PayPal Settles With New York

Agrees to Better Disclose Account Holders' Rights

March 9, 2004
New York Attorney General Eliot Spitzer has reached agreement with PayPal - the nation's largest online payment service - to better disclose the rights of account holders when an affiliated merchant fails to deliver merchandise.

Spitzer may not be PayPal's only headache. In its annual report, PayPal's parent, eBay Inc., disclosed that federal and state investigators are examining whether PayPal violated consumer-protection laws.

An investigation by Spitzer's office revealed that PayPal's "User Agreement" misrepresented to account holders certain terms and conditions, including a statement that it afforded to its account holders "the rights and privileges expected of a credit card transaction."

In practice, consumers were often denied these rights – both by PayPal and by the credit issuers American Express and Discover.

"Protecting consumers' rights in online transactions is the best way to establish and maintain confidence in electronic commerce," Spitzer said. "As with any new industry, it is essential that consumers making e-payments receive full disclosure of their rights and liabilities."

This is the third agreement obtained by Spitzer's office to address complaints that consumers were denied billing credits, or "chargebacks," when goods ordered through PayPal, and funded with American Express or Discover cards, were not received as promised. Late last year, Spitzer's office obtained agreements with American Express and Discover, both of which are issuing "chargeback" credits to consumers who did not receive goods ordered through a PayPal merchant.

The agreements, taken together, close a loophole that, if left uncorrected, would have effectively exempted credit card purchases made through "e-payment" systems from the protections of the federal Fair Credit Billing Act and similar state laws. PayPal is by far the largest such system in the nation, with more than 25 million account holders.

The issue of card holder protection in transactions done through online payment systems, such as PayPal, is a product of the Internet age and the burgeoning web traffic of sites such as eBay. Small merchants and individuals now can easily and safely send and receive payments through such payment systems, which in turn have relationships with credit card issuers.

The Attorney General's agreements have been the first to offer guidance on the obligations of e-payment systems and credit issuers when affiliated merchants do not live up to their promises.

Under the agreement, PayPal must clearly describe in its User Agreement account holder rights, including any conditions or limitations to those rights, and reversal or refund policies. The company will pay New York State $150,000 as penalties and costs of investigation.

Besides Spitzer's probe, federal and state investigators are looking into PayPal's practice of freezing customer accounts while it investigates suspicious transactions, a practice that has generated complaints to consumer-protection authorities, the online auctioneer said in its annual report.

"As a result of customer complaints, PayPal has ... received inquiries regarding its restriction and disclosure practices from the Federal Trade Commission and the attorneys general of a number of states," the report said.

PayPal handled more than $12.2 billion in transactions in 2003 and has 40 million customer accounts, according to the annual report. The rate of fraudulent PayPal transactions is less than one-half of one percent, eBay has said.

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