How Pay-Pal Squeezes Merchants with Unfair and Likely Illegal Business Practices
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When Andrew Sauter decided to start taking online credit card payments for his small business, he didn’t think twice about PayPal, the dominant Web-based money transmitter in the United States.
A subsidiary of the auction giant eBay, PayPal bills itself as “the faster, safer way to pay and get paid online” and “the world’s most loved way to pay and get paid.” There are 103 million active PayPal accounts, and in the third quarter of 2011 alone the company processed $29.3 billion in payments. According to a February Reuters report, 59 of the top-100 American e-commerce sites use PayPal.
With PayPal, Sauter was able to process credit card transactions quickly and at reasonable rates. And it was easy to sign up for, perfect for his growing company, which designs Facebook marketing campaigns. More importantly, customers demanded it.
In exchange for the service, Sauter paid 2.2 percent of each transaction to PayPal, along with a $30-per-month fee, totaling about $5,400 over the life of the account. For four years, everything worked.
But when he checked his account on September 3, he found an unwelcome surprise. Instead of the nearly $2,600 he expected, his available balance was only $192, with $2,399 listed as “pending.” PayPal was reserving 30 percent of the value of each of his transactions for 90 days. The reserve was applied retroactively, creating a sudden cash-flow problem that threatened to shut him down or force him to take on expensive and otherwise-unnecessary loans.
What followed for Sauter mirrors the experiences of many other merchants who rely on, and reward, PayPal to make their businesses function: a battle with an opaque corporate bureaucracy marked by frustration, desperation and dead-ends. With the help of the Illinois Department of Financial and Professional Regulation, Sauter, who lives in Chicago, would eventually get his money and compel PayPal to withdraw its reserve permanently. He also joined Zepeda v. PayPal, an ongoing class-action lawsuit representing, according to one of the principle litigants, more than 1,800 plaintiffs in similar situations.
PayPal insists that its reserves policy is a risk-management tool that benefits consumers, an untold number of whom will use the company’s payment tools to buy gifts this holiday season. By zealously policing merchant activity, PayPal hopes to retain its most vital resource: shoppers’ trust. As long as shoppers want to use PayPal, merchants feel they have little choice but to offer it.
Their stories reveal how PayPal takes advantage of its indispensability and its customers—and how a legal apparatus that ignores real harm empowers it to do so. Backed by finely crafted disclaimers, the “faster, safer” online transactions company seizes merchants’ funds and refuses to tell them why.On the basis of eBay's 2010 Annual Report and statements from PayPal representatives, there is good reason to suspect that the company not only protects itself with that money, but also invests it for its own gain. And in the process, it may violate state laws.
PayPal didn’t invent seller holds and reserves. As the company describes them, they serve a purpose much like escrow; a way to ensure fair dealing between buyers and sellers. And credit card processors routinely withhold portions of some merchants’ funds in order to protect themselves from chargebacks.
Say you’re in Michigan, and you use your credit card to buy a gold coin from an online seller in Florida. He sends you a nickel, or he sends you nothing at all. You’ll want your money back, and if the seller refuses, you can request a refund through the credit card processor. If the processor agrees that fraud has occurred, it will initiate a chargeback, hounding the seller for the refund by imposing penalties and taking legal action against it.