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Comment by jellicle | Hacker News Reader

The whole idea behind Paypal was:

-- we'll do everything a bank does, but without all those "laws" and "accountability for mistakes" that the other banks labor under

Go on, look it up.

And they achieved that goal. Paypal largely escaped regulation as a banking entity. Banks are trustworthy with your money (to the extent that they are) not because they're magically trustworthy, but because there is a regulatory state forcing them to be. Paypal has no regulatory apparatus overseeing it. Paypal will steal your money and your only recourse is to sue them.

PayPal has made the calculation that the vast majority of their customers will not sue them. Therefore, it is profitable for Paypal to steal from these customers. This is now common knowledge. If you use Paypal today, you have no excuse for not knowing that they will steal your money.

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How come nobody sues them? How come there hasn't been enough of an uproar to get congress involved in regulating PayPal?

Reading HN, these horror stories seem to be fairly common, or maybe I'm just hearing the same stories over and over again.

Currently we have two choices. You have banks, which are huge, bloated, slow, massive barriers to entry. If you want to build an MVP and accept payments right away, good luck with a bank. But your money is safe.

On the other hand, we have PayPal. Sometimes they steal your money. For a very small business, paypal is easy to get going with. Millions of small business people have decided that this tradeoff is right for them - worst case, you lose a few grand.

I'm hoping congress doesn't turn PayPal into a bank. If they do, we will only have one choice (banks), and life will be harder for smaller businesses.

Thousands of very small businesses have decided PayPal's offers the right set of costs/benefits, why do we want congress to second guess them?

> I'm hoping congress doesn't turn PayPal into a bank

I'm hoping this doesn't mean you think any new regulatory oversight on PayPal would bring more harm than benefit.

In principle, I'm sure one could come up good regulations. In practice, I'm leery of congress's ability to do anything besides make PayPal more bank-like. That would be bad, since if customers really wanted a bank, they would already have a merchant account at one of {BankAm, Citi, Chase, PNC, ...}.

Some sort of "cc-number portability" regulations might be useful - i.e., if your customers saved their recurring payment cc-number into PayPal, you can take the cc-numbers to a new service provider. It's a minimal intervention which empowers customers.

I'd also be interested in having congress create a BankLite category of institution - more protections than PayPal, but not as heavyweight as BankAm. Some people want something which is 51% paypal, 49% bank, and a BankLite category might fit their needs better. Shoehorning PayPal into this would be a bad idea, but creating the option might be helpful.

[edit: As suggested by extension, better disclosure of PayPal's non-bank like nature would also be very helpful. Minimalist regulations which enhance customer choice/knowledge are awesome.]

Then perhaps congress should force Paypal to clearly advertise that they make serious errors and steal from you, so that these small businesses are clear on the choice they are making.

>advertise that they make serious errors and steal from you

Might look a bit like a truism .. Paypal bank is a bank?

Seriously though even knowing that Paypal mess up and take money and have terrible customer service doesn't mean that they are necessarily worse than a highstreet bank. Banks mess up and have poor customer service too - admittedly knowing the occurrence rate of monies taken on both sides would allow the price to be weighed against the negative factors (of both Paypal and regular banks) in a more transparent way.

I've been using PayPal since 2001 when I signed up in order to send Sluggy Freelance a $5 donation. Since 2002 I've used it increasingly for payments from my freelancing customers - there was no other convenient way to get money from Europe to America, and PayPal revolutionized the translation industry (along with Moneybookers and similar services, but PayPal is the biggest).

Not once have I had any problem with them.

Jacques, I've had a bank - a real live regulated bank - deduct my paycheck instead of depositing it, and not notice until I complained. Granted, they fixed it immediately when I complained, and PayPal may not, but human error does occur. Certainly PayPal has never gratuitously deducted money from my account.

Here's the thing though: when the bank made a mistake, you had recourse. You actually had someone to complain to - you could go to a branch or otherwise deal with a human. With paypal, you have no recourse, except to hope your case gets voted to the top of Reddit and some paypal insider takes pity on you.

There are several 'internet only' banks, or phone only banks. You have a similar amount of recourse with those.

you're overestimating the worth of that human- retail banks are generally franchisees, and they have very limited powers. If the problem has to be escalated, you're in the same place as you would be with Paypal, except BoA insiders don't read reddit.

