10 ms·

Paypal froze our funds, then offered us a business loan

299 points by caser 11y ago

kayfox 11y ago
I am in a position to hear a lot of comments on Paypal from freelance artists, and I often hear of them freezing someone's account over some transaction or for no expressed reason at all. I often wonder how they can get away with this, I would imagine if a bank did this they would be in hot water quickly with a regulator. It all seems a bit shady.
- rodgerd 11y ago
  > I often wonder how they can get away with this, Regulation bad! Disruption good! Magic of the marketplace!
- URSpider94 11y ago
  Merchant account banks do this ALL THE TIME. It's standard business. See here: https://www.reddit.com/r/smallbusiness/comments/320bbd/my_merchant_account_provider_is_holding_over/ https://www.reddit.com/r/smallbusiness/comments/320bbd/my_me... or here: https://chargebacks911.com/knowledge-base/what-is-a-merchant-account-reserve/ https://chargebacks911.com/knowledge-base/what-is-a-merchant... or here: http://www.cardfellow.com/merchant-account-holds/ http://www.cardfellow.com/merchant-account-holds/
  - scott_s 11y ago
    This is the key point: PayPal is not your checking account. PayPal is more like a merchant account which voluntarily takes on much more risk than most banks are willing to in their merchant accounts.
Osiris 11y ago
I have a small side business that does < $1000 a month in PayPal transactions, but I regularly withdraw money from my PayPal account to my bank account specifically because I don't trust leaving my money in PayPal. Why don't larger business do more frequent withdrawals from PayPal to a proper bank?
- JTon 11y ago
  Probably due to withdrawal limits (x dollars/month)
- frandroid 11y ago
  There's kind of a "sour spot" with PayPal where you make enough money to be a serious liability but not enough to have an account manager. I used to work for an organization that went through $100k's per month on PayPal and we had an account manager who could solve problems for us fairly quickly. Also unlike the story here, all of our customers were in Canada so there was probably a lot less automatic risk-flagging happening on our account...
- kentt 11y ago
  It's happened to me. The issue is, you aren't allowed to withdraw your money. Like you, when I get paid in Paypal, I want it out of Paypal as soon as possible. I've request the transfer to my bank account the same day and as per usual but then found that the funds were frozen. In my case, I guess I looked sketchy because I had surges of sales (no sales most months, 5k one month). I did eventually get my money.
  - mcv 11y ago
    Did they pay interest over your money? Getting your money late can still be very costly for some businesses.
    - kentt 11y ago
      Sorry, just saw this now. Nope, they just released it after a period of time expired (a month?).
- mrweasel 11y ago
  We had an account manager from PayPal at a meeting, a rather unpleasant person, not that I blame that on PayPal. He didn't take it to well that I told him that they are the last company I would entrust with my money. We use them out of necessity, not because we want to.
iaw 11y ago
I've avoided having to trust PayPal with any sum of money since I first heard of their freezing practices years ago. Back then (not sure if this has changed) they weren't regulated like a bank so they could get away with some pretty shady behaviors. I always suspected that they were taking the collateral and making short-term investments, this is the first time I've ever seen them try to do both with the same company at the same time...
quasse 11y ago
I'm just starting to need a real solution for taking regular payments and Paypal didn't even cross my mind as a serious contender. The business model they've cultivated engenders similar levels of trust to car salesmen and the people who charge lost equipment fees at Comcast. I'm looking at Paysimple for their integrated invoicing and transaction handling but I'd love to hear what other people use.
- pc86 11y ago
  The last project I worked on required integrating with clients' existing payment infrastructure, including merchant accounts, and processing their customers' payments for them in addition to billing them a small monthly fee (we didn't take any piece of customer payments). We used Chargify. It was pricey, I think about $120/mo to support ACH for a few hundred clients, but the API is solid and well-documented. They've got several employees whose job it is to work on the official libraries, as well. I am no longer a Chargify customer because that project never really panned out. I don't have any official relationship with them.
  - jakejake 11y ago
    The one-stop-shops are definitely slick and easy to get started. But when you start doing serious amounts of transactions you really have to shop for competitive rates and consider other less sexy gateway providers. I don't know anything about chargify but even stripe will negotiate with you if you reach a certain volume. Once you start paying tens or hundreds of thousands in fees, those percentage point fractions become a big deal!
