PayPal criticismPayPal is not subject to regular banking regulations. Because it considers itself to be an 'electronic money transmitter', user rights and safeguards vary.
Controversial aspects of PayPal include the terms of its User Agreement; particularly, for limiting account access and user access to funds. According to the PayPal user agreement, users agree to give PayPal the power to limit access to funds in the account for 180 days. This policy appears to protect PayPal from financial loss in the event of chargebacks or disputes. Banks and financial institutions provide chargeback rights for a specified period of time that varies by the institution. PayPal's account access limitations prevent the movement of funds until discrepencies, or terms of the limitation, are resolved.
In March 2002, two PayPal account holders separately sued the company for alleged violations of the Electronic Funds Transfer Act (EFTA) and California law. Most of the allegations concerned PayPal's dispute resolution procedures. The two lawsuits were merged into one class action lawsuit (In re PayPal litigation). An informal settlement was reached in November 2003, and a formal settlement was signed on June 11, 2004. The settlement requires that PayPal change its business practices (including changing its dispute resolution procedures to make them EFTA-compliant), as well as making a $9.25 million USD payment to members of the class. PayPal denies any wrongdoing.
In September 2005, PayPal suspended an account (opened by Something Awful owner Richard Kyanka) used to collect donations for the American Red Cross to help Hurricane Katrina victims. After receiving over $30,000 USD in donations in 9 hours, PayPal locked-down the account. To re-activate the account, PayPal demanded "proof of delivery", even though no products were being sold. Kyanka asked PayPal to transfer the funds to the Red Cross; PayPal said they couldn't do this, but could give the money to United Way (a rival charity collecting for the same cause, that had an undisclosed agreement with PayPal). Kyanka originally agreed to this, but after learning of the United Way's prior legal troubles, he asked PayPal to refund all the donations. It's unclear whether simply waiting for PayPal to reach a decision in regards to the account would have resulted in PayPal allowing the money to eventually reach the Red Cross. [4] [5] [6]
PayPal's Seller Protection policies do not cover intangible goods or goods that are "not as described".
PayPal does not allow people from certain countries to use its services, and in some occasions where it does, it only allows the participants to send and not receive. This has brought criticism from people from within these countries.[7]
In August 2005 eBay required that sellers who accept PayPal not refuse credit card payments, which result in transaction fees. [8] Beginning in January 2006, eBay now prohibits any online payment system other than Paypal, as stated here[9]. This is due to the wide numbers of fraudulant online payment methods.
EBay lists Bidpay.com as the only alternative, but that company's demise predates this policy. Questions of illegality and antitrust have been raised over this new rule, mostly by merchants who believe they shouldn't have to pay for a legitmate service and abused the personal account status on PayPal. EBay specifically prohibits E-gold, a PayPal competitor with high fraud history. Ebay's new policy states that accepting a non-PayPal online payment system could result in the user's account being banned. Since PayPal only works in certain countries, Ebay's policy limits participation to the countries that PayPal supports.
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