PayPal Updated: How to Protect Yourself From Fraud
Written: Jul 24 '00 (Updated Dec 18 '00)
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Product Rating:
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Pros: Convenient email payment system, great for auctions
Cons: Payments are just like cash, not regulated
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| netKat's Full Review: PayPal |
If you are a user, or potential user of PayPal, you owe it to your wallet to read this review. PayPal has a loophole in the system for scam artists and you could be the next victim! Although there are over 269 reviews on PayPal in the Epinions system right now, this one will take a look from a different vantagepoint... one of fraud protection for your money.
• First, An Overview of the Service
PayPal is a service that acts as a conduit for monies between people via email. It is the largest internet based payment network in the world, and has recently merged with X.com, a large internet bank. There are currently over 2.6 million registered users of this service and its popularity is growing by leaps and bounds daily. It is the primary method of payment used on eBay, and many other online auction sites.
PayPal is also expanding to allow transactions via Palm Pilots, Internet enabled cell phones, web enabled pagers, and will be going International in the near future.
PayPal is deceptively simple. You sign up for an account (and get a $5 bonus, by the way) and you're ready to start channeling money, both paying and receiving, with other PayPal account holders. You can fund your account via check, money order, electronic fund transfer, or credit card. When it's time to pay someone, you simply transfer monies from your PayPal account into their PayPal account. You will even receive a bounty (another $5) for others that you sign up to PayPal. What a great idea! Simple, convenient, and free.
***UPDATE: As of October 9, 2000, PayPal no longer pays $5 per referral on personal accounts.***
PayPal is "safe" in that all the transactions over the Internet are secure, and your personal bank and/or credit card information is never known by the other parties.
• But How does PayPal Make Money?
PayPal makes plenty of money enjoying the float on the money of others. They are acting as a holding place for large sums of money on which they are taking in interest, yet paying out none.
• Watch Out! PayPal is not Regulated
PayPal is so simple, that anyone with an email address can open a PayPal account. And once you send your money to that PayPal user, it's gone, and PayPal will not be held responsible.
The danger is that many people look at PayPal as a kind of bank or credit card substitute. Although PayPal is now affiliated with X.com, an internet bank, PayPal itself is not a bank therefore it does not have to abide by Federal banking and/or credit regulations. You have none of this type of protection under law for monies you store in, or send through, PayPal. None.
PayPal makes it very clear in its Terms of Use document that it "does not ensure the quality, safety, or legality of the merchandise received, nor that the seller will even ship the merchandise". Additionally it states: "Confinity {the parent company} shall not be responsible for payments made to unintended recipients due to the input of incorrect information by senders, nor shall we be responsible for the verification of the identity of users".
Previous to a very recent amendment to their terms of use, even though you may have been funding your PayPal account through your credit card, you would have none of the protection of a credit card purchase once that money left your PayPal account. Based on consumer feedback, and the following scam, PayPal has now agreed to at least cooperate with your credit card issuer should you initiate a dispute. Of course, if you did not fund your purchase via a credit card, you will not be able to dispute the charge.
• The Scam
The scam that has developed involves a seller auctioning items, being paid via PayPal, and never sending the merchandise. With a credit card, you have many legal rights, including the ability to dispute the charge and have it refunded to your credit card. With PayPal you have no such rights, especially if your account was funded by means other than a credit card.
I would like to add here that a representative of PayPal did get in touch with me to fully explain their recently updated policy of cooperating in a consumer initiated credit card dispute. They changed their policy based on some recent consumer issues. Previously, it was PayPal's policy not to get involved at all. They will now cooperate with your credit card issuer, even though your dispute is really with a third party (the seller) and not with PayPal itself.
Here is a list of people who were scammed by one Auctioneer on Yahoo when they attempted to purchase hard drives. The total is over $10,000!
http://www.geocities.com/jhamstead/fraud_list.html
It is admirable that PayPal has changed their policy from one of noninvolvement to cooperation, but remember, it is ultimately our responsibility as consumers to know to whom we are sending our money before we enter into a third party transaction!
• Cash from your Credit Card billed as a Purchase!
Another interesting loophole I found during my investigations was that PayPal bills to your credit card as a purchase. Therefore, you have the potential of a grace period on your funds even though you hold them in cash. Utilizing this system, you can get what amounts to a cash advance from your credit card without paying any of the fees or higher interest rates normally associated with that type of transaction.
