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How Pay-Pal Squeezes Merchants with Unfair and Likely Illegal Business Practices

A class-action suit charges Pay-Pal with some shady practices that leave small businesses in a jam.

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What does PayPal do with the money it withholds? Beyond furnishing legitimate refunds, the high reserve percentages and long withholding periods provide the company capital it could build on, and money transmitter licensing laws are no obstacle to investment.

There is ample reason to believe that this is precisely what PayPal is doing. Alongside fees that customers know about, eBay’s “other revenues are derived principally from interest earned on certain PayPal customer account balances” and two unrelated sources, according to the annual report.

The report does not elaborate on which account balances are invested, and Hakes neither confirmed nor denied whether PayPal invests the earnings it denies merchants. However, since merchants are required by the user agreement to turn over interest on held accounts, it is fair to assume that their accounts are among the “certain” few.

In addition to boosting PayPal’s revenue, the refusal to pay interest to merchants may encourage PayPal to crack down on accounts less carefully than it otherwise would. “If PayPal had to pay a rate of interest that was not trivial, that would also give it an incentive to not impose a reserve except in cases where it really thought a substantial risk existed,” said Todd Rakoff, a contracts and administrative law expert at Harvard Law School.

Yet even if PayPal is not exploiting merchants for its own gain, many sellers are undeservedly and negatively affected by the company’s hold and reserve policies.

“This is just [PayPal] abusing their position of power,” Sauter said, echoing a message found on countless blogs and Web sites, such as, and the official PayPal and eBay forums. Pattee is convinced that “the ones who made them who they are are getting stomped on.”

Lack of transparency and any meaningful internal appeals process forces accountholders to seek redress through government agencies and the law. But the law, at least, seems to be no ally. PayPal’s user agreement protects the company in a manner that subjects even merchants who play by the rules to a range of real harms that the law ignores.

PayPal’s brief responding to the plaintiffs in Zepeda is a stark indictment of the law’s capacity to respond to injury. The company deflects every charge without disputing the substance of plaintiffs’ complaints. For example, no credence is given to the accusation of deceptive marketing, even though PayPal’s product descriptions are intended to convince merchants to sign up for services that frequently turn out to be vastly different from those advertised. PayPal argues as though the actual experience of harm is of secondary importance to a legal system swayed not by real events, but by legalistic interpretations of them.

Given that the plaintiffs’ lawyers chose not to respond to PayPal’s brief and have instead entered into settlement talks, it appears PayPal’s understanding of how the law works—call it cynical, call it realistic—is on safer ground than its customers’ accounts.

Correction: A previous version of this article stated that PayPal has been operating with an expired license in Tennessee since April 15, 2011. PayPal's Tennessee license expired in April and was retroactively renewed in October.

Simon Waxman is managing editor of Boston Review. His work has previously appeared in the Boston Globe, McSweeney's, and elsewhere.

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