PayPal

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PayPal Inc.
PayPal
File:PayPal website.png
PayPal homepage
Type of businessSubsidiary
Available inMultilingual
FoundedPalo Alto, California, United States (June 1998)
HeadquartersSan Jose, California, United States
Area servedWorldwide
OwnereBay Inc.
Founder(s)Ken Howery
Max Levchin
Elon Musk
Luke Nosek
Peter Thiel
Key peoplePatrick Dupuis, CFO
David Marcus, President
RevenueUS$5.6 billion (2012)
URLwww.paypal.com
AdvertisingYes
RegistrationOptional
[1][2][3]
PayPal's corporate headquarters in San Jose, California
eBay, PayPal, Kijiji, and StubHub in Toronto

PayPal is an international e-commerce business allowing payments and money transfers to be made through the Internet. Online money transfers serve as electronic alternatives to paying with traditional paper methods, such as checks and money orders. It is subject to the US economic sanction list, and subject to other rules and interventions required by US laws or government.

PayPal is an acquirer, performing payment processing for online vendors, auction sites, and other commercial users, for which it charges a fee. The fee depends on what currency or payments the seller is using.[4] In addition, eBay purchases made by credit card through PayPal may incur extra fees if the buyer and seller use different currencies.

On October 3, 2002, PayPal became a wholly owned subsidiary of eBay.[5] Its corporate headquarters are in San Jose, California,[2] United States at eBay's North First Street satellite office campus. The company also has significant operations in Omaha, Scottsdale, Charlotte, Boston and Austin in the United States; Chennai and Bangalore in India; Dublin and Dundalk in Ireland; Kleinmachnow in Germany; and Tel Aviv in Israel. From July 2007, PayPal has operated across the European Union as a Luxembourg-based bank.

History

Beginnings

PayPal developed after Internet financial services company X.com acquired Confinity in March 2000.[6][7] Confinity was founded in December 1998 by Max Levchin, Peter Thiel, Luke Nosek, and Ken Howery and in 1999 launched a money transfer service called PayPal.[6][8][9][10] The PayPal money-transfer system was only months old at the time X.com acquired Confinity, but X.com founder Elon Musk was optimistic about its future success.[6] Musk and then-president and CEO, Bill Harris, disagreed on this point and Harris left the company in May 2000.[6] In October, Musk made the decision that X.com would terminate its other Internet banking operations and focus on the PayPal money service.[11] The X.com company was then renamed PayPal[12] and expanded rapidly in 2001 primarily as a result of its use on eBay.

eBay acquisition

The newly renamed company was offered as a publicly traded company in February 2002 and PayPal was able to turn the corner and become the first dot-com to IPO after the September 11 attacks.[13] The company was acquired by eBay for $1.5 billion later that year.[6][11][14] By April 2000, more than 1,000,000 eBay auctions used the PayPal service.[15] 70% of all eBay auctions accepted PayPal payments, and roughly 1 in 4 closed auction listings were transacted via PayPal.[16] As of 2008, PayPal's total payment volume, the total value of transactions, was US$60,000,000,000, an increase of 27 percent over the previous year,[17] and US$71 billion in 2009, an increase of 19 percent over the previous year.[18]

PayPal became the payment method used by a majority of eBay users (it was also the default choice), and the service competed with eBay's subsidiary Billpoint, as well as Citibank's c2it, Yahoo!'s PayDirect, Google Checkout, and Western Union's BidPay service, all of which closed in subsequent years. PayPal's present competitors include Wirecard and Moneybookers.[19][20] eBay Australia was forced to offer PayPal payment alternatives by the Australian Competition & Consumer Commission including[21] bank deposit, cheques and money orders, escrow, and credit cards.[22]