The ability to go into a branch and refuse to leave until something is done is not a silver bullet, but it's something. If you happen to run in to 2 or three other unhappy customers with the same idea, it's even better.

You're with the wrong bank maybe. Once upon a time I overdrew my account by $10 and was charged $35 overdraw fee. My account balance became -$45. Someone sent me $50. I then withdrew another $50, and because the account balance was negative again, I was charged another -$35 and left with -$80. When I found out I was angry, I knew the rules were that if you overdrew your account you have to pay a fee, but it seemed ridiculous that they'd charge me twice when it only ever briefly went over 0 again. So I went to my local branch and asked one of the bank staff about it. They apologised and reversed not just the second overdraw fee but both as well! Quite happy with my bank that day; The rules were there and I knew them but they still refunded all my fees back.

I can't even imagine a Chase teller doing that, and I like the people at my bank.

It was the commmonwealth bank of australia.

I'm from the US, perhaps that's why we don't see eye to eye?

> Certainly PayPal has never gratuitously deducted money from my account.

I'm happy for you and hope that you will never be in my shoes.

Likewise. Sorry you're having troubles. I agree with the sentiments elsewhere in the thread, that you should take it up with the European banking authorities.

I think the whole thing will end up revolving around whether or not giving paypal access to your bank account gives them carte-blanche to remove and / or deposit money at their whim.

I would argue that they don't, that they need an explicit instruction from me to do so, they will probably argue that they don't need any permission at all, that the permission once granted stays granted until explicitly revoked.

"Granted, they fixed it immediately when I complained, and PayPal may not"

That seems a rather large caveat.

I second that. I run my entire SaaS business through PayPal, dozens of transactions each day, and while I've had a few problems with large payments being flagged as "suspicious" they've not resulted in me losing any money (as far as I'm aware... ;-).

I've been using PayPal regularly for over 10 years as well, as in, almost daily, for work. I, too, have never had a single problem. I have had occasion to call them for phone support in one instance where a PayPal debit card was stolen, and in another where there was an error in my account balance, as something was deducted twice. In both instances, they were very helpful and had the matters resolved in minutes.

I'm not discounting the problems other people hav ehad, just sharing my own experience with PayPal.

It isn't necessarily an evil thing to want to be out from under those regulations. A lot of them are what conspire to make your banking experience terrible. For example, why can't you transfer from your savings account all you want? Regulations. Why do banks have such onerous process for signing up for a new account? Regulations.

Which is not to say that PayPal isn't sleazy-as-all-hell. The whole point of PayPal was to find a way around the regulations so that they could make a ton of money by gaming your financial transactions in their favor, and cutting out the credit card middle man. Have you ever paid attention to how ardently PayPal tries to stop you from using a credit card to pay?

The really sad part is that PayPal had the chance to become the Next Big Financial Thing. Their core ideas—if you separate away all the evil, that is—are not bad ones. “Make online payment easier and more secure.” Unfortunately, they seem to have dropped the second part and just settled on “Make online payment”. They took the short-term road to profit and missed a much, much larger play.

"Make payment easier" is a bad idea. The difficulty is designed to make it easy to track. Making it easier makes money harder to track, which is a Bad Thing.

I disagree, in the strongest sense possible. Payments are hard for consumers because banks prefer it if you funnel money through channels they make money on (e.g., Credit Cards and accounts with stiff fees).

For large financial institutions, they move money in different and less expensive ways. For example, ACH fees are a tiny fraction of the cost that you use when you move money by credit card, and they're almost frighteningly easy to initiate (there is 0 authorization for these). It's just rare for the banks to expose a way to do ACH for you except in the specific case of billpay (and even then, many institutions handle these as mailed checks rather than ACH).

The idea that finance has to be hard with big ceremony in order to be secure is a clever ruse by big banks. They're not content with the large amount of security-from-competion that regulation gives them. They want your trust, and they're not afraid to scare you into believing that they're the only option.

Credit cards have stiff fees? Seems to me it's pennies per transaction.

I really don't believe it's a ruse, or even that the fees are that large. They're large for small businesses - and that's far from the only place where small businesses have trouble competing with the economies of scale larger players can use.

