Redditor burnt by Paypal's "Rolling Reserve" feature
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Try getting a false charge on your paypal card - the moment you notify them, they instantly cancel the card - but to get the money back you have to file a written snail mail report - and then they do not send you a replacement card automatically, they allow it to remain canceled and never support you otherwise unless you specifically ask for another card which will take at least two weeks to receive.
They have no problem with people leaving them as there is an endless supply of newbies and near zero competition with easy entry, because they aren't competing as a bank and don't have to obey banking laws.
Even traditional banks have way better customer service and terms.
That means he's going to be subject to the same kind of things other merchants who accept credit cards have to put up with (everywhere, not just at PayPal), including acquiring banks deciding to hold a reserve to offset their risk.
The acquiring bank is on the hook to the credit card associations and issuing banks for any chargebacks that he can not cover. Worst case would be if he goes out of business leaving no money, and a year's worth of his customers chargeback. The acquiring bank is on the hook for all of that.
From a risk point of view, an acquiring bank is in about the same position as a bank that is giving you a loan, collateralized by your business, in the amount of a year's worth of your credit card sales.
-A 30% default rate is absurdly high. There is no way 30% of the cards being used over the phone are stolen.
-Even if usage of the service stops, the Rolling Reserves are a permanent change to they way PayPal handles his account. He cannot turn this off, even if his risk profile goes to 0.
-PayPal is not even authorized to act as a bank in the state he lives and operates in.
It's not at all clear that merchant account providers are banks as far as state banking law goes.
Rolling reserves are not uncommon for merchant accounts. PayPal didn't event them. 30% is on the high side but if PayPal feels the merchant is risky they should have the right to ask for it. There are other merchant accounts out there this guy can use.
Does this matter? I use a bank which isn't authorized to operate in the country I live in (Harris Bank, operates in the US; I'm in Canada).
Other services suggested as alternatives in the Reddit thread, such as Google Checkout, also can hold reserves. This is not a PayPal thing--it is a credit card system thing. The system is designed so that if you end up owing money to the credit card association and member banks (say, for chargebacks), it is the responsibility of your merchant account provider to collect that money from you, and if they can't for some reason (e.g., you are involvement) then THEY have to pay it themselves. Essentially, your merchant account provider is guaranteeing to the credit card associations and the issuing banks that your debts to them will be covered.
This is what the author was using before. His change was to enable a feature that gave him access to a "terminal" wherein he could type credit card numbers himself.
In high-risk markets, and new merchants, it's not uncommon for funds to be held. But apparently this was neither. This is just paypal doing what it's always been known to do -- Assault the merchant while whispering in his ear "this is for your own good."
We really can't tell from the OP what market this guy is in, and what he is really selling. He is deliberately vague..
"I run a few online stores which sell various products (non-Ebay, just regular old stores that sell stuff I make or provide)"
If he's going to attempt to draw such a large amount of attention, it might be helpful to know what specifically he is selling from all of his "regular old stores."
I'm thinking there is far more to this story.
I no longer have anything for sale (I open sourced my AIS Parser SDK late last year) so it didn't have a dramatic impact on my income. I decided to drop my PayPal and eBay accounts without argument -- if that's the way they want to play the game then I'll just take my business elsewhere.
This also affects how each implements reserves. While merchant account providers may institute a 5% or 10% reserve over 3-6 months, it is more of an insurance policy spread across all of its accounts since it doesn't have a good handle on which individual account will blow up. Whereas PayPal implements reserve only after it has detected risk, it immediately places a larger reserve.
It never ceases to amaze me how negative the sentiment is towards PayPal from an audience that I would expect to be much more understanding of how difficult it is to process payments in real-time. And that PayPal became successful because of its actions, not despite them.
I guess that, to take a phone order over Stripe you would need a small app to talk to the API, live. Someone should build that!
Merchants physically located in Illinois, and directly selling goods, using PayPal to accept funds from Illinois residents and businesses and dispense those funds to Illinois businesses...that's a much stronger argument for tying PayPal to state regulation.
But what if some other service required you to provide a copy of a goverment issued id as well as the address associated with that id?
Stripe allows businesses to process on their merchant account, similar to how PayPal works. This removes the direct impact of a reserve, but if Stripe observes behavior that could increase their exposure to risk, I'm sure they will take action. It seems likely to me that Stripe will be more reasonable than PayPal in these instances, but that remains to be seen.
The difference will be if they're straight-forward with their customers and let them know of policies long enough before they're implemented so that they could plausibly leave the service if they disagreed. The problems with Paypal in the linked article were their refusal to discuss, especially beforehand.
Paypal, like EBay, (go figure) is an early entrant whose ubiquity has made them think they're successful on merit, and whose sheer size has kept competition away to re-enforce that image to themselves. As soon as a capable competitor steps up customers will flee these user-hostile companies.
Feefighters tells their customers to go with the absolute lowest priced merchant account provider because they are all the same otherwise. As this post points out, that's horrendously inaccurate.
A consequence is "It is therefore not possible for UK customers to obtain legal redress from (PayPal) in the English, Scottish, or Northern Irish Courts"
Another reason for not using PayPal in the UK.
I've been using them for years.