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This is totally fair. We knew this was something we might have to deal with given the nature of the business.

Still, things change when they then turn around and offer you a business loan. It's hard to argue that they need to freeze your funds for collateral when they then deem you credible enough to lend you money.

It's not so much that our accounts got frozen that makes this interesting. It's the fact that they froze our accounts and then offered us a loan.

See my separate comment -- a hold plus a loan is not the same as just not holding the money, from a risk point of view. Although it would look the same to your bank balance, the two look nothing alike to PayPal's accountants and auditors. If you think there's a potential liability between two parties, it's much better to formalize it as a loan agreement than to just carry it as a risk.

This is why, for example, the cable and cell phone companies show up on your credit reports. When you pay them in arrears for your service each month, you are in effect borrowing money from them.

Interesting point. From that perspective, you could argue that giving a loan against the collateral is a way to account for some of the risk on Paypal's side while still giving us some funds.

Still, we've been with Stripe since then and have had no problems.

Exactly. To give another example, I was at Lucent in the late 90's, just before the telcom collapse. Ultimately, Lucent stock collapsed by 90% and the company was bought by Alcatel (which was just bought by the remaining parts of Nokia that Microsoft didn't grind into dust, but I digress). A big part of what brought Lucent down was not just that sales of communications equipment plummeted, but also that Lucent had extended financing to its customers so they could buy more equipment, and then those same customers defaulted on their loans.

Ultimately, it's important to make sure that a loan-granting organization is run separately from your core business, to avoid people making poor-quality loans just to goose sales numbers.

Still, we've been with Stripe since then and have had no problems.

yet ...

There was a recent article on how hoverboard sellers have suffered massive fraud losses, that specifically talked about how Stripe is trying to chase people to recover hundreds of thousands of dollars in chargebacks. That can't happen too many times, given the thin margins of payment processing, before they have to do something to protect themselves.

I just googled that:

>In one case, hoverboard vendor IO Hawk had a reported $900,000 negative balance. Stripe’s documents call it “one of our largest losses ever.”

You'd think there'd be some way to delay shipping for a couple of days while someone checks if the card is stolen. Maybe they could have some way of just calling the card owner and asking if they ordered a hoverboard?

So now Stripe has that risk on their books? Don't you think they'll eventually need to do the same as Paypal did?

Maybe Stripe won't freeze your assets first, but they could notify you that they will only support a certain transaction volume unless you take a loan.

> If you think there's a potential liability between two parties, it's much better to formalize it as a loan agreement than to just carry it as a risk.

Such a clear and excellent point. This is the basis of the idea people are thinking when they tell someone to "get it in writing."

I have never seen a cable, cell phone, or utility account reported on my credit, other than the initial credit check to open the account. But it seems everyone around me thinks paying a power bill late will affect their credit.

Do companies in other areas typically report such accounts to the credit agencies?

Do companies in other areas typically report such accounts to the credit agencies?

Generally the companies themselves do not report to credit agencies. However, once the account is turned over to a collections company then that company will nearly always report the delinquency to the credit agencies. So from the consumer point of view, the statement "If I don't pay my bill, it will show up on my credit report" is true, but there is a middleman in the process.

In the US, yes. Almost all utilities except perhaps the water company can report delinquent payments to the three credit agencies.

I don't know. For a while, I'd forget to pay my electric bill every other month or so, and SDG&E never did anything but send a polite reminder with my next bill.

Utilities generally consider your account to be in good standing so long as you don't fall more than two or three payments behind. They may use a late fee and/or a deposit return agreement to incentivize on-time payments, but they're not going to go after you (such as disconnecting service) until usually the 3rd month that you fail to pay, sometimes (especially for municipal utilities) much longer.

Essentially, accounts paid late just aren't a big deal for them. They almost always get the money anyway.

Usually takes a chargeoff (you never pay the delinquent amount) for it to hit your credit.

It's basically a secured credit card. And you get the primary holders SSN (credit report) to have a credit relationship with. It actually makes a lot of sense.

Howdy again! (I think I met you personally in Tokyo if I'm mapping nicks to names correctly.)

Does it make a little more sense if you consider this decision as being generated by two separate entities? For marketing purposes, that loan appears to be originated by Paypal, but it actually comes from Webbank in Utah. They are one of the more tech-forward companies which actually has a banking license. It's tough to tell externally which tail is wagging which dog, but I'd bet you that a) Paypal the low-margin-fraud-kills-us AI company is institutionally very, very risk averse but b) Webbank is primarily thinking of not your business model but rather your existence in a pool of pre-vetted credit risks, and their risk model says "Approved without further need for clarification; this is probabilistically profitable."

(To the extent that a bank would view Paypal having a reserve against your account as a plus or minus in deciding to grant you a loan: it's an obvious plus, right? Heads you pay them back; tails they have recourse against an identifiable pile of money sitting at an affiliated entity!)

Assuming that the monetary terms they offered you were roughly in line with what Paypal offered me back in the day: they make substantially more money lending to you than Paypal does through payment services (one's expensive, risky to them, and cheap to you; one is inexpensive, not terribly risky to them, and not terribly cheap to you).

