Tuesday, January 4, 2011

Should you use PayPal? Maybe

PayPal has made it a lot easier to send and receive money from eBay.  But like anything else, there are plusses and minuses.  At the very least, PayPal is not as horrible as it was in the bad old days.

Many folks are unsure whether to use PayPal.  Others hate it or have had bad experiences with it.  I have had a horrible experience with PayPal, back when it first started.  But over the years, they have gotten better, and it is pretty indispensable if you are going to eBay a lot.  And increasingly, it is an easier way to buy things from other online websites and also to send and receive money.

What was my horrible experience with PayPal?  What is PayPal exactly?  And should you use it?  Let's take these one at a time.

Before eBay acquired PayPal, it was one of those Internet Start-up companies, and like most Internet start-ups, they were sort of making rules as they went along, which lead to a lot of problems.  I signed up for the service, as it seemed an easy way to pay for things and receive money on eBay.

They also claimed that you could accept credit card payments through PayPal, and this seemed like a cheap and easy solution to a need I had to accept credit card payments from customers.  However, as it worked out, it was not the solution I had hoped for, and I ended up getting a merchant account anyway.

How PayPal accepted credit cards is interesting.  They have a merchant account for accepting credit cards.  A merchant account is not easy to obtain, unlike a credit card.  If you have one, you can accept credit cards for payment, and after a day or so, the money is deposited to your bank account.  I have a merchant account through epaysecure/transfirst, and it costs about $25 a month, plus a percentage of each transaction, from 2-5% depending on the transaction.

What PayPal did was "farm out" their merchant account to end users like me, accepting payment using their merchant account and then paying end users the money by crediting their PayPal accounts.  Under ordinary circumstances, this would be considered a grievous violation of the Terms of Service of any merchant account.  I would lose mine, if I "farmed it out" like that.

But as they say, money talks.  And pretty soon, PayPal was running up millions in transaction fees for the credit card companies.  So while there was initial talk of suspending their merchant account, in the end, the credit card companies decided to modify the terms of service and let PayPal do their thing.

I tried to use PayPal's credit card acceptance, but clients said that when they went to use the site, it asked them to "join" PayPal, and they freaked out.  It was not a professional-level solution, so I got a merchant account instead.

The other troubling aspect of PayPal is that it looks, acts, smells, walks, talks, and quacks like a bank, but it is not regulated as a bank.  They pay interest, charge fees, offer credit cards, transfer money (overseas and domestically) and do just about all the things a bank does, except put the name "BANK" on their door.  As a result, they are not regulated like a bank and are not beholden to normal banking rules.

Nor were their deposits insured.  PayPal tried to get around this by depositing their money in FDIC insured accounts ($250,000 in each account) and then arguing their funds were "FDIC insured" and even plastering the logo on their site.  But the problem with this is twofold:  First, the money would be insured only to PayPal, not the end user.  Second, the maximum you can insure with an FDIC account is $250,000 for an individual, and you can't "aggregate" the amount by opening multiple accounts.

But all that taken aside, that is not the trouble I had with PayPal, only the background of how they operated back in the "Wild West" days of the early Internet commerce.  They have cleaned up their act since then, and are not only no longer outlaws, but the Sheriff in town.  And yea, that happened a lot in the Wild West, too.

For example, I sold a car on eBay.  The buyer paid me by making three $2000 payment on PayPal.  PayPal then "flagged" this as "inappropriate".  I called PayPal and asked the 20-something who answered the phone what this meant.  He giggled and said that PayPal was going to keep all the money and I could go sit on a tack.  Needless to say, this alarmed me, as I had over $8000 balance on PayPal.

I finally called on a weekend and got someone who was older.  He explained that the company was going through growing pains.  They set up these unwritten rules, that, if broken, would "freeze" your account.  As I pointed out to him, I didn't break the rules, the buyer did - and such a system would allow ANYONE to "freeze" someone else's account.  He agreed it was a silly rule (it has been modified now, and if you try to make multiple payments, PayPal will first ask the seller before accepting).

He also said that they had hired a lot of college kids to answer the phones and that they were saying all sorts of crazy shit - like that PayPal was going to steal their money.  PayPal had grown so fast, so quickly, it was out of control.  Anyway, he helped me get the account straightened out.  I got my money and closed my PayPal account.

eBay then bought PayPal.  Since then, things are a lot more professional.  I opened a new PayPal account, for buying and selling on eBay, and it has worked well since then.  I even use it to pay an overseas vendor, which is a lot less hassle than sending wire transfers.

Do I trust PayPal?  Not very much.  My earlier experience still burns me.  They keep trying to push - too hard - to sell credit cards and other bank-like services.  This pushiness, along with their history, and their sort of quasi-legal Bank status, makes me nervous.  I do not keep a lot of money in my PayPal account, to be sure.

And of course, they are in business to make money.  Buying and selling on eBay is fun, but you have to pay eBay listing fee, eBay seller fees, and if you accept PayPal, you have to pay PayPal fees.  For some items I have sold on eBay, after paying postage and all these fees, I net maybe a few dollars at most - which is not a lot for the effort involved.

There are still some folks who refuse to use PayPal, citing "problems" they have had with the service.  I cannot say as I blame them, having had horrific problems in the past myself.  But it is convenient, and I think today, can be trusted, at least for smaller transactions of under $1000.

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