    - pc86 11y ago
      Absolutely! One thing I liked about Chargify was that you used whatever payment gateway[0] you wanted, including Stripe. I don't know if you can negotiate with the gateway directly at large volume even if you're going through Chargify - I suspect not, but it'd be worth a shot. [0] https://www.chargify.com/payment-gateways/ https://www.chargify.com/payment-gateways/
- 11y ago
akeck 11y ago
Friends who do a lot of Ebay transactions have always recommended getting a dedicated checking account for Paypal, and then setting up regular transfers out the account, so that one's ability to pay bills and vendors will not be impacted by a Paypal issue.
maxmcd 11y ago
The fraud department at PayPal has to exercise a large amount of caution because if they make a mistake they lose more money. The lending department at PayPal can be more opportunistic because they can potentially turn a profit with a successful loan. I'm not saying that either of those actual departments are correct or that their decisions are sound, but even at a perfectly run organization wouldn't this paradox be somewhat present?
- mcphage 11y ago
  I see what you're saying, but I wouldn't expect there to be overlap. I don't know how paypal chooses whose accounts to freeze, but let's say, for the riskiest 5% of accounts. Now, the lending department can handle a lot more risk than the fraud department (as you note). But I don't think they would be willing to extend that to the riskiest 5% of accounts. If there is overlap in "too risky to thaw funds" and "trustworthy enough to offer loans", then either their lending department offers loans to some seriously risky clients, or the fraud department freezes a huge % of accounts' funds. Neither seem like an acceptable situation.
  - maxmcd 11y ago
    Sure, no disagreement here. I'm looking at it slightly from the other direction. Knowing PayPal's history, and how hard fraud is to nail down on the web, I'm assuming that the 5% is actually much larger, and that the fraud department is overcautious. If that's not the case, then you're right. But if I work in the loans department and I know that the fraud department tends to blow things out of proportion, because that's what's required to prevent fraud at PayPal scale, then I should expect a little overlap. I guess overlap might not be expected at a "perfect" organization as I mentioned, but I can imagine how it might happen at PayPal
sageabilly 11y ago
Is PayPal still around simply because, as one of the earliest and one of the biggest payment facilitators on the Internet, it's become ubiquitous enough to not have to worry about being displaced? I cannot for the life of me understand how it's still a thing since every week there's yet another story of "PayPay did Shady Thing that a bank couldn't do and now I have no money and no way to get my money back." Why is PayPal not dead? In all my research I have never been able to come up with a good answer to that question. [edited to add] Aside from consumer ignorance of other options, that is.
- oxryly1 11y ago
  I'd switch to square, but since I don't have a debit card I can't use it. I can still use paypal (and annoy my friends in the process.) EDIT: To answer your question, paypal still exists for the same reasons banks exist when people hate them, and for similar reasons to why you'd hire a tour company or local guide when visiting a different country. They are embedded -- they offer increased access via established agreements with more financial entities. They have more mastery of the regulatory landscape than their competitors (especially startups). Finance is in many ways very traditional business, and paypal has invested in traditional parts of business. I'd bet they employ more lawyers than any other payment startup out there, for example.
  - sageabilly 11y ago
    What kinds of transactions are you doing? Friendly ones between people you know, selling stuff on CL, eCommerce? I'm curious.
    - oxryly1 11y ago
      Just paying friends back for dinner and such.
      - sageabilly 11y ago
        Venmo is your new best friend.
jamisteven 11y ago
Think OP is assuming Paypal has departments that understand how eachothers decisions affect the other, PP is a huge company and I doubt malice was actually intended, but nonetheless pointing it out to them was necessary.
jusben1369 11y ago
There's very little thought put into a discussion on "why" PayPal froze those funds. PayPal says "based on what we've seen in the past there's a high probability that you'll collect a lot of money for an event and then not execute that event. If that happens, we PayPal will be on the hook to make those payments to those disgruntled end users. So we can either 1) Simply refuse to work with you or 2) risk share with you by keeping enough in your account so that we can reduce our exposure to those types of claims" If you chose a business model with an elevated level of risk then you'll have extra expenses associated with that. I really dug that email. It's encouraging that it triggered what sounds like a very real internal discussion amongst multiple people there vs being getting completely ignored. I know I sound like a PayPal apologist - I'm not! I know there are some very real horror stories out there. It's just that they're probably one of the few payment companies that would enable this business to actually be a business and asking $20K in surety when you're _on the hook too_ isn't as mean spirited as it first appears.