In January 2008, PayPal acquired Fraud Sciences, a privately held Israeli start-up company with expertise in online risk tools, for $169 million, in order to enhance PayPal's proprietary fraud management systems.[23] In November 2008, the company acquired Bill Me Later, an online payments company offering transactional credit at over 9000 online merchants in the US.[24] The company continued to focus on international growth and growth of its Merchant Services division, providing e-payments for retailers on eBay. In 2011, PayPal announced that it would begin moving its business offline so that customers can make payments via PayPal in stores.[25] As of 2012, PayPal's total payment volume processed was US$145,000,000,000.[26] and accounted for 40% of eBay's revenue, amounting to US$1,370,000,000 in the 3rd quarter of 2012.[2]

Corporate governance

As of April 2012, PayPal's president is David Marcus; Marcus joined PayPal in August 2011 after its acquisition of Zong, of which he was the founder and CEO.[3] David Marcus succeeded Scott Thompson as president, who left the role to join Yahoo.[3]

Services

As of 2014, PayPal operates in 193 markets and has 143 million active, registered accounts. PayPal allows customers to send, receive, and hold funds in 26 currencies worldwide.[27] These currencies are the Australian dollar, Brazilian real, Canadian dollar, Chinese renminbi yuan (only available for some Chinese accounts, see below), euro, pound sterling, Japanese yen, Czech koruna, Danish krone, Hong Kong dollar, Hungarian forint, Israeli new sheqel, Malaysian ringgit, Mexican peso, New Zealand dollar, Norwegian krone, Philippine peso, Polish zloty, Russian ruble, Singapore dollar, Swedish krona, Swiss franc, New Taiwan dollar, Thai baht, Turkish lira and United States dollar. PayPal has localized marketing websites in more than 80 countries.[27]

PayPal revenues for Q1 2009 were $643 million, up 11 percent year over year. 42 percent of revenues in Q1 2009 were from international markets. PayPal's Total Payment Volume (TPV), the total value of transactions in Q1 2009 was nearly $16 billion, up 10 percent year over year.[28]

In 2008, PayPal's Total Payment Volume (TPV) off eBay exceeded volume on eBay for the first time. PayPal's TPV in 2008 was $60 billion, representing nearly 9 percent of global e-commerce and 15 percent of US e-commerce.[29]

At an analyst day on March 11, 2009, eBay CEO John Donahoe announced that PayPal could be a larger driver of revenue than the eBay marketplaces business.[30] RIM (now BlackBerry) announced that PayPal will be the only payment mechanism for its BlackBerry App World (now BlackBerry World), which launched on April 1, 2009.[31] However, by April 2011 RIM started offering two other options: credit card payment and mobile carrier billing (using the Bango Payment system).[32]

PayPal launched Student Accounts for teens in August 2009, allowing parents to set up a student account, transfer money into it, and obtain a debit card for student use. The program provides tools to teach teens how to spend money wisely and take responsibility for their actions.[33][34]

In November 2009, PayPal opened its platform, allowing other services to get access to its code and to use its infrastructure in order to enable peer-to-peer online transactions.[35]

PayPal Operations Center and main office located in Omaha, NE

Although PayPal's corporate headquarters are located in San Jose, PayPal's operations center is located in Omaha, Nebraska, where the company employed more than 2,000 people as of 2007.[36] PayPal's European headquarters are in Luxembourg and international headquarters are in Singapore. In October 2007, PayPal opened a data service office on the north side of Austin, Texas. Previously, the company opened a technology center in Scottsdale, Arizona,[37] and Chennai, India.[38]

On November 28, 2011, PayPal reported Black Friday brought record mobile engagement including a 538 percent increase in global mobile payment volume when compared to Black Friday 2010.[39]

PayPal business model evolution

PayPal’s success in terms of users and volumes was the product of a three-phase strategy described by former eBay CEO Meg Whitman: "First, PayPal focused on expanding its service among eBay users in the US. Second, we began expanding PayPal to eBay's international sites. And third, we started to build PayPal's business off eBay".[40]

Phase-1

In the first phase, payment volumes were coming mostly from the eBay auction web-site. The system was very attractive to auction sellers, most of which were individuals or small businesses that were unable to accept credit cards, and for consumers as well. In fact, many sellers could not qualify for a credit card Merchant account" because they lacked a commercial credit history. The service also appealed to auction buyers because they could fund PayPal accounts using credit cards or bank account balances, without divulging credit card numbers to unknown sellers. PayPal employed an aggressive marketing campaign to accelerate its growth, depositing $10 in new users' PayPal accounts