The swipe fees (paid by the merchant) are composed of a switch fee (goes to the network), plus an interchange fee (which goes to the bank that issued the card). They can be quite substantial, ~1.9% on average.

Interchange fees in the US are some of the highest in the world, and rising. They are a lucrative revenue stream for banks (iirc, ~$40 billion annually). See this piece by Felix Salmon for more: http://blogs.reuters.com/felix-salmon/2010/01/05/the-interch...

Thanks to the passage of Frank-Dodd, they should be dropping soon.

I either don't agree with your point, or don't understand it. Why is it a bad thing (and who is it bad for) to make money hard to track? I'm also pretty sure payment is difficult for far more reasons than just tracking.

It's a bad thing because it requires a business model where bucking the Federal government is a key requirement.

I hate to be so flippant, but do you not care where your money is? If money is hard to track, it's hard to tell who has been paid. Money laundering, for example, would be easier if money were harder to track. So... I can't imagine that making money laundering easier, in general, would be a good thing.

You're saying that everyone should have difficulties with payments so that the government can track criminals. By this logic, why have payment services at all? Then money laundering would be entirely impossible.

Cynically stating that PayPal is truly attempting to "steal" from their customers is incorrect. Based on most of what I've read (and I, like everyone here, have read a of PayPal horror stories...), PayPal "stealing" is really just PayPal giving a false positive about fraud and having abysmal customer service. While the end-result is indistinguishable from "stealing", they at least deserve the distinction.

However, that certainly doesn't excuse their actions. I wouldn't object to further regulation for PayPal but I have a feeling this won't happen anytime soon.

No. They are fully aware that their support is abysmal and they are fully aware of their false positive rate and they are fully aware of the positive consequence to their bottom line. Just because they abstract the stealing process doesn't make it less stealing.

> Theft: the illegal taking of another person's property without that person's freely-given consent.

We all consent to PayPal's terms when we choose them over some of their competitors.

"While the end-result is indistinguishable from "stealing", they at least deserve the distinction."

Sometimes the most straight-forward word to describe a thing brings the most clarity to the discussion. Doesn't pretty much any thief have a euphemism for what it is they do?

I agree, the word "feels" correct. The problem is we consent to using PayPal. Check this out:

> PayPal, at its sole discretion, reserves the right to close an account at any time for any reason, including but not limited to a violation of this Agreement, upon notice to the User and payment to the User of any unrestricted funds held in custody.

Didn't everyone click "I agree" to that?

1) I hate paypal.

2) I would respectfully argue that your point about banks being safe due to regulation is quite false. On the contrary I would say that it is (over-)regulation that causes banks to lose sight of their reason for existence (hint: its not selling mortgages to fanny and freedie), protection of capital (a service they used to charge for - Remember monthly checking fees?).

Banks used to be in the business of protecting capital before the FDIC insured deposits for them at an insanely low price (relative to the risk the banks can take), thus killing the "Capital Preservation" specialized bank and entered free checking / free saving / free homes. Low reserve ratios and a never evolving asset classification (Mortgage backed securities were satisfying the reserve ratio for banks? Only government regulators could think up that one) allowed banks to play with everyone's money. Was it because of greed? Kinda. Exacerbated by having customers deposits insured? Now we're getting somewhere.

Your point is not necessarily wrong, since most regulation is just a standardization of norms and practices common in the industry. But regulation can be bad (as almost anything in excess can be). The real reason Paypal sucks is my next point.

3) The real reasoning for their horror stories lies in the fact that they are simply an intermediary (of sorts, I believe that Paypal, the intermediary, is separate from Paypal, the bank). Person X pays Paypal and Paypal pays person Y. There are many ways this system could break down, but the most expensive for paypal are:

- Person Y (the getting-paid) has their account hacked and starts scamming people on eBay, listing a lot of auctions and getting paid, never shipping stuff, and running with the money. eBay has made it harder to do this though, since you have to provide proof of shipping to get the funds released.

- Person X (The payer) - has their account hacked (or their just a terrible person) and they charge up $1,000 in online shopping. Person Y ships the merchandise and Person X files a chargeback against Paypal. Paypal must then freeze that amount, sometimes taking it out of your bank account, to make sure they have the cash in case they lose the chargeback claim (which is really easy to do).

