller for more than 40,000 international Web sites offering a wide range of shipped products, downloadable products (such as e-books and software), and online services. It competes with PayPal and ClickBank.

As for PayPal, not everyone has complaints. The company's About Us page reports winning a number of awards, including the 2006 Webby Award in the Best Finance Services Site category. The Webby Awards are the People's Choice of the Internet. Site visitors cast votes for nominated sites.

According to Wikipedia, as of the end of 2006, PayPal operates in 103 markets and manages more than 133 million accounts. It allows customers to send, receive and hold funds in 17 currencies worldwide. "PayPal's total payment volume, the total value of transactions in Q4 2006, was $11 billion, up 36 percent year over year. The company continues to focus on international growth and growth of its merchant services division, providing online payments for retailers off eBay."

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