How Pay-Pal Squeezes Merchants with Unfair and Likely Illegal Business Practices
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But if the seller lacks sufficient funds to refund a customer, skips town, or has gone bankrupt—an increasingly likely possibility in the economic downturn—the processor is on the hook. Though PayPal isn’t strictly a processor, it too faces such liabilities and understandably tries to mitigate them.
So it places “rolling reserves” like Sauter’s on the accounts of merchants it deems risky. It may also hold the entire contents of accounts for up to 180 days.
It’s not clear how many accounts are affected. In a June 2009 post on PayPal’s official blog—the only public communication from the company about merchant reserves and holds outside its user agreement—a former PayPal risk analyst writes, “We’re requiring reserves for a very small percentage of our sellers—currently less than 1%.” Assuming that figure has held stable, there could be tens of thousands of merchant accounts held or reserved at any given time, receiving millions of dollars withheld by PayPal.
According to the company, there must have been something dicey about Sauter’s business, though PayPal is unwilling to disclose the nature of its risk analysis. In an email spokesperson Jennifer Hakes said the company considers a number of factors when deciding to place a hold or reserve, such as the seller’s credit rating, the number and frequency of customer disputes, the type of business a seller runs, and average delivery timeframes.
In his four years doing business with PayPal, Sauter had never had a chargeback or customer complaint; he’d never made a late payment to PayPal or violated the user agreement. His business was expanding steadily, not fluctuating wildly, a possible red flag. When he attempted to figure out which risk factors applied in his case, he was stonewalled. “I didn’t get very far” with customer service, he said, “I talked with one 'supervisor.' His name was Chris.”
Hakes offered that PayPal does “communicate with sellers when they may experience a hold or reserve, to the extent we can without revealing proprietary risk modeling information.” In practice that communication is extremely limited and, in the cases of the merchants interviewed for this article, amounted to little more than “canned responses,” as Brian Pattee, a Georgia-based eBay seller and participant in the class action suit, described it.
Sauter emailed PayPal’s accounts vetting department, vice president of operations, chief financial officer, office of executive escalations (a kind of advanced customer service), senior director of accounts protection, appeals department, communications department, and others at the company. When his complaint at last reached the office handling reserves, he was told to try again in a year, though there was no guarantee the account would be reviewed. Even at this stage he was told nothing about why the account had been reserved or why PayPal intended to keep it that way.
It was much the same story for Jamie Pflughoeft, a Seattle-based photographer who specializes in pet portraits. When asked about her experience with PayPal, she said she “can’t talk about it without getting bitter or angry.”
Pflughoeft (pronounced “flew-hoff”) wasn’t always so disgruntled. For six years, she happily used PayPal without incident. She ventures that, on top of her photography business, the 12 workshops she and her partner have run for aspiring shutterbugs grossed an average of $40,000 each, every dollar transacted through PayPal and subject to its fees. “They’ve made a good chunk of change off my business, for sure,” she said.
On May 26, 2010 Pflughoeft noticed that her account had been hit with its own 30 percent, 90-day reserve, resulting in an inaccessible pending balance of $1,567.33. PayPal’s rationale—protecting itself against chargebacks for unshipped or unsatisfactory merchandise—made little sense to Pflughoeft, whose business provides services at the point of sale. “There are no refunds on a service once it’s performed,” she explained, “it’s very straightforward.”