In the end, I'm not really sure where they system breaks down. Paypal is over-zealous about trying to prevent fraud, but, unfortunately, they are at the mercy of the Credit Card processors. Its kind of amazing that they were able to create a market where they are bullied on all sides, by essentially bullying their customers.

Banks used to be in the business of protecting capital before the FDIC insured deposits for them at an insanely low price (relative to the risk the banks can take)

They were never very good at that business, though. The main problem is that even a very conservative bank can't survive a large-scale bank run, and bank runs happened about every 15-20 years for an extended period of time: in the U.S., the Panic of 1819, Panic of 1837, Panic of 1857, Panic of 1873, Panic of 1893, Panic of 1907, and finally the panics of the late 1920s.

And now we're getting into the some good stuff. While there were events named "panics", before Quantitative Easing was even a buzzword, they oddly resemble their central banking modern day equivalents, primarily because they were/are caused by the same reason - Government meddling in/with the money supply.

I won't go through them all, but they faced the same problems we face today, and the same actors are the cause:

In the panic of 1873, lots of railroads had been financing up to the hilt with debt because you couldn't lose money building railroads (or houses, right?) and they lobbied the government for easy money policies (non-convertable notes, issuing more currency) so that the value of the greenback would drop, making their outstanding debt worth less in real terms.

Then the supreme court ruled in Hepburn v. Griswold in 1870 that "Legal Tender" (non-convertable US notes) was unconstitutional as per article 1 by a 5-3 vote. That shook up the market for the greenback, which was already trading at a heavy discount to gold dollars. But, don't worry, sure to create fear in the markets, President Grant appointed two new Republican judges (one open spot, and another spot created by a Majority member retiring post-vote), who quickly overturned that decision in Knox v. Lee by a 5-4 vote in May 1871.

Add on top of this divide between wanting Gold backed dollars vs US non-backed "greenbacks", the money supply doubled as new banks opened and loaned out too much. According to Murray Rothbard:

"The panic of 1873 was, not to initiate a great depression, but to cause bankrupt- cies in overinflated banks and in railroads riding on the tide of vast government subsidy and bank speculation."

I can see that argument for some of them, but some of them seem clearly unrelated to government meddling with the money supply. For example, the Panic of 1907 was caused by a failed stock-market-cornering scheme, which caused a cascade of failures when it collapsed (the cascade exacerbated by loss of public confidence leading to mass deposit withdrawals).

The trigger seems less important than the fundamental problem of bank runs, though, which is as old as banking: some trigger will eventually come by, and then you're hosed. The only way besides deposit-insurance I can think of to avoid it is full-reserve banking, where a bank literally holds its depositors' money in the vaults. But such banking has never been commercially very successful, because it has to charge fees and pays no interest to depositors, and when there hasn't been a crisis in some years, depositors' memories grow short, only to be awaked again in panic when it seems another crisis might loom.

One possibility could be to mandate that normal retail banking be full-reserve, by prohibiting banks that take retail deposits from lending that money out. That'd be fairly draconian regulation, though, even more strict than the old Glass-Steagall regulation of what retail banks could do with their deposits. (It seems Rothbard wants to get rid of fractional-reserve banking without the government banning it, but I'm skeptical it would actually go away the way he thinks it would.)

Thanks for the engaging discussion _delirium, its one of the best (well-mannered) I have had on HN in some time.

As far as full reserve banking goes, I think that it is all too easy to forget what bank products were actually intended for and how they are used now. For instance, a bank could in theory offer full-reserve banking without charging a fee to its customers by utilizing age-old banking products: The fixed term Certificate of Deposit (CD) and the Savings account.

If you wanted to invest your savings into something that would draw interest, you would use a CD, and the bank would be able to lend out that money for the designated length of maturity of the CD. Yea, mortgage interest rates wouldn't be 4%, but the proliferation of Buy now, pay later attitudes would decrease also.

If you didn't want to tie up your money for a fixed length of time, you could put it into a savings account. No way, other than by transferring to another account could you get money from this account. The bank could use this for shorter-term liquid investments (treasuries, whatever).

Checking accounts and accounts with access to credit / debit cards would require a fee and the bank could not lend out those funds, as they are held in full-reserve.

