Paypal Takes Heat for Customer Service

The article notes two soon-to-be class action law suits against Paypal. If you are not familiar with Paypal, it is a company which provides a way for people to pay one another online, extracting a small fee from the seller in the process. It's primary function is enabling one person to buy something off another using a credit cards when that seller has no way of accepting credit cards. In this way, Paypal (and services like it) have gone a long way to enabling online auctions.

With over 13 million registered users, Paypal is by far the most popular third party payment service. With that popularity has come a bit of notoriety. Recently, Paypal has had to fend off a rash of attacks. The latest two come in the form of class action lawsuits, alleging that Paypal's customers service is substandard, noting cases in which Paypal customers have had their accounts (and money) frozen for lengthy periods of time.

These lawsuits follow other bad news for Paypal, including attempts by MasterCard to completely squeeze them out by blocking third party payments. MasterCard argues that this is new policy will "protect financial institutions and card holders from fraud and identity theft." It would force anyone who would like to take a payment with a credit card to get a merchant account (rather than piggy backing on Paypal's). Unfortunately, this just isn't practical for most people.

Much of Paypal's trouble arises from the fact that Paypal is not a bank, as the FDIC recently determined. Paypal is consequently (and controversially) exempt from the federal and state laws which regulate banks. The FDIC noted that "PayPal does not physically handle or hold funds placed into the PayPal service." Well, if that is true, I have to wonder who exactly holds the money when an account is frozen? Better yet, when a seller receives money into their Paypal account, who is holding it if not Paypal?

Regardless, right now Paypal is cheering the FDIC decision. However, the FDIC contends that "It's really a state issue....They [the states] are going to have to come to their own determination under state law." This could spell very bad news for Paypal as the popularity it now enjoys is partly do to its ubiquity. A Paypal buyer can purchase something using credit cards, debit cards, bank accounts, etc. with little to no restrictions on the locality of either the buyer or seller. If, however, the states begin instituting their own individual laws, this could change dramatically.

So, while Paypal looks like the leader now, the future may favor Paypal's competition. Services like eBay Payments (formerly Billpoint) and C2It (owned by Citibank) "play by the rules," so to speak, as they already follow banking regulations. Furthermore, they are intimately tied to financial industry giants Wells Fargo and Citibank, respectively. Paypal, in contrast, appears to have very little clout in the industry.

As a sort of aside, it is important to note that as in most things, I'm fairly biased. :) My own experience with Paypal has not been overwhelmingly positive. I chose to donate money to an organization using Paypal. I created a personal Paypal account and donated a small sum of money using a credit card. No problem. Everything went smoothly.

However, the next time I used Paypal was after I had bid on and won an item in eBay. The seller specified that I pay with Paypal. No problem, I thought, I've already used Paypal once. This should be easy. But it wasn't.

Paypal would not even let me log into their site unless I gave them my bank account routing number. They didn't explain why they needed this information or even what they were going to do with it once they had it. I felt like I didn't have a choice, though, since I had already bid on the item in eBay and the seller was waiting for his payment.

So, I gave them the information they demanded, logged into the site, and paid the seller with my credit card. Paypal has never touched the bank account so I can only assume that having access to my bank account is some kind of "insurance policy," though I am still waiting for a response from them on the matter.

Regardless, consumers and, in particular, auction sellers love Paypal so its near term success seems guaranteed.

-ben


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