Phase-2

The biggest challenge in 2000 remained PayPal's unsustainable business model. Initially, PayPal offered its service with lower cost, planning to earn interest on funds in users' PayPal accounts (i.e., the "float"). However, most recipients withdrew their funds immediately. Furthermore, a large majority of senders funded their payments using credit cards, which cost PayPal roughly 2% of payment value, rather than relying on much less with business accounts qualified for seller protection against losses due to chargebacks, provided that they complied with reimbursement policies (e.g., retaining traceable proof of shipping to a confirmed address or requiring a signature receipt for items valued over $250).

Phase-3

After fine-tuning PayPal's business model and increasing its domestic and international penetration on eBay, PayPal started its off-eBay strategy. This was based on developing stronger growth in active users by adding users across multiple platforms, despite the slowdown in on-eBay growth and low-single-digit user growth on the eBay site. A late 2003 reorganization created a new business unit within PayPal—Merchant Services—to provide payment solutions to small and large e-commerce merchants outside the eBay auction community. Starting in the second half of 2004, PayPal Merchant Services unveiled several initiatives to enroll online merchants outside the eBay auction community, including:

  • Lowering its transaction fee for high-volume merchants from 2.2% to 1.9% (while increasing the monthly transaction volume required to qualify for the lowest fee to $100,000)
  • Encouraging its users to recruit non-eBay merchants by increasing its referral bonus to a maximum of $1,000 (versus the previous $100 cap)
  • Persuading credit card gateway providers, including CyberSource and Retail Decisions USA, to include PayPal among their offerings to online merchants.
  • Hiring a new sales force to acquire large merchants such as Dell, Apple's iTunes, and Yahoo! Stores, which hosted thousands of online merchants
  • Reducing fees for online music purchases and other “micropayments”
  • Launching PayPal Mobile, which allowed users to make payments using text messaging on their cell phones

Local restrictions

Countries not supported by PayPal include Republic of Macedonia, Iraq, Afghanistan, Bangladesh, Pakistan, and Montenegro, in addition to the countries on the US economic sanction list.

Japan

In late March 2010, new Japanese banking regulations forced PayPal Japan to suspend the ability of personal account holders registered in Japan from sending or receiving money between individuals and as a result are now subject to PayPal's business fees on all transactions.[41][42]

Taiwan

As of mid July 2010, users in Taiwan have noticed that the "Personal" tab for sending money has been omitted without notice. There is no longer an option to send personal payments, thus forcing all recipients to pay a fee.[citation needed]

Brazil

As of mid-November 2010, users in Brazil have noticed that the "Personal" tab for sending money has been omitted without notice. There is no longer an option to send personal payments, thus forcing all recipients to pay a fee. Balance transfers between PayPal accounts of the same account holder incur an additional 6.4% fee.

As of beginning January 2011, Brazilian users are no longer allowed to withdraw money using credit/debit cards.[citation needed]

India

As of March 2011, PayPal made changes to the User Agreement for Indian users to comply with Reserve Bank of India regulations.[43] Notable changes to the agreement were:

  • Any balance or future payments must not be used to buy goods or services but transferred to a bank account. The PayPal balance is automatically withdrawn to the bank account.[44]
  • PayPal balance cannot be used to make purchases. Credit/Debit cards linked with the PayPal account must be used to pay through PayPal.[44]

The per transaction limit had been set to USD 3000, since October 14, 2011. However, on July 29, 2013 PayPal has increased the per transaction limit to USD 10,000.[45] This brings the per transaction limit for India in line with the restrictions imposed by PayPal on most other countries.