It doesn't change the analysis much if you think of it as two groups with competing imperatives within Paypal, either. (And who knows, perhaps Webbank has substantially delegated decisionmaking authority to a model developed by Paypal. I'd bet somewhere in the midpoint -- Paypal provided a model, Webbank agreed to robostamp most loans consistent with the model insofar as regulations allow them to do so, and then Webbank got Paypal to agree that if performance across the pool was below $FOO then Paypal would pay Webbank $BAR.)

I didn't tackle the apparent contradiction because I think others here did a good job. But let me try then based on your follow up:

1) Your business, without a balance of funds, is an unacceptable risk and not worth them supporting 2) Your business, with the appropriate balance of funds in reserve, is now not risky to them

I understand it seems contradictory/hypocritical. But it's all about whether you view it as a "freeze" (which has much more dramatic connotations) or simply a risk mitigation strategy on their behalf. Once you solve for the risk mitigation they're comfortable doing normal business with you.

The issue is that they generate the need for you to take out a loan with them by securing "the appropriate balance of funds." If they did not hold the 20k, his business would not need a 20k loan. Would paypal be on the hook if the business withdrew the 20k and they were hit by a bunch or refunds? Sure, but thats the risk they take by being a "bank." They make interest off your capital. Thats the exchange they agree to. This is them trying to make double interest off your capital by locking your funds and offering a loan for the same amount.

Put another way, would you be okay with your bank holding 20k to make sure you can pay for housing/bills, and then offering you a 20k personal loan that generated them interest? No, because that would be unreasonable. Its your money. If they think you are a risky client, they should stop working with you.

Its a conflict of interest, and a blatant one that could be heavily abused.

Paypal needs a cleaner distinction between:

* Gift/send cash without any other expectations (services already rendered).

* Sale/Escrow (pay for future goods/services).

* Charity (Gift, but tax implications/validation).

Taking money that isn't yours isn't a risk mitigation strategy; it's theft. Calling it a freeze is pretty mild. It is not PayPal's money. The customer didn't intend that money for PayPal, but for the merchant. By freezing that money, PayPal is endangering the transaction that they should be enabling.

> Still, things change when they then turn around and offer you a business loan

> It's the fact that they froze our accounts and then offered us a loan

How? Those are surely separate departments at PayPal (possibly even another [sub]company).

Not to mention loaning you money has other strings attached to it which makes it less risky-ish on PayPal's part (they have a clear legal proceeding to take if you default on the loan). If you screw over all your customers and run with the money, PayPal will take the major hit (because your customers will go after PayPal to get reimbursed).

Freezing your funds, and offering you a loan are very clearly "apples and oranges".

Nonetheless, you should have known this was a risk and was likely to occur before it became a critical issue for your business. Clearly you were not prepared nor did your homework on how to operate in this climate.

This sounds harsh, but it needs to be heard. It's difficult to feel sympathy for someone who put all their eggs in a single basket, and was too naive to understand the risks.

Lesson learned - don't put every penny you have into a single account administered by a company you have only recently begun a relationship with. You are a high risk customer for any banking institution. If it wasn't PayPal, surely a similar situation would have occurred elsewhere.

I don't understand why customers would go after PayPal if the merchant doesn't deliver. They should be going after the merchant. PayPal should not be the merchant here. If PayPal does insist on acting like the merchant, then real merchants should use a different payment provider.

I've got to admit, though, I'm not American. The way payments work in the US often seems completely backwards to me. But I really dislike that that backwards way of handling financial transactions gets exported by companies like PayPal, Visa and Mastercard to Europe, where banks do offer reliable payment infrastructure: when I pay someone money, the money ends up with them, not with some middleman.

They are remunerated more for the risk taken when they offer you a loan that they would if they unfroze your assets.

If you accept the premise of your business being risky, then Paypal's approach seems fair as well.

Freezing the account is not, in and of itself, what makes this incredibly unethical. It's trying to sell a loan after freezing the account.

That creates an enormous conflict of interest for the people at PayPal who decide when to freeze/unfreeze an account.

Sounds exactly like a protection racket to me.

Artificially create an urgent need for a service, then sell the service.

It's just an automated ad promoting a product. I'm sure that company saw other ads when logging in on different days. Is it silly that they advertise it on high risk accounts? Maybe.. but it's nothing nefarious.

According to the article, PayPal claimed that it was not an automated ad and they were in fact eligible for it.

"To paraphrase: “It may seem weird that we’re holding collateral on your account and offering you a loan, but that was not a mistake! You’re still eligible. Contact me if interested.”"

They didn't claim it wasn't automated. They just claimed that it isn't a mistake. The better explanation is that the criteria for a hold and the criteria for a loan are not one and the same.

Hence the concerns over a conflict.

Whilst the risk to PayPal may be deemed acceptable to PayPal, the only reason you would need the loan is because they froze Tor funds. They are not just managing your risk, they are increasing it whilst mitigating the effects it has on themselves!