Ta-da, full reserve banking (not sure how Rothbard would have felt about the savings account thing). Way off-topic from the OP, but a great debate non-the-less.

"Way off-topic from the OP, but a great debate non-the-less."

I find this discussion very relevant to the question of whether Paypal is a bank, whether it should be a bank, if we were better off if Paypal was brought under government banking regulations, etc.

A bank doesn't exist to safeguard your capital. That's what they tell you to convince you to deposit your funds there. The government promises to make good any bank failure in order to convince you to deposit your funds in a bank both because it helps the economy and because it makes it easier to keep track of you for tax purposes. Before this guarantee it was common enough for a bank to fail and depositors would lose all their funds.

A bank exists to take in deposits, pay interest and then loan that money out to other people at a higher interest rate. It's a completely different model to PayPal, which exists as a payment transfer company along the likes of Western Union. Yes, they avoid banking regulations, but the banking regulations exist to protect the banking industry, as widespread bank failures can seriously damage the economy. This is because banks use fractional reserve banking and actually don't have the funds to satisfy all depositors at the same time. There's no reason why a payments transfer company should be regulated like this, because PayPal should be able to make good all requests for funds at the same time, as they don't (well, I hope not) leverage the funds on deposit and lend them out again.

If any regulation should be applied to PayPal, it should be in the area of consumer protection by having an ombudsman or defined area of recourse for settling disputes. But because of the trans-national design of the business, this is never going to work. And any increase in regulation is going to cause an increase in fees, which is the reason everyone uses PayPal in the first place.

Actually, in Europe Paypal operates as Luxembourg-based bank.

Does this mean that the horror stories of frozen assets donn't/won't happen to European accounts?

Considering that this story was from Europe, that doesn't appear to be the case.

Just recently a story was published in Germany where they evaded their responsibilities as a bank by clever shifting of responsibilties between eBay, PayPal and the credit-card issuer. So in case of a TV shipped to a identity thief chargebacks were no longer possible (I cannot find the article right now).

Another story where PayPal doesn't provide chargebacks to the customer after paying a non-shipping company:

http://www.heise.de/ct-tv/artikel/Video-Vorsicht-Kunde-80133...

(Update: I had the description and the video mixed up...)

I can assure you (from my own experience) that these horror stories also apply to EU accounts. In fact, the article was written about a Dutch PayPal account.

I can confirm that they are sitting on 2000 GBP of mine and not responding to anything.

Stop contacting them, and start contacting the relevant authorities.

It's looking increasingly likely that I will have to sue them.

I also confirm. My account is frozen for no good reason since 1 year. No reply to any mails. Germany.

I once used my Bank to get back my money from Paypal. Paypal took an amount from my credit card. So I called the bank and told them, Paypal did it without authorization. I had to fill a form and got my money back within a few days. I gave Paypal only access to my credit card, not to my bank account. Although they claim in their terms and conditions that this is correct (account OR credit card), I assume this is the main reason why my account is frozen. I can't even close it or delete data.

Technically, this is true. Being based in Luxembourg, however, effectively abrogates the effect of the regulatory aspect of things. I am not au fait with the ins and outs of Luxembourg's banking laws, but I do know it is a grey area of banking in the wider scene. Countries that tax worldwide income (e.g., US, Germany) routinely decry Luxembourg as a tax haven. I suspect, therefore, that Luxembourg does not regulate or apply its laws to commerce that occurs outside its borders. As I noted in the last round of "Paypal-was-architected-by-robber-barrons", Amazon in Europe is also incorporated in Luxembourg. Aside from its proximity to Brussels and being at the centre of western Europe, this is almost certainly for tax reasons. That is, they don't ship (or ship pitifully little) to Luxembourg itself and so pay considerably less in taxes than they otherwise might. Similar, though considerably less convenient, havens also include Jersey, Gibraltar, and Cyprus, all semi-autonomous regions belonging to the UK that attract businesses by taxing only commerce that occurs between two parties within their borders.

FWIW, I wouldn't touch PayPal with a barge pole. We use RBS WorldPay because 1. we get favourable terms as we have an account with RBS, 2. we get 1% transaction costs with no monthly fees,and 3. we get fraud protection by RBS WorldPay for free.