PayPal has disabled sending and receiving personal payments in India, thus forcing all recipients to pay a transaction fee.[46][47]

PayPal wants to make India an incubation center for the company's employee engagement policies. In 2012, PayPal hired 120 people for its offices in Chennai and Bangalore. PayPal plans to recruit 1000 candidates for its Bangalore Development center.[48]

PayPal Labs

PayPal's innovation environment, PayPal-Labs.com,[49] hosts several outreach and experimental projects such as the storefront application,[50] the Myspace and Facebook donations widgets, and the PayPal blog.[51]

Payment sources and destinations

Originally, a PayPal account could be funded with an electronic debit from a bank account or by a credit card at the payer's choice. But some time in 2010 or early 2011, PayPal began to require a verified bank account after the account holder exceeded a predetermined spending limit. After that point, PayPal will attempt to take funds for a purchase from funding sources according to a specified funding hierarchy. If you set one of the funding sources as Primary, it will default to that, within that level of the hierarchy (for example, if your credit card ending in 4567 is set as the Primary over 1234, it will still attempt to pay money out of your PayPal balance, before it attempts to charge your credit card). The funding hierarchy is (1) a balance in the PayPal account; (2) a PayPal credit account, PayPal Extras, PayPal SmartConnect, PayPal Extras MasterCard or Bill Me Later (if selected as primary funding source) (It can bypass the Balance); (3) a verified bank account; (4) other funding sources, such as non-PayPal credit cards.[52]

The recipient of a PayPal transfer can either request a check from PayPal, establish their own PayPal deposit account or request a transfer to their bank account.

Paypal Local

In October 2013, PayPal announced that it will soon allow users to pay with QR codes or PayPal Ibeacon,[53] hoping to expand and encourage mobile payments. PayPal expects for the technology to be available in the first quarter of 2014.[54]

Regulatory status

Peter Thiel, the founder of PayPal, has stated that PayPal is not a bank because it does not engage in fractional-reserve banking.[55] Rather, PayPal's funds that have not been disbursed are kept in commercial interest-bearing checking accounts.[56]

In the United States, PayPal is licensed as a money transmitter on a state-by-state basis.[57] PayPal is not classified as a bank in the United States, though the company is subject to some of the rules and regulations governing the financial industry including Regulation E consumer protections and the USA PATRIOT Act.[58]

In 2007, PayPal Europe was granted a Luxembourg banking license, which, under European Union law, allows it to conduct banking business throughout the EU.[59] It is therefore regulated as a bank by Luxembourg's banking supervisory authority, the Commission de Surveillance du Secteur Financier (CSSF).[60][61][62]

In Australia, PayPal is licensed as an Authorised Deposit-taking Institution (ADI) and is thus subject to Australian banking laws and regulations.[63]

Safety and protection policies

The PayPal Buyer Protection Policy states that the customer may file a buyer complaint within 45 days if he or she did not receive an item or if the item he or she purchased was significantly not as described. If the buyer used a credit card, he or she might get a refund via chargeback from his or her credit-card company. However, in the UK, where such a purchaser is entitled to specific statutory protections (that the credit card company is a second party to the purchase and is therefore equally liable in law if the other party defaults or goes into liquidation) under Section 75 Consumer Credit Act 1979, the purchaser loses this legal protection if the card payment is processed via PayPal.[64]

According to PayPal, it protects sellers in a limited fashion via the Seller Protection Policy.[65] In general the Seller Protection Policy is intended to protect the seller from certain kinds of chargebacks or complaints if seller meets certain conditions including proof of delivery to the buyer. PayPal states the Seller Protection Policy is "designed to protect sellers against claims by buyers of unauthorized payments and against claims of non-receipt of any merchandise". The policy includes a list of "Exclusions" which itself includes "Intangible goods", "Claims for receipt of goods 'not as described'" and "Total reversals over the annual limit". There are also other restrictions in terms of the sale itself, the payment method and the destination country the item is shipped to (simply having a tracking mechanism is not sufficient to guarantee the Seller Protection Policy is in effect).[66] The PayPal Seller Protection Policy does not provide the additional consumer protection afforded by UK consumer legislation (e.g., Sale of Goods Act) and in addition it cannot be enforced in the Courts because PayPal operates from Luxembourg, outside all three of the UK legal jurisdictions.

