What do we know about PayPal?

Paypal remains a controversial payment system for several reasons. Websites like are built with huge amounts of data to back the controversy. Even within the DX system we have seen Pay Pal be on the list of recommended DX in One currencies and then suddenly it is turned off for reasons unknown to many of us. We believe that the reasons have to do with Pay Pal's fraud policy and the fact that it is backed only by US dollars and that it can be funded directly with credit, which presents a problem. Additionally, PayPal is the dominate payment method of its kind and by far the easiest way to connect the Internet to your bank account. In fact, this may be the problem that it is TOO easy to connect to your bank account to the Internet and is very insecure when you see how easy it is to retrieve a password.

The reason most people use the PayPal system rather than purchasing a merchant account is that PayPal is far less expensive to set up and allows you to send and receive money almost instantly. You are required to verify that you are a real person by providing a bank account and confirming that the account is yours by typing in the small deposits made by PayPal into your account. Usually it is between 1 and 25 cents.

But what are the pitfalls of using PayPal? We are not anti-PayPal, we just want you to understand more about how their business model works, so that you can make an informed decision about using their service. We hold the opinion that it is not wise to become dependent upon the PayPal service.

First of all, it is important that you understand PayPal is not a bank. PayPal's own lawyers have stated "PayPal is not a bank and the Paypal service is a payment processing service rather than a banking service". This comment was in response to the massive number of complaints that PayPal was locking peoples accounts when large amounts of in them. Part of the reason this happened frequently during the early days and occasionally still does- is that PayPal wants to prevent money laundering schemes and they cannot back up large funds with Federal Insurance. They have to use money from investors to guarantee your funds. Additionally, since PayPal can be funded by debt (credit card) there is a high possibility of fraud and fraud has run rampant through the PayPal system. They will not insure fraudulent claims and they are far more focused on protecting the CONSUMER, not the vendor.

Why do so many people have a grievance with PayPal? Usually the ones who are the most upset have received an e-mail like this: "Following an investigation, this account has been permanently locked due to violations of our Terms of Use. This decision may not be appealed."

This letter, (or one like it), is politely sent to people in order to explain that their funds, which can be anywhere from 400 dollars to 4,000 dollars has been confiscated by a virtual bank. When you get this letter, it means that you will almost certainly not get your money back.

There are ways to make sure that you do not get this kind of "Paypal letter of death". Make sure that you follow all kinds of procedures including faxing and sending in all required information. Red flags go up when you start receiving large amounts of money into your PayPal account.

There are those that say PayPal would only like to have us believe that seizing funds is "in your best interest" and that they are trying to control fraud. But it needs to be honestly admitted that PayPal does profit from such seizures in a big way- not only in the accrual of interest but in the absorption of questionable funds. They also make a strong point in letting you know that you agreed to such terms when you agreed to use their services:

"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."

In other words, the bank accounts that PayPal uses to "protect" your money and have it gain interest are not owned by you, they are property of PayPal. i.e. you have no ultimate say over what they decide to do with your money. This is a little misleading. As a result they do get away with practices that no bank in America would ever implement legally. By seizing funds, it is theorized that they can fund their huge volume of transactions without being fiscally accountable for the bottom line.

The real question is why did PayPal not simply become a bank when they had the chance? In early 2000 the company was considering buying a bank charter but decided against it. The reason may be because they would become far to regulated and accountable to the consumer for transactional seizures and inconsistencies. In other words they couldn't just park money and pocket the interest indefinitely.

Damien Cave reported the reasons why PayPal executives decided not to purchase a bank charter:

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

- Russell Wright, eCurrency.TV 

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