> They are not just managing your risk, they are increasing it whilst mitigating the effects it has on themselves!

Well, they're passing the risk on. The risk is in chargebacks from people who bought things from the OP's company, right? If they weren't using PayPal or some other third-party payment processor, that would be their risk.

> Well, they're passing the risk on

Yes, but PayPal gets a (high) transaction fee in exchange for assuming that risk. The company borrowing from PayPal is charged interest for the privilege of taking that risk away from PayPal. That's insanely exploitative on PayPal's part.

My point is, I don't believe they are offering the loan because the company is in financial trouble (due to the hold). I believe they are offering the loan because the company meets certain requirements in terms of transaction volume.

Companies can reach the required transaction volume without having holds on their account.

I don't see why it matters whether it was automated or not. Either way, PayPal has a huge conflict of interest by A) creating a situation where a business needs a loan and B) selling loans.

I think the freezing is unethical. It's not PayPal's money. The customers didn't intend that money for PayPal, but for the merchant. Taking money that isn't yours is theft in my book.

Does PayPal even pay interest over the money it denies their customers?

This a thousand times over ...

Why would PayPal be on the block when the merchant doesn't deliver? The merchant should be on the block. PayPal should just be payment infrastructure. The fact that PayPal pretends to be the merchant, at the same time pretends to represent the customer in a way the customer never asked for, and undermines the payment between the real customer and the real merchant, makes PayPal unreliable as payment infrastructure.

PayPal has a history of denying people access to their money, and I'd certainly never allow any of my money in the hands of PayPal. They operate as thugs. They take money they're not entitled to, make commercial transactions unreliable, and endanger the companies' ability to provide the services that customers paid for. PayPal is the biggest source of risk here.

If this is true, shouldn't Paypal give you the option to receive your $20,000 back and then quit using Paypal? Or perhaps be a bit more explicit with this up front (_before_ they froze your account)?

Unfortunately, it's too late by that point. Paypal have taken on the risk, if they just let you get your money and leave, then that's what all the fraudsters would do.

Is that really PayPal's problem though? It's the user fault for being defrauded. Does PayPal really have liability?

The whole thing is pretty convoluted.

In the US, if the merchant doesn't pay, or is fraudulent then Paypal would have full liability. Same situation with Stripe.

From the perspective of a Paypal or Stripe, letting someone accepting credit cards is very similar to extending someone a loan. In the early days of Paypal, fraud almost killed them several times. I've been involved in a smaller credit card processing business and fraud almost killed us a few times.

In the current system in the US, legit merchants ends up getting beat up the most, and taking the most liability, in exchange for the convenience of accepting plastic.

If someone uses a stolen credit card to purchase goods online or in person, it's their, and they have to pay. And often lose the items sold too.

If the Paypals can't pay, then the upstream banks have to pay. Of course this would never happen, so the upstream banks never have to pay. Their risk is totally covered along the chain; so they don't really care THAT much about fraud.

Meanwhile, the end users of credit cards enjoy pretty good liability protection, and get paid in miles and cash rewards. So, they're fat and happy.

But the poor merchants..

Yes, I believe PayPal would have to pay if the user made a chargeback on their CC.

I have a friend who ran a computer store. He accepted credit cards and sold used Windows 7 Pro PCs for $150USD.

Some of the customers bought a PC and then did a chargeback on their credit card to get it for free. Enough of them did that so that he got blacklisted by his bank and his credit card machine no longer worked.

People do the same thing with Paypal when I sell something on eBay. Even if it is the right item, they do an item not as described to get their money back. For example I sold a used Macbook that was an older model and could only run 10.7 and buyer knew it was used and old and could only run 10.7 but filed an item not as described claiming it was old so he wanted half off. Macbook was worth $500 and he bought it for $350. I told him Macbooks keep their value unlike PC Laptops. Paypal froze my funds and eBay investigated. Eventually eBay sided with me because the listing said old and used and limited to 10.7 etc. It took like two weeks of freezing my account until they resolved it. It was not even my fault, the buyer wanted half off for no good reason and item was as described. He could have sold the Macbook for $500 and made a profit.

From my experience I'd be surprised if a legitimate business that had proper checks for fraud and delivered their service as advertised ended up getting a high enough rate of charge backs to lose their account.

I used to run a computer store. Did not take credit cards as we couldn't afford the service. Got hit with a lot of bad checks. People take advantage of small businesses in that way. We couldn't afford a fraud scanning service or credit check in 1995-1997 and went out of business as a result.

My friend with the computer store that took credit cards, the card scanner was supposed to check if the card was used in fraud and all of that. He got hit by people using the chargeback to get free computers so many times that he got black listed. Getting the checks for fraud is hard as one can do a chargeback multiple times and it doesn't count as fraud.

The problem with most people's complaints seems to be that PayPal doesn't look at your business and say they'll need a $20K surety. They just seem say nothing and then grab the money without warning, leaving people to scramble for cash. If they made a deal in advance it would be much more civilized.

eventbrite, on the other hand, holds the money collected until the event concludes.