The Problem with PayPal

UPDATE: PayPal has been acquired by Ebay. The jury is still out about whether this will make the management and service of PayPal better or worse, but I have noticed much fewer "PayPal horror stories" in the message boards these days, so it could be that they've cleaned up their act to some extent. Reports still are, however, that their customer service remains obtusely bureaucratic and hard to get straight answers from (as, in fact, Ebay's own customer service has always reportedly been). Ebay's reputation tends to be that of a company that is more interested in preserving and extending its own profits and covering its corporate butts against all possible liability rather than providing cooperative and understanding service to its clients, but at least that's a notch above PayPal's reputation of actively putting the screws to its users. Thus, I remain guardedly optimistic, but still cautious about doing any sort of business with PayPal unless I absolutely must. However, I finally broke down and ended my own boycott of PayPal by beginning to accept payments that way from affiliate programs that insist on using it; so now that I've got a PayPal balance I'll probably also use it on Ebay and places like that... so I guess now I've been assimilated...

PayPal seems like a great idea at first -- a service that lets people and businesses transfer money to one another, quickly and easily, over the Internet. It's especially handy for online auction sales, where the sellers are often not the sorts of large, well-organized businesses that can easily get merchant accounts to accept credit cards, and the buyers are often distrustful of providing their credit card information to an unknown seller anyway.

But there's a down side too. When PayPal zoomed to prominence in the online payment service business through a highly successful "viral marketing" technique where its users themselves are enticed to spread the word about the service, it granted the company in charge of it an enormous degree of power over the money and online transactions of Internet users, and this power has often been used to the detriment of the users.

PayPal seems great -- until they screw you. A growing litany of "horror stories" (see links below) shows what can happen when you wind up on the wrong side of PayPal. They are well-known for freezing people's accounts with the flimsiest of reasons, or no reason at all, and making the customer go through a Kafkaesque bureaucratic nightmare to regain access to his/her own money. I've heard enough that I'm not at all eager entrust one cent of my own money to them.

Even if they don't screw you royally, they're putting the screws to all of their customers in a milder way. When they began, they claimed that they'd always be entirely free of charge to consumers, since they intended to make their profit from the "float" of money in the time between payment and withdrawal by investing it (as banks do with deposited funds). However, like so many dot-com schemes, this proved unable to provide a sufficient source of profit, so they went back on their word in a "bait-and-switch" scheme, steadily imposing more restrictions and limitations on consumer-level accounts to get customers to switch to the pay-for-service business accounts, and finally imposing fees on credit card payments no matter what sort of account they're done through. Now, charging fees for service is not immoral by any means (after all, they're in business to make money), but attracting millions of customers on the basis of it being an entirely free service and then yanking it out from under them is likely to make people feel let down.

If PayPal were just a run-of-the-mill company with poor service, it wouldn't bother me so much; I'd just take my business elsewhere. But their "viral marketing" was so successful that they've reached a point of ubiquity that puts people who refuse to use that service at a disadvantage. A large and growing number of Ebay auctions show PayPal as the only accepted means of payment (even though Ebay themselves endorsed a competing payment provider, BillPoint -- however, now that Ebay is acquiring PayPal, this is changing). Many Web sites seeking voluntary contributions, including funds to assist legal action by disgruntled consumers who were screwed over by other companies, use PayPal as their primary payment method, either not providing any alternate means, or doing so as a well-hidden afterthought. And many affiliate programs won't pay off by any other means than PayPal. This means that anybody who can't or won't use PayPal -- whether on principle, or because they're not allowed to because they live in a country that PayPal doesn't support (they refuse to allow their site to be accessed by residents of certain countries because they think most people there are scam artists) or their account was frozen by PayPal's bureaucracy -- is out of luck if they wish to purchase, contribute to, or receive affiliate payments from such things.

Much of the problem with PayPal, and ironically much of their success, derives from their basic method of operation. Other payment services like Billpoint and C2It require both sender and recipient to be enrolled in their service before a payment can be initiated -- both parties have account information on file with the payment service, and when the payment is requested, the funds get withdrawn from the sender's (bank or credit card) account, and deposited in that of the recipient. The funds don't stay under the control of the payment service except for a very brief period when they are in transit.