- smt88 11y ago
  Freezing the account is not, in and of itself, what makes this incredibly unethical. It's trying to sell a loan after freezing the account. That creates an enormous conflict of interest for the people at PayPal who decide when to freeze/unfreeze an account.
  - omfg 11y ago
    It's just an automated ad promoting a product. I'm sure that company saw other ads when logging in on different days. Is it silly that they advertise it on high risk accounts? Maybe.. but it's nothing nefarious.
    - PixelB 11y ago
      According to the article, PayPal claimed that it was not an automated ad and they were in fact eligible for it. "To paraphrase: “It may seem weird that we’re holding collateral on your account and offering you a loan, but that was not a mistake! You’re still eligible. Contact me if interested.”"
horsecaptin 11y ago
Clearly the used car sales department forgot to check with the customer service department whether the customer is actually happy with the ongoing relationship.
ChuckMcM 11y ago
Generally good advice when considering PayPal is to recite to yourself "PayPal is not a bank, PayPal is not a bank, ..." But they do like money, and they like to move it around creatively and create ways to use other people's money to make money for them. One of the reasons they aren't a bank is they don't do (and are not allowed to do AFAICT) fractional reserve lending. In that sort of scenario this story makes a lot of sense, you freeze(or seize) assets from your customers, and then loan them out to other customers who pay you interest on repaying that loan, and if they default you presumably keep the other customer's money to cover that "loss". Sort of 100% reserve banking.
- pc86 11y ago
  Do you have any evidence that freezing funds is related to lending? Because that's a pretty massive claim, particularly since they are supposedly two completely separate business units on separate budgets and P&Ls (fraud prevention and lending).
nqzero 11y ago
regardless of what division is making the determination, either the company is risky or they're not. charging them interest to access the money that is rightfully theirs is extortion, plain and simple
URSpider94 11y ago
This is not surprising to me at all, nor do I see anything nefarious in this. PayPal operates two different business units, a payments processing business and a commercial loan business. Both operate on separate P&L's, and with different risk requirements. Let's consider two different situations: 1. PayPal's payments processing group worries about the risk of your account, and thinks about applying a hold on your funds. Just before doing so, they call the loans group, who says that they'd be perfectly happy to give you a loan for the amount of the hold, you're good for it. So, Paypal as a whole decides not to place a hold. 2. Paypal's payment processing department worries about the risk of your account, so they place a hold on your deposits. In parallel, the loan department decides you're a good credit risk, and so you apply for and receive a loan for the same amount as the hold. In case 1, if those payments do indeed get charged back, Paypal is forced to try to come after you for the balance. Unfortunately, this debt won't have very strong legal standing, because it's not backed by a loan agreement. They might or might not get their money back. It also puts them in the position of having to chase you for the money. In case 2, if the payments get charged back, Paypal is sitting on the funds already, and can just claim them. This might cause you to default on the loan, but that's your problem now, not PayPal's. They are also making interest on the amount of the loan. It's pretty clear that Case 2 is MUCH better for PayPal, and only marginally worse for you, assuming that you are right about the payments all being good -- you are only out the interest cost on the money. What you seem to be arguing is that PayPal should be "nice" to you and go with Case 1. The other fact that you might be missing is that nearly all traditional payment processors would require some kind of reserve account in situations like this, and even if they weren't holding the money, they require that they have withdrawal privileges on the account into which the funds deposit so that they can claw back money if needed. PayPal is by no means unusual or abusive in holding funds, it just seems that way because they don't pitch this as part of their up-front marketing.
- nickpsecurity 11y ago
  Well-put. A parallel here is the pre-approvals for credit cards that people receive in the mail. It's not uncommon for a person to get those who is regularly turned down by offers or even in collections. There's just some algorithm or set of criteria by a certain company that says "send the offer" while others with different information or criteria would refuse it. Simple as that most of the time.
a3n 11y ago
> Since we were a risky account, they said they needed to hold on to the remaining $20,000 for up to six months. I would think just about any new business is some flavor of "risky." I don't see why any new business would use paypal knowing that.
ErikAugust 11y ago
Speaking from a nightmarish personal experience moving hundreds of thousands with PayPal over the years, it is astounding to me that it took so long for someone like Stripe to come along. It is not astounding they have quickly blossomed into a valuable company. Why did it take so long? And what about eBay? Someone should consider taking that on. Letting a huge business being an incumbent without competition for 15+ years in the web world seems so absurd.