The tech folk at RBSWP are not the sharpest tools in the shed, but RBSWP itself has proven to be good for us financially. Another one that is quite popular but whose breadth of availability I do not know is SagePay.

How do you get no monthly fees? We have an account with NatWest (RBS group), but the site says 20 euros/mo.

Talk to your WorldPay account manager. We started off at 20 pounds/mo + a set transaction fee and then switched to 1%. It doesn't hurt so much when you are first starting out and it gives a helpful percentage to use in projections.

Thank you, I've send them a contact enquiry. How can it be so cheap, though? PayPal does 3.4% + $0.35, and WorldPay does just 1%? Is there a catch?

Paypal is regulated by the luxembougish banking association. The most important rule is "know your customer". If you don't do that as a bank, you will go to jail if you have dirty money coming in.

I suspect all those crying foul in the past (also the minecraft) guy never provided identifying information (an email and a name is not enough!) and when your account exceeds a certain quota, you have to provide these information.

" I suspect, therefore, that Luxembourg does not regulate or apply its laws to commerce that occurs outside its borders."

is just plain wrong.

It may be. But it is true that most tax havens, including the other three I mentioned, do not tax anything that does not happen within their borders. That is why there is the infamous address in the Caymans to which some 8000 businesses are registered, according to Obama.

What you are claiming holds for Delaware (which is in the USA!). Just google for delaware tax haven.

What you said is not true. According to the first link in the google search you recommend...

http://www.lectlaw.com/filesh/bbg33.htm

"Delaware LLCs pay a $100 annual tax and are otherwise tax free if no business activity is carried on in the US, most of its members are not US citizens or residents and it does not invest in US companies."

That's a lot of if's that there's no way a company like Amazon could satisfy. Also:

"Although there is no state income tax, as with all states no matter their particular tax laws, all US companies (or any entity for that matter) are subject to applicable federal tax laws & reporting requirements."

In other words, of course US taxes are still payable for companies incorporated in Delaware.

Businesses don't need the government to tell them how to treat their customers. It is in a company's best interest to be accountable for their mistakes because if they don't they will lose business.

Fraud is and always has been illegal, so why we would need a regulatory institution to tell businesses how to treat their customers is beyond me.

If anything, regulations just protect bigger companies from smaller competition because smaller companies can't afford to bear the cost of complying with regulations.

Businesses don't need the government to tell them how to treat their customers.

Apparently some do.

The annoying thing is that in cases like this, people are not supposed to just resign themselves to take it and they are not supposed to try to get Congress to force PayPal to do what they want by fiat, they are supposed to look around, say, "Oh, PayPal is a dishonesty entity that makes a lot of money from stealing; if it hasn't happened to me yet, it is more happenstance than anything else", and not use PayPal. This is a great opportunity for someone to create a non-broken, non-evil PayPal and make money off of it.

That is how the market is supposed to work but people are generally too lazy to care or do any research before they go on with something. What good is it to keep running to the government to tattle on everyone who crosses us? We need to teach people to cultivate a brain and learn from their mistakes instead of getting upset and running to Uncle Sam crying about the bully down the street; instead of trying to make your dads fight, just don't play with the bully anymore and the problem goes away.

PayPal should be running amiss of generic anti-evildoing laws involving fraudulent activities and deceitful business practices without the need for any specific legislation.

I don't think the problem is as much that end-users don't care enough to want alternatives, but that it's near impossible for an alternative to exist. During the dot-com era when PayPal came about, there were many other 3rd party processors doing the same thing, and they went out of business primarily because they were losing more to fraud than they were making on fees. PayPal was losing tens of millions of dollars a month at one point, but they managed to create good enough screening systems and policies in place to stay in business.

These days even if another company were to manage the fraud as well (which will almost automatically make them as bad as PayPal with freezing funds and accounts... you know real merchant accounts underwritten by banks do this too), but the regulatory climate around finance is so different that they'd be unlikely to get off the ground. Visa/MC/Amex/Discover would never agree to allow such large scale factoring (accepting payments on behalf of another business, forbidden in every standard merchant account agreement) again.

I wouldn't jump to conclude that regulation is the only answer. One of the reasons we have so little competition and innovation in this space is regulation.

It would be nice if Paypal got pulled in to line a little, but what I would really like is an alternative.

BTW, don't we already have laws against stealing?

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