Additionally, it makes for very easy kiting of funds (funding accounts with money that you actually don't have - ie: "purchase" on your credit card). You could actually be earning interest on monies channeled through PayPal, and keep a cycle going so that you never really have money out of your pocket. I can't imagine that the Visa/MasterCard cartel will allow this to go unchecked much longer. It should be noted that kiting is not a legal activity and one which can result in your accounts being closed, not just with PayPal but also with your credit card issuer and even your personal bank.
• What if Someone Uses Your Account?
According to the PayPal Terms of Use, if you notify them within two business days after you learn of unauthorized use on your PayPal account, you can lose no more than $50. However, if you do not notify them within two business days, and PayPal can prove that they could have stopped someone from using your account had you told them, you are out up to $500.
PayPal may also send out a notice asking you to inspect your account history online. If you have unauthorized transfers on your account and you do not respond to their notice within 60 days, and they can prove that they could have stopped the unauthorized use had you responded, there is no limitation on how much you can lose.
• In Conclusion
PayPal is an excellent service and is successfully utilized by many people, including me. But we need to be aware that paying with PayPal is just like paying with cash. Buyer Beware, know who you're dealing with, because PayPal has no obligation to take any responsibility for helping you get your money back in cases of fraud.
Think of it this way: would you walk up to a stranger on the street and hand him a couple hundred dollars based on his promise of delivering some merchandise to you in the near future? Sounds kind of preposterous, right? Well, this is basically what PayPal is, the middle man on a street full of strangers. We, as consumers, need to use every precaution available to us. PayPal may be a friend, but be sure that third party is too.
I would like to thank fellow epinionator Kurt_Kurosawa for bringing the PayPal/Yahoo Auction scam to my attention via this article he sent me by email: http://www.msnbc.com/news/434192.asp?0nm=-14K&cp1=1.
*** UPDATE 8/5/00 ***
Once again, PayPal has altered its Terms and upgraded its protection to consumers.
Buyer Protection Guarantee
PayPal has refined their registered user system to provide a Buyer and Seller Protection Guarantee. For the Verified Buyers, they will reimburse you up to $5,000 per year for cases in which a Verified Seller fails to deliver the paid for goods.
For Verified Sellers, they will indemnify you for a chargeback liability resulting from fraudulent use of a Verified Buyer's credit card for purchases through PayPal.
(A chargeback on a credit card results from a dispute, which is arbitrated in favor of the purchaser. The issuing bank will reverse the charge, crediting the purchaser's account and debiting the merchant's account.)
How Does a Buyer or Seller become "Verified"?
PayPal will ask you to provide your bank routing number and account number. They will then make two small deposits into that account and ask that you verify the amounts of the deposits by entering their amounts in a dedicated section of the PayPal website. This verification process is all done at PayPal's expense and only takes several days.
How Do I Know Who is Verified and Who is Not?
When you get to the confirmation page during the transaction process, PayPal will indicate whether or not the person you are dealing with is registered and/or verified. You do not have to go through with the transaction at that point if you do not want to.
Here is some important information about the new policy:
• You must make several documented attempts to resolve the dispute on your own.
• You must have contracted with a Verified Seller.
• This is for nonreceipt only, this policy does not apply to disputes involving the quality or the delivered goods.
• You must file a claim within 60 days from the date of payment, but no earlier than 30 days from the date of payment.
• Buyer Protection is only available on transactions made on or after August 1, 2000.
• PayPal reserves the right to terminate accounts that have "excessive" disputes, claims either on or from other consumers, chargebacks, or refunds.
This is a step in the right direction for PayPal. They appear to be a consumer oriented company who is trying to do the right thing. In order to take advantage of this new guarantee; remember that both you and the other person must be "verified".
- You may be interested in these other related articles: -
• What YOU need to know about Credit Card Fraud, from an Industry Insider
http://creditexpert.epinions.com/finc-review-78D6-D46160-3887762C-bd1
• An Insiders Comprehensive Guide to Avoiding Credit Card Fees
http://creditexpert.epinions.com/finc-review-7D30-14D8F7F-3894936A-prod2
• The ABCs of ATMs: Tips to Avoid the Fees from an Industry Insider
http://creditexpert.epinions.com/finc-review-5F88-AA45237-38E3D91C-prod4
• Horror of Another Kind: Credit Card Fiascoes: How other people's mistakes can save YOU money!
http://creditexpert.epinions.com/finc-review-5BF7-C7714F5-38E88159-prod2
Recommended:
Yes
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Epinions.com ID:
netKat
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 - Top 200 |
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Member: Kat
Location: Maryland
Reviews written: 166
Trusted by: 885 members
About Me:
Analytically inclined mom, bank officer, freelance writer, and internet addict.
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