- TheOtherHobbes 11y ago
  My understanding is there are epic regulatory and bureaucratic blocks involved in setting up international payment services - ironic given PP's reputation, but so it goes.
deleted 11y ago
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CPLX 11y ago
The OP of this story was collecting money in the U.S. for events and lodging that had not yet happened in third world countries, and presumably was remitting a healthy amount of money from those transactions to multiple small accounts in said third world countries. Their business was brand new and had no extensive transaction history with Paypal or anyone else. The customers providing the funds in question were most likely paying with credit cards and would be able to charge back the funds if the events didn't take place or were unsatisfactory. I find it impressive that Paypal was willing to work with them at all given the above fact pattern. Many, many payment processors simply wouldn't be usable at all.
Animats 11y ago
Why use PayPal for credit card payment processing above the petty cash level? If you're up to $30K, you should be getting merchant services from a real bank, not an intermediary. If you're not using eBay, PayPal provides few benefits.
- rsync 11y ago
  I can't comment on the OP, but in addition to the "normal paypal stuff" that paypal does and that we are all familiar with, paypal also has a standard bank-style card processing unit called "payflow". Rates and policies and fees are very, very good with payflow - they are very competitive - and it made very good sense for us to move from a traditional card processing setup at wells fargo to paypal for this. We made that switch three years ago and it's all worked out very well - and it saved us a lot vs. wells fargo, who was doing all of the "normal" merchant/bank/processor tricks that distort the costs a lot.
Kinnard 11y ago
I think this is more common than people might realize. In fact, I think it's fundamental to how the predatory lending industry(READ: banking industry) operates. David Graeber's DEBT is a good read: http://libcom.org/files/__Debt__The_First_5_000_Years.pdf http://libcom.org/files/__Debt__The_First_5_000_Years.pdf
pmontra 11y ago
Partially off topic but what would you recommend for transactions in the 1 to 10 Euros range in Europe? PayPal and Stripe have fixed costs per transactions that are quite substantials on the amounts at lower bound of that range. Thanks.
deleted 11y ago
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patsplat 11y ago
This is frustrating, but not necessarily a conflict of interest. Any type of events business carries a significant risk to a payment processor. Funds are paid up front before services are delivered. If the event doesn't happen there will be a demand for refunds. This isn't necessarily due to malfeasance on the part of the promoter. Imagine there was a conference booked in the World Trade Center for September 12th. Boil it all down and what PayPal is doing is charging a higher percentage fee (aka the base fees plus the interest on the loan) for a business they deem to be more risky. Entirely fair. Now for the way they presented those fees - absolutely unacceptable customer service.
- patsplat 11y ago
  To clarify the comment about refunds. Participants would first go to the promoter. But if they were unable to resolve the dispute, they could then go to their bank and dispute the charge. My understanding of this is murky, but in the end PayPal does carry a liability for those funds as a participant in the transaction.
jadoti 11y ago
Nice of them to loan you your money with interest... if they were an honest company, maybe they'd offer to use the business LOC as collateral and free up your funds, dipping into the credit should the risk become real and your funds get charged back... ... if they were an honest company ...
shorsusan1 11y ago
I am considering on using Paypal in my startup business. How do you feel about it? I attended a startup conference 6 months ago. Paypal was also there claiming that there will be solutions for startup business. I don't know if this is a special case. How can I avoid my capital from being frozen? Singing "Let it go"?
- patio11 11y ago
  Will you have delivered the product/service at issue at the time you charge the card or within a short period of time thereafter? If so, it is highly likely you will not have any issue with Paypal. If you are accepting pre-payment for something which cannot be delivered in full shortly after payment, it is likely that you'll have to become conversant with Paypal's published guidelines about this. Spoiler alert: if you are in an events business, "We emailed a ticket" does not constitute delivery of the purchase. Successful conclusion of the event constitutes delivery. Most events businesses structurally need to pre-sell tickets. They will, virtually inevitably, have more issues with collecting payments than e.g. a software company which says "You give us a credit card we give you a working download link." This is not a result of caprice by Paypal -- more than 1% of scheduled events fail to actually happen; when that happens, Paypal gets hit with hundreds of chargebacks. More details: https://www.paypal.com/webapps/mpp/brc/presale-policy-and-reserves https://www.paypal.com/webapps/mpp/brc/presale-policy-and-re... Events businesses: https://www.paypal.com/webapps/mpp/brc/account-reserves-tickets-and-reserves https://www.paypal.