Security

File:Paypal Security Key Card.jpg
A credit-card sized alternative to the keychain security token, the PayPal Keycard generates a temporary login code to authenticate the user.

Security token

Main article: Security token

In early 2006, PayPal introduced an optional security key as an additional precaution against fraud. A user account tied to a security key has a modified login process. The account holder enters his or her login ID and password as normal, but is then prompted to enter a six-digit code provided by a credit card sized hardware security key or a text message sent to the account holder's mobile phone. For convenience, the user may append the code generated by the hardware key to his or her password in the login screen. This way he or she is not prompted for it on another page. This method is required for some services, such as when using PayPal through the eBay application on iPhone.

This two-factor authentication is intended to make it difficult for an account to be compromised by a malicious third party without access to the physical security key, although it does not prevent so-called Man in the Browser (MITB) attacks. However, the user (or malicious third party) can alternatively authenticate by providing the credit card or bank account number listed on his or her account. Thus the PayPal implementation does not offer the security of true two-factor authentication.

The credit card sized hardware security key currently costs US$29.95 for all users with no ongoing fees.[67] Use of a security code that is sent to the account holder's mobile phone is currently free.[68] The option of using a security key with one's account is currently available only to users registered in Australia, Germany, Canada, the United Kingdom, and the United States.[69]

MTAN

It is also possible to use a mobile phone to receive an MTAN (Mobile Transaction Authentication Number) via SMS.[70] Like all security measures, there have been reports of vulnerabilities to older mobile handsets.[71]

Regulation

In Europe, PayPal is registered as a bank in Luxembourg under the legal name PayPal (Europe) Sàrl et Cie SCA, a company regulated centrally by the Luxembourg bank authority, the Commission de Surveillance du Secteur Financier (CSSF)[72] (note that all of the company's European accounts were transferred to PayPal's bank in Luxembourg on July 2, 2007.[73]) Prior to this move, PayPal had been registered in the UK as PayPal (Europe) Ltd, an entity which was licensed as an Electronic Money Issuer with the UK's Financial Services Authority (FSA) from 2004. This ceased in 2007, when the company moved to Luxembourg.[74][75]

In the US, although PayPal has an extensive User Agreement,[76] PayPal is not directly regulated by the US federal government, because it serves as a payment intermediary.[77] PayPal is regulated as a money transmitter, 31 C.F.R. 1010.100(ff)(5). PayPal is also subject to state regulation, but state laws vary, as do their definitions of banks, narrow banks, money services businesses and money transmitters. The most analogous regulatory source of law for PayPal transactions comes from P2P payments using credit and debit cards. Ordinarily, a credit card transaction, specifically the relationship between the issuing bank and the cardholder, is governed by the Truth in Lending Act (TILA) 15 U.S.C. §§ 1601-1667f as implemented by Regulation Z, 12 C.F.R. 226, (TILA/Z). TILA/Z requires specific procedures for billing errors, dispute resolution and limits cardholder liability for unauthorized charges.[78] Similarly, the legal relationship between a debit cardholder and the issuing bank is regulated by the Electronic Funds Transfer Act (EFTA) 15 U.S.C. §§ 1693-1693r, as implemented by Regulation E, 12 C.F.R. 205, (EFTA/E). EFTA/E is directed at consumer protection and provides strict error resolution procedures.[79] However, because PayPal is a payment intermediary and not otherwise regulated directly, TILA/Z and EFTA/E do not operate exactly as written once the credit/debit card transaction occurs via PayPal. Basically, unless a PayPal transaction is funded with a credit card, the consumer has no recourse in the event of fraud by the seller.[citation needed]

In India, as of January 27, 2010, PayPal has no cross-border money transfer authorization. In The New York Times article "India's Central Bank Stops Some PayPal Services", Reserve Bank of India spokesman Alpana Killawalla stated: "Providers of cross-border money transfer service need prior authorization from the Reserve Bank under the Payment and Settlement Systems Act, PayPal does not have our authorization."[80] PayPal is not listed in the "Certificates of Authorisation issued by the Reserve Bank of India under the Payment and Settlement Systems Act, 2007 for Setting up and Operating Payment System in India".[81] PaisaPay is an Indian sister sister service to PayPal, and is also owned by eBay.[82] PaisaPay makes possible payments from abroad by PayPal account holders to Indian sellers on eBay.in.

