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PayPal Settles Customer Service Complaints

28 states had taken action against the company

Online payment company PayPal has settled a consumer complaint with the attorneys general of 28 states. The states had brought action against the eBay subsidiary because of some of its customer service policies.

The company said it will shorten and streamline its user agreement and provide more information about its protection programs. The company will pay $5.2 million to customers and to the states to cover their investigation costs.

The state officials said they received a number of complaints from consumers using PayPal. Many consumers said their accounts had been frozen without notice. Some said their bank accounts were debited by PayPal when they expected their credit cards to be charged, and some said they never received refunds for items they had purchased online but never received.

"The consumer has rights, and PayPal must explain those rights," said Maryland Attorney General Joseph Curran.

"Under this agreement, consumers will no longer have to click through multiple hyperlinks to get critical information about their financial transactions," said Washington Attorney General Rob McKenna.

PayPal is the largest company providing payment services for consumers making online purchases. It was acquired by online auction site eBay in 2002.

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PayPal Settles With New York

Agrees to Better Disclose Account Holders' Rights

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.

PayPal Settles With New York; Agrees to Better Disclose Account Holders' Rights...
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PayPal Named in Class Action Suit

Paypal is named in a class action suit charging it illegally froze clients' funds without their knowledge and without providing a means for customers to contact the online payment service.

The suit alleges that PayPal violated the Electronic Fund Transfer Act, which provides that a phone number be made available to customers who want to inquire about their electronic fund transfers.

The suit, filed in federal district court in San Francisco, also claims that PayPal unlawfully freezes customers' accounts and fails to fully compensate customers who are damaged by erroneous financial transactions.

The suit was filed by Girard Gibbs & De Bartolomeo of San Francisco. Joining the action was Horwitz, Horwitz & Associates of Chicago, acting on the basis of complaints filed with ConsumerAffairs.com.

PayPal faces other problems as well. Several states are trying to require PayPal to be licensed; the company suspended service to Louisiana residents after the Bayou State threatened to fine PayPal for transferring money without a license. New York, California and Idaho have also notified PayPal that it may be operating an unlicensed banking business.

Although it concedes that most states regulate nonbank payment and money-transfer systems, PayPal has argued that it is only required to be licensed in its home state of California.

In what may turn out to be good news for PayPal, the Federal Deposit Insurance Corporation (FDIC) recently issued an opinion stating that at least some PayPal customer accounts may qualify for FDIC insurance. But the agency cautioned that the opinion would be applied on a case-by-case basis and would apply only to funds being handled by PayPal for deposit into accounts at FDIC-member banks.

PayPal customers have the option of placing their funds into their own bank accounts, which are presumably insured by the FDIC, or depositing them in a PayPal money market account which, like other money market accounts, is not insured.

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Consumers Learning PayPal Offers Few Protections Against Fraud

PayPal lacks many of the protections of banks and credit card companies

PayPal promotes itself as the most trusted payment service for Web auctions. And so it is, with 2.6 million registered users. PayPal simplifies the process of buying and selling online -- making it quick and easy to transfer payments from one party to another without sending checks through the mail and paying fees to credit card companies.

But consumers are finding out the hard way that, while it may be quick and easy, PayPal lacks many of the protections of banks and credit card companies.

In just the last few weeks, dozens of consumers were cheated out of $100 or more each by a scam artist selling on-existent hard drives on Yahoo! auctions. When the hard drives didn't arrive, the "successful" bidders learned there was no way they could stop payment or get their money back.

When consumers turned to PayPal for help, they got a terse statement from the company that say: "PayPal is not an escrow service, and cannot proect buyers from sellers with illegal or unsavory business practices."

In other words, tough.

When buyers pay by check, they can stop payment if a deal goes bad. And credit card users can contest a charge through the card issuer. But PayPal takes a hands-off approach, saying its job is to transfer funds. Period.

To use PayPal, consumers open an account and fund it with a check or credit card, or even with an online payment from someone else. They can then use the account to instantly pay others online.

The company does make clear in its terms of service that it is not a bank or escrow service and that it has no obligation to "ensure the quality, safety or legality of the merchandise received." Thus, it's not an escrow service -- where funds are held until the buyer receives the validates the merchandise.

Should PayPal offer more consumer protections?

Congress, the Federal Trade Commission and several state attorneys general are looking into the issue and it's likely that litigation or legislation -- or both -- will result. An FTC spokesman last week said that at the very least PayPal may have to do a better job of spelling out what it does and does not do to protect its customers.

Jill of Miami writes:

I have had nothing but trouble from Paypal.com and unfortunately for me being both a purchaser and seller on Ebay, it is very convenient for all to use. The first problem I had with Paypal was right before Christmas 2000. I made several transactions for purchases and a few days later, I received a statement from my bank showing overdrafts and overdraft fees of $450.00. This was because when making a transaction, Paypal took the money directly out of my bank account, but also put a hold for the same amount of money on my credit card (for their protection) which was my debit card. Because I used my debit card, there was a double hold for each transaction on my checking account. When I went back through Paypal to see if they had indicated that this would happen, I had to go through 4 windows in order to see that they did state that a double hold would incur. If they had written out their policies on paper, the debit card info would have been so small, I would have needed a magnifying glass to read it.

When I informed Paypal of this and to see if they could reimburse any of my overdraft fees (since I technically wasn't overdraft), they were not sympathetic at all and I had to call them everyday for two weeks before I finally got a live person in accounting who would tell me this. The second problem I had with Paypal was on 12/28/00. I had a 'gift card' which is a Visa Card with a set amount in my account. I tried to make a purchase using my gift card and when I entered it into the computer, it would not allow that credit card and cancelled the transaction. No problem except that the $50 I had in my account is now on hold with Paypal for 5 days and they won't release it, even though the transaction was null and void and was never completed.

I am very frustrated with them because although they do state on their website all of the info you need, it is hidden behind so many windows that unless you specifically know what you are looking for, it could take you forever to find it. By that I mean the debit card (or instant purchase) info vs. what they call an e-check. Also, when you go to make a payment to anyone, Paypal automatically defaults to the instant purchase (which causes the double holds when you use your debit card) and you have to go manually change which type of payment you want to make. It can be tricky if you don't know what you are doing and I think that consumers should be aware of the problems.

I don't think I have to tell anyone of the emotional stress I was caused by the $450.00 overdraft fees for holds which were not taken off my account even though the transaction amounts were taken out of my checking account immediately and paid. (I had plenty of money in my account, but not enough to cover double what I charged).

Consumers Learning PayPal Offers Few Protections Against Fraud...
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