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Comment by glimcat | Hacker News Reader

A big part of the problem is that fraud prevention is HARD.

Worse, it's prone to expensive scaling laws, and more so if you want to catch edge cases, and much more so if avoiding false positives is critical.

Any PayPal successor which is successful enough to become an interesting target for fraud will have to deal with exactly the same problems, possibly causing service to break down in similar (or equally problematic) ways.

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Fraud prevention is hard, customer service is not. PayPal works hard at fraud prevention but totally abandons customer service. All they need is a few people who have authority to actually help. If a company the size of amazon can do it, so can PayPal.

Good customer service is expensive. Paypal doesn't sell itself on customer service for sellers, since it perceives (probably correctly) that those sellers using Paypal have nowhere else to go.

The patent on a fraud-free electronic payment technology has come and gone. The banking industry relies on the existence of fraud, because it decommoditizes money into an identity-based instrument - akin to ISPs wanting to provide bundled "differentiated services" instead of moving opaque bits. Information commoditization causes frictionless competition, which makes for a race to the bottom and much less profit.

Really? So if I used Visa or Amex and I got a sudden run of orders they would suspend my account? I hardly think so!

Yes, they would. With a traditional merchant account (as you apply for to directly accept Visa or Amex), you declare your expected monthly volume and average ticket size on the application. If your actual processing deviates from those values significantly, the risk department will almost definitely hold your funds in a reserve account until they straighten things out with you and establish you're still operating within the bounds of the risk profile established when they opened your account.

And if PayPal did that then they wouldn't get the same criticism that they get for holding your funds WITHOUT being willing to straighten things out.

When I got my first merchant account, I declare those numbers based on the current state of the business: About $1000/mo. I never revised those numbers in the 6 years I had the account. When I sold the company, we were doing +$1MM/yr. I've never had this happen on any other merchant account I've used since.

Obviously YMMV, but that's just my experience with risk tiers.

You built it up over 6 yrs... if you went from $1k/mo to $1k/day fairly quickly, say even in the first year, you would have had to do some explaining.

With an established account, it is a non-issue because they have the chargeback history. New accounts are monitored differently because of the potential for abuse. Had your chargebacks spiked, your merchant bank likely would have withheld funds.

My first start-up was almost tanked immediately because of a crappy merchant bank (Cynergy, if you're wondering). We got our first large order, much larger than we ever had before, and it exceeded our average daily balance in our bank account. They froze the funds for 6 months since that's the potential chargeback period. Meanwhile, we had to foot the bill on the material as we were a hardware company and had to float those funds for a while. Our margins weren't so high that this was a simple matter for us.

We ended up switching to a merchant bank that was better for online transactions. Cynergy ultimately released the funds as three different disbursements after we closed our account and decided to charge us account activity fees for those three months as well. It was frustrating to say the least.

Could that risk not have been averted by paying closer attention to merchant agreements and shopping around more?

Your merchant account has a limit. When you're about to blow it out of the water, you pick up the phone and call your merchant and talk about it, not wait for everything to go into automatic investigation fraud hell.

There are no flawless , fire and forget payment solutions that scale to any amount out there, there are just too many variables.

Possibly. But I've never actually been given a merchant agreement with any of the accounts I've ever set up. I've been given a rate sheet and little more beyond that. Shopping around is hard when you effectively have no prior business history. This has gotten a bit easier in recent years and Stripe makes the issue a bit moot. But, the point is the grass isn't necessarily greener and merchant banks can and will freeze funds if they think doing so will avert a bad outcome in a risky situation.

While this may be true, this also doesn't always hold. I was treasurer for a student union and if people signed for it, we would take the money directly out of their bank account ("automatische incasso", very normal over here). Doing this requires a contract with a given limit and number of transactions. I tried to get the limit raised, but they refused, so I just went over the limit and no one ever ever complained. Had no chargebacks, but still, doesn't seem like a very safe situation.

I stand corrected!

Believe it or not, yes. You have to make them (through the arm they entrust with safeguarding them against risk, your Acquiring Bank) aware that you are expecting a large increase in your transaction volume so that you do not get shut off.

From what I understand they have tiers for assessing risk level, if you're not approved for a higher tier and try to cross the threshold your account will be flagged and cut off automatically until they can investigate/approve.

The difference is that when this happens you have someone to call and tell you what's going on. If you ask nicely, maybe you can even get a ballpark estimate for when something should happen next. You know, people acting professionally and such.

They almost certainly will not unfreeze the funds if your bank account can't cover the amount. All credit cards allow the customer to chargeback. If you're no longer solvent, the merchant bank eats that loss. So, they do whatever they can to prevent that.

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