Fraud

As early as 2001, PayPal had substantial problems with online fraud, especially international hackers who were hacking into PayPal accounts and transferring small amounts of money out of multiple accounts. Standard solutions for merchant and banking fraud might use government criminal sanctions to pursue the fraudsters. But with PayPal losing millions of dollars each month to fraud, while experiencing difficulties with using the FBI to pursue cases of international fraud, PayPal developed a private solution: a "fraud monitoring system that used artificial intelligence to detect potentially fraudulent transactions. ... Rather than treating the problem of fraud as a legal problem, the company treated it as a risk management one."[83]

If an unauthorized third party obtains and uses someone's PayPal login information and completes a transaction using the accountholder's debit or credit card, EFTA/E and TILA/Z[clarification needed] make PayPal responsible for the breach. There are some specific exceptions to this rule. One is if funds are illicitly withdrawn from a PayPal deposit account. In that situation, neither PayPal nor the bank is required to return the funds, because the agreement between a consumer and PayPal makes those types of transactions authorized.[84]

In the United States, PayPal account holders' private information is marginally protected under one US federal law. Since PayPal is a financial institution under the Gramm-Leach-Bliley Act (GLB), it cannot disclose its account holders' non-public personal information to third parties unless account holders opt into those disclosures.[84]

If an account is subject to fraud or unauthorized use,[when?] PayPal puts the "Limited Access" designation on the account. At this point, the account holder must:[citation needed]

  • Log in
  • Reset their password
  • Develop a set of security questions (based on the subjective and not fact — e.g., "What is your favorite ice cream?" not "What is your mother's maiden name?")
  • Verify location by phone or by mail
  • Provide a set of documents, including but not limited to, a copy of the user's social security card and state ID, home utility bills, business licenses, and proof of original purchase of recently sold good

Phishing

PayPal presents anti-phishing advice on their website.[85]

Shop-for-free bugs

In its x.commerce innovate developer conference 2011, PayPal presented to merchant developers five types of security flaws which allow malicious shoppers to shop for free in vulnerable web stores using PayPal.[86] The details of these flaws are documented.[87]

Criticism

See also: Criticism of eBay

In 2003, PayPal voluntarily ceased serving as a payment intermediary between gambling websites and their online customers. At the time of this cessation it was the largest payment processor for online gambling transactions. In 2010, PayPal resumed accepting such transactions, but only in those countries where online gambling is legal, and only for sites which are properly licensed to operate in said jurisdictions.[88]

In September 2005, Richard Kyanka, owner of the website Something Awful, set up an account to collect donations for Hurricane Katrina to be given to the Red Cross. Owing to the high rate at which donations were made, the account was automatically frozen, and Kyanka criticized the time and difficulty involved in getting PayPal's customer service to unfreeze the account. In response to the concerns of Something Awful members about the charity used by PayPal, United Way, Kyanka finally opted to have the money refunded to the donors so they could donate directly to their charities of choice, though PayPal did not refund exchange and handling fees for international donors.[89][90]

In March 2008, the Australian current affairs show, Today Tonight, aired a segment criticizing PayPal with regard to safety, freezing accounts, and customer service.[91]

Several PayPal gripe sites and blog posts[92] have been created complaining of problems such as the freezing of accounts of eCommerce stores if they experience rapid growth, preventing them from being able to pay suppliers and fulfill orders.[93] One such site, Paypalsucks.com,[94] ranked third on a Forbes Magazine listing of "Top Corporate Hate Web Sites" in 2005 based on "hostility" and "entertainment value" of web forum postings and other criteria.[95]

In June 2008, the Australian Competition and Consumer Commission found that, "The evidence available does not support the view that PayPal is the most secure method of payment, or offers the best service for all transactions."[96]