On the other hand, PayPal works differently. It maintains a running balance for each of its users, from which payments can be removed or added. They are thus acting like a bank, except that they're not subject to any of the standards of the banking industry (whether imposed by government regulation or simply traditional industry practice), which have evolved over centuries to ensure the security and integrity of bank accounts. PayPal has the typical "dot-com company" attitude that holds that they can make up the rules as they go along, which makes for a very unstable base on which to place your trust and money. Because of the running-balance system, some PayPal users have thousands of dollars deposited with them, either because they do large volumes of online business or because they just haven't gotten around to withdrawing accumulated funds (or are purposely keeping them in PayPal so that they can make future payments from this balance). Many of these users are unaware that there is nothing stopping PayPal from suddenly freezing their account and cutting off their access to their own money, perhaps just when they need it most.

Another PayPal "feature" is the ability to send a payment to somebody who is not yet a member. You can address a payment to any e-mail address, and are encouraged to do so by PayPal's marketing and by its sheer ubiquitousness in the online auction community. To actually cash in on the payment, though, the recipient must complete the sign-up process with PayPal, jumping through whatever hoops PayPal might have added (such as divulging all sorts of personal information). This was a key part of the "viral marketing" technique that got so many people "hooked" on PayPal; a lot of people who otherwise would have no desire to sign up with such a service felt compelled to do so because they had money coming to them that they could only retrieve by signing up. As PayPal became increasingly popular, many online users started assuming that anybody selling things online accepted it, even if they made no mention of it (and, in fact, sometimes even when they explicitly stated that they did not accept PayPal). It had reached the same sort of "blind assumption" stage among the unsophisticated masses as the belief among AOLers that "everybody" uses AOL (when actually it's a really awful proprietary online service and you'd be better off getting a real ISP account elsewhere), or the belief among users of Microsoft software that it's the only way to access the Web or e-mail (it isn't; try Mozilla for browsing and Pegasus for e-mail, for an alternative view), or that all domain names end in .com (see my Domain Name Site). This sort of thing always hands an untoward degree of power to those in charge of whatever proprietary thing is being assumed as "the standard".

Because they made it so easy to join PayPal and to be the recipient of PayPal payments, in order to get their user base up in the millions rapidly, they inevitably had a large problem with online fraud. The way they dealt with this is the cause of much of their problems -- they had to be hyperactive in freezing accounts on the merest suspicion of fraudulent activity. They run all activity through some sort of complex algorithm that rates the chance of fraud, and if you score too badly on this hidden scale, you lose. Some things that one might do for perfectly innocent reasons, like using a post office box as your mailing address, accessing your PayPal account while on a vacation or business trip overseas, transferring larger amounts of money than you did in the past, or even having your e-mail address in your own domain name instead of a "normal" thing like aol.com or yahoo.com -- can be used against you in this scoring process. For instance, I somehow wound up at the bad end of their scoring system (despite having a very good credit rating) and for a long time was not allowed to use a credit card with PayPal. (Eventually, years later, they finally let me add a credit card to my account.)

Once your account is frozen, you find yourself facing "customer service" ranging from indifferent to actively hostile. Their corporate culture is to assume that anybody whose account is frozen deserves it and is probably a con artist, so they don't make it easy to convince them otherwise. They hide their contact phone numbers, prefering to deal with customers by e-mail so that they can ignore them or respond with irrelevant form replies. If you do get them on the phone, anybody you talk to will be unauthorized to do anything to actually resolve your problem, so you'll just get empty platitudes. About the only way anybody can actually get their account unfrozen is to complain publicly on an online message board, which usually eventually brings out a guy named Damon who seems to be the only PayPal employee who actually shows a sign of caring about the customers -- his job seems to be to do "damage control" by calming down irate customers who post publicly about their stories, and nudging his company's bureaucracy into fixing their problems which would otherwise fall through the cracks. His hands are still tied by company policy, though, so he sometimes can't resolve an issue even when the spotlight has been shined on it -- once some nameless functionary at PayPal decides that a customer is a deadbeat, even by mistake, it seems to be beyond the power of anyone on heaven or earth to reverse it.

PayPal has also attracted a large number of "cheerleaders" -- people who support and defend them in online forums against the disgruntled consumers who recount horror stories against them. These people buy the party line that problems are always the user's fault, but sometimes they change their tune when they, or a friend of theirs, gets screwed by PayPal.

I guess about the only good thing I can say about PayPal is that they put up with the large amount of negative commentary about them on message boards without threatening to sue their critics, like some other companies do. But it would be even better if PayPal would fix their deficiencies so that they could be a service we all can wholeheartedly endorse.

The Problem with PayPal

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