How PayPal Makes Money With Your Money.

By Bernd Schneider

Alternative headline: How Paypal makes money with my money.

I have been using PayPal for a few months. Initially, I have been under the impression that their services would be free.

I don't mind paying for financial services. I don't believe in an economy in which things are gratis to consumers. That doesn't work. I want committed suppliers of services. They have to derive a benefit from providing a service. Otherwise, the quality of their services will decline, or will not be much to start with.

I furthermore believe that businesses providing a service ought to make a profit out of providing their service. I want to be tied into a healthy economic environment.

I believe that, in principle, a capitalist system provides a healthy economic environment.

They have tried the opposite in communist Russia. Ideologically, they were based on the idea that everybody works to the best of his capabilities, and draws benefit from the society to the extent of his needs.

This doesn't work by itself. It has to be enforced. People will search for loopholes. So it has to be enforced even stronger. People will still try to get an edge over other equals. So you need dictatorship.

The economic success of the US, and the bankruptcy of communist Russia are proof that a capitalist, profit-based economic order provides the healthier economic environment. Sure, capitalism needs to be regulated to prevent those who are too smart to take undue advantage of those who have a harder time to compete. But this doesn't mean that the basic profit-based, capitalistic principle would be abandoned by regulating the conduct of competitors or businesses. Do we consent on this?

Now, here comes PayPal. Initially, so I (and many other people) had the impression, they offered something free. This did make me suspicious. Nobody can maintain a company and quality of service if everything is for free.

When I was told that I could pay charges, I immediately agreed. I am much happier when I know what a service costs. As long as I am told that it is free, I suspect that I will sooner or later be tricked.

Their charges were competitively priced, so I thought. I wasn't aware at that time that PayPal couldn't sustain their services on the charges they imposed.

Any business that loses money on the services they provide only has two solutions to its predicaments. One, they can find investors willing to provide more burn money (PayPal has been rather successful in this respect). Or, two, they can go for sideline businesses that do provide an income after all.

PayPal has found a way for that, too.

When you engage in financial transactions using PayPal and channel money into their system, it will take a while until this money will again be out of their system, even if everything is conducted orderly.

But in practice, because of their habit of locking ("restricting") accounts and then requesting their clients to enter a time-consuming process of providing documentation, money often remains in their system for a considerable length of time. My own account of 467.11 US dollars has been "permanently locked".

The impression they'd like the public to have is that they restrict accounts to prevent fraud. But actually, they derive profit from restricting accounts, and from keeping them locked for as long as possible. And YOU have agreed to this by using their website.

Just read the following excerpt from their Terms of Use (downloaded December 14, 2001):

"PayPal will pool your funds together with funds from other Users, and will place those funds in accounts at one or more FDIC-insured banks ("Pooled Accounts"). You agree that any earnings on the Pooled Accounts will be the property of PayPal, and you will not receive interest or other earnings on the funds that PayPal handles as your agent."

So, they take your money, and my 467 dollars, and put it all together in an account, or several accounts, with proper banks, and pocket the interest. You, and I, get nothing.

And of course, as PayPal is facing economic problems, the incentive to make money simply by temporarily or permanently locking customer accounts, and then collecting interest on the withheld amounts, is a considerable factor.

I am surprised that they get away with this. No bank or other financial institution would.

Damien Cave, in his excellent February 23, 2001 article on PayPal, published by Salon.com, wrote:

"Its terms of use emphasize that PayPal is 'not a bank ... not subject to banking regulations.'"

The wording as quoted above seemed to reveal too blatantly their business strategy. The line "not subject to banking regulations" is no longer part of their Terms of Use.

Instead, on the version I downloaded on December 14, 2001, the section reads:

"PayPal is not a bank and the Service is a payment processing service rather than a banking service"

I don't think that their lawyers, or whoever drafts their legal documents, are very good with words, so they regularly have to rework their writings.

The form letter from them that provoked me to set up this site stated:

"Following an investigation, this account has been permanently locked due to violations of our Terms of Use. This decision may not be appealed."

I guess they'll change the above wording, too, though it may take a while. There must be more elegant, and more polite, methods to tell a customer that his 467 dollars have been virtually confiscated by a virtual bank.

Ups, no, they aren't a bank. They don't want to be one, either.

As Damien Cave reported in the above-quoted article: ". while the company considered buying a bank charter last year, executives ruled against it."

Why? Quote Peter Thiel, a co-founder of PayPal: "The cost and regulatory burden was too high."

Damien Cave: "The paperwork and all the restrictions of law were just too much."

Yeah, if PayPal were properly regulated, they couldn't just park my money indefinitely on their accounts, and pocket the interest.

Damien Cave quoted Peter Thiel with the following additional enlightening statement: "Consumers didn't want another bank account, they want to move money."

Yeah, I would like to move money, my money. For example, from PayPal's pooled account to my own account. For that purpose, I don't really care whether they call themselves a bank or a pen pal club.

I have lost 467.11 US dollars to PayPal's scheming. I will probably survive the loss of 467.11 US dollars. But, to be honest, I don't want PayPal to survive on the kind of schemes by which they got hold of those 467.11 US dollars of mine.

[Update: after several weeks, and after having found their attention with this website, they unrestricted my account, and I was able to withdraw my money. Please see the subscriber section for tips on how to make PayPal release funds, or write to me for individual advice.