In February 2010, PayPal stopped or reversed all "personal" transactions in or out of India without prior notice. Funds already transferred and transactions that had previously been "completed" were reversed leaving many vendor accounts over-drafted. Companies, contractors and service providers throughout India were left in debt to PayPal for services they had already provided when PayPal, without warning or consent, returned funds vendors had already received and withdrawn.[97]

In March 2010, PayPal froze donations to Cryptome, seizing over $5300 of in-transit donations.[98] PayPal refused to inform Cryptome of the reason for this action, claiming that to disclose why the donations had been confiscated would violate Cryptome's own privacy.[99] A week later, PayPal offered an apology, which Cryptome founder John Young rejected as "insulting and unacceptable".[100]

In September 2010, PayPal froze the account of Markus Persson, developer of independent video game Minecraft. Persson stated publicly that he had not received a clear explanation of why the account was frozen, and that PayPal was threatening to keep the money if they found anything wrong. His account contained around €600,000.[101][102]

In December 2010, PayPal permanently restricted an account used to raise funds for WikiLeaks citing it was in violation of the PayPal Acceptable Use Policy. At a conference in Paris, a PayPal VP, in response to an attendee's question, stated the account was restricted after PayPal was allegedly pressured by the US State Department.[103] Afterwards, PayPal reiterated the decision was based on violation of PayPal's Acceptable Use Policy. This was followed by cyber attack on the PayPal.com website and a boycott of PayPal, in which some users closed their PayPal account in protest.

In November 2011, PayPal moved all shipping to eBay. This move also forced businesses with multiple users to use only their administrative passwords for all employees, which opens the door to potential account fraud by merchant employees. As a result of this shipping change, many PayPal merchants already frustrated with PayPal fraud protection moved their shipping from PayPal/eBay to other online shippers such as Stamps.com[104]

In December 2011, PayPal froze funds in an account held by April Winchell, the owner of Regretsy, used for charitable giving, requiring the account holder to refund the donations collected but keeping the fees charged. Following some public outcry the account was reinstated, PayPal apologized and donated to her cause.[105][106]

As of December 2011, PayPal is embroiled in a controversy over their policy of holding 30% of vendor transactions for 90 days, which PayPal argues is intended to make funds available to customers in the event that a transaction is found to be fraudulent; to provide PayPal the funds to refund the seller. But PayPal has refused to provide information regarding the reasons particular sellers have been identified to have funds reserved. There is also criticism about the perceived arbitrariness of the 90-day waiting period, when customers have only 45 days to file a claim against a seller, and complaints about the fact that PayPal has not paid interest on the funds held back. Many sellers have surmised that the policy is due to a desire on the part of PayPal to use their funds for investing. There is a class action suit pending regarding the practice.[107]

By 2012, PayPal had garnered a reputation for being "slow and bureaucratic", which has prompted internal reorganization, including layoffs, to "speed innovation".[2] For an optional monthly fee, the company now offers its vendors "13x7 Enhanced" or "24x7 Premium" customer support as an alternative to its free phone line, which has received criticism for its long wait times.

In May 2013, PayPal refused to pay a reward offered in its Bug Bounty Program[108] to a German researcher who discovered a Cross-site scripting flaw on its site.[109][110][111] The company took the position that 17 years of age was too young for a researcher and cited violation of the program's terms and conditions even though the researcher practiced responsible disclosure and the condition was not listed on the program's web page. Fostering responsible disclosure was one of the stated goals of the program. The disclosure prompted other researchers to uncover 13 similar flaws in the site.[112]

In August 2013 entrepreneurs who had used PayPal to collect the funds they raised on crowdfunding platforms like Kickstarter and Indiegogo reported difficulty in being able to withdraw the money they have raised. Most notable victims are Ouya, GlassUp (a rival to Google Glass) and Mailpile.[113][114]

Litigation

In 2002, CertCo filed a suit against PayPal claiming patent infringement concerning the use of distributed computing systems that process micropayments, or small cash amounts. In April 2002, CertCo dropped the suit and stated that they had come to a settlement involving, "a non-consequential payment and mutual releases".[115]

