"Online Sales And PayPal"

By Bernd Schneider

It is my opinion that online stores should evaluate with care whether they should accept payments through the PayPal system. That PayPal may all of a sudden restrict an account and make received funds unavailable is an important but not the only consideration (as I have mentioned repeatedly, PayPal should verify clients' identities before accepting accounts, not after).

Another aspect to evaluate carefully is that clients who want to send money are burdened with much more effort than credit card transactions would be. Any CEO should try to run his or her own PayPal account before requesting clients to transact via PayPal.

I occasionally receive requests from corporations evaluating the use of PayPal, and I give advice to the best of my capabilities. I have received copies of mails of one CEO who discussed with PayPal the use of their payment system, with permission to quote them. I believe that these mails are an excellent source of information for other corporate executives contemplating the use of PayPal.

"Hi P. (PayPal employee),

"I thought it was only fair to let you know that we have decided not to implement PayPal payment method for the time being. We will remove the PayPal logos and "coming soon" from our web site asap. We have decided to continue to use an instant ACH check service instead which costs approximately $1.50 per transaction (vs. 2.2% + $0.30 for PayPal), which in our testing accounted for 10% of sales and had a 10% chargeback rate at $1 per chargeback fee. This service uses some forms of verification which are immediate, yet we see that 10% fraud still slips thru.

"Originally we thought that PayPal could provide a superior e-check with its ironclad verification system which makes 2 small deposits in the bank account which user must verify. And that we would be affiliating with a top-tier company which could only help our reputation. And possibly in the future another way to pay by credit card.

"Reasoning:

"1. A search at Google on "PayPal complaints", such as AboutPayPal.org, AuctionWatch, etc, reveals that PayPal gets far too many complaints for a financial entity. When it comes to a person's $, one doesn't want complaints. It is the kiss of death for any long-term business.

"2. For what we might gain in reducing the overall +1% chargebacks (10% of 10%) on ACH payment method, we could potentially lose in terms of affiliating with a complex system which is still in rapid state of change. Not to mention, I myself have been unable to get prompt phone support thru PayPal.

"3. The PayPal e-check is not immediate, which possibly could result in that we won't even get 10% sales thru PayPal e-check. It seems to me that in our model (no tangible product cost), the first funding should serve as the verification, instead of the delay to verify deposits.

"4. PayPal's IPN integration is poor and relies on a client-to-server POST to initiate the transaction. As well, the return fields can be specified in the client, which is a security hole that could in theory be hijacked and reveal customer data (not account numbers) to someone other than the seller PayPal indicates to the customer. Also we give control of the customer away to PayPal, for no real gain, since PayPal can't afford to support its own customers.

"5. It is not clear what the cost of, and the procedure for handling NSFs in PayPal e-check.

"6. We have some reason to believe that the porous instant ACH check serves as a release valve for our own merchant account credit card fraud (currently < 1%), at a lower cost of chargeback and no risk to merchant account relationship.

"7. Unlike the ACH vendor we will use, PayPal is a heavily leveraged company and has not yet developed a profitable business model. It is agreed that PayPal does not make a majority of $ on the float. We think PayPal will need to earn much more than 2% of transaction fees in future in order to recover for its investors. We base this theory on our knowledge of the cost of being an intermediary for high number of low volume clients using a flawed funding vehicle-- the credit card-- which was not designed for online payments. Western Union which supports credit card to cash payments charges a must higher percentage, i.e. $15 / $50 = 30%, so as to cover the support and fraud costs. It appears from review of info in public domain on internet, that PayPal is caught between either having to use "slash and burn" draconian anti-fraud techniques, or our theory is it will have to raise more revenue by using it's member list (whether that means selling products or services, or being bought out by a larger financial entity). In either case, we don't want to be a victim of the potential fallout. We've seen how much the @Home failure has cost us thru our customers, even we weren't affiliated with them in any way. Although our fees are advertised at 5%, our return will be much higher thru a clever twist, mutual beneficial for all parties, affiliate program that does not spam or other undesirable actions (not fully released yet). PayPal may indeed find a way to treat its members well and be profitable, but there is a risk to the downside.

"We wish you good luck. And I am hopeful we will revisit the PayPal Idea later to see if things have improved and solidified.

Additionally, I received the following explanation directly from the CEO:

"Your article helped convince us not to use PayPal to distribute payments globally at this time (further research reveals only 8 countries can reliably get their $ out of a PayPal account without spending it). And we did not plan (at least initially) to use PayPal for credit card payments, only their unique e-check which can verify an account electronically with deposits.

"One thing you may not understand is there is no way for PayPal to know whether a credit card is good until after the damage has already been done. Like any company that accepts credit cards online, they must use "heuristics" to try to filter out the fraud. Unfortunately by definition (look in the dictionary) a heuristic is never exact-- some innocent are misfiltered and guilty are not filtered. If you look at what PayPal is trying to do with credit cards, you realize the whole model is screwed up. How can you possibly reliably transfer $ using an unreliable black box as funding source? Their e-check funding is more reliable in USA, but only the USA has the ACH system for electronically crediting and debiting checking accounts in a reliable manner.

"So I can understand if you feel that PayPal is overly ambitious, but there is a huge demand for financial systems which do not currently exist in this world.

"IMHO, you would be much better off to try to understand the limitations of the world financial systems, and then try to work with PayPal within the risks you can tolerate.

"I sympathize with your funds being possibly unfairly restricted. But for one thing, on your site, you never stated what activity had occurred with your account which may have lead to the restriction. Without all the facts, your site is more propaganda than a useful resource.

Editorial note: To the best of my knowledge, my account was "permanently locked" because I had logged into this account from computers in Asia. I find this amazing, as I have been doing Internet banking for years, logging into my accounts from various countries. No bank ever told me that I couldn't log into my account from India, Indonesia, or Indiana.

I guess I am one of the few PayPal customers or former PayPal customers who has actually read their Terms of Use (you can spend an evening on it). I haven't seen any paragraph that would forbid logging into one's account from a country other than the country for which an account has been registered.

When they "permanently locked" my account, they said that it was due to a violation of their Terms of Use. But they never specified what part of their Terms of Use I violated. (I'm a peace-loving person; I hate violence, even when dealing with PayPal's Terms of Use.)

After several week, and with the help of this website, my funds were finally released.