In March 2002, two PayPal account holders separately sued the company for alleged violations of the Electronic Funds Transfer Act (EFTA) and California law. Most of the allegations concerned PayPal's dispute resolution procedures. The two lawsuits were merged into one class action lawsuit (In re: PayPal litigation). An informal settlement was reached in November 2003, and a formal settlement was signed on June 11, 2004. The settlement requires that PayPal change its business practices (including changing its dispute resolution procedures to make them EFTA-compliant), as well as making a US$9.25 million payment to members of the class. PayPal denied any wrongdoing.[116]

In May 2002, Tumbleweed Communications filed a lawsuit against PayPal (and later expanded it to include eBay) claiming that PayPal had violated its patents for sending personalized links through e-mail, which PayPal uses to alert its customers about financial transactions. In January 2004, the two parties came to an agreement, but didn't disclose the financial terms of their licensing agreement.[117]

In June 2003, Stamps.com filed a lawsuit against PayPal and eBay claiming breach of contract, breach of the implied covenants of good faith and fair dealing, and interference with contract, among other claims. In a 2002 license agreement, Stamps.com and PayPal agreed that Stamps.com technology would be made available to allow PayPal users to buy and print postage online from their PayPal accounts. Stamps.com claimed that PayPal did not live up to its contractual obligations and accused eBay of interfering with PayPal and Stamps.com's agreement, hence Stamp.com's reasoning for including eBay in the suit.[118]

In August 2002, Craig Comb and two others filed a class action against PayPal in, Craig Comb, et al. v. PayPal, Inc.. They sued, alleging illegal misappropriation of customer accounts and detailed ghastly customer service experiences. Allegations included freezing deposited funds for up to 180 days until disputes were resolved by PayPal, and forcing customers to arbitrate their disputes under the American Arbitration Association's guidelines (a costly procedure). The court ruled against PayPal, stating that "the User Agreement and arbitration clause are substantively unconscionable under California law," noting their unjustifiable one-sidedness and explicit prohibition of class actions produces results that "shock the conscience" and indicate PayPal was "attempting to insulate itself contractually from any meaningful challenge to its alleged practices".[119]

In September 2002, Bank One Corporation sued PayPal for allegedly infringing its cardless payment system patents.[120] The following year, PayPal countersued, claiming that Bank One's online bill-payment system was an infringement against PayPal's online bill-payment patent, issued in 1998.[121] The two companies agreed on a settlement in October 2003.[122]

In November 2003, AT&T Corporation filed suit against eBay and PayPal claiming that their payment systems infringed an AT&T patent, filed in 1991 and granted in 1994.[123] The case was settled out of court the following month, with the terms of the settlement undisclosed.[124]

In March 2004, PayPal and New York state's Attorney General, Eliot Spitzer, came to an agreement to require PayPal to disclose clients' rights and liabilities more accurately and to pay $150,000 to the state of New York for penalties and the costs of the investigation.[125]

In April 2007, one of two anti-trust lawsuits was filed against eBay/PayPal by Michael Malone of Texas.[126] This suit claimed that the monopolistic relationship between eBay and PayPal violates United States anti-trust laws. In March 2010, Judge Jeremy Fogel entered summary judgement in favor of PayPal.[127]

In June 2011, PayPal and Israel Credit Cards–Cal Ltd. were sued for NIS16 million. The claimants accused PayPal of deliberately failing to notify its customers that ICC-Cal was illegally charging them for currency conversion fees.[128]

In July 2011, fourteen alleged members of the Anonymous hacktivist group were charged with attempting to disrupt PayPal's operations. The denial of service attacks occurred in December 2010, after PayPal stopped processing donations to Wikileaks. On December 5, 2013, 13 of the PayPal 14 plead guilty to misdemeanor and felony charges related to the attacks.[129][130]

Paypal Galactic

In conjunction with the SETI Institute, PayPal is researching the development of a program to enable financial transactions for people in space.[131][132] The program would be used by space tourists and astronauts,[131] and would also be used in space hotels, which are in the planning stages of development.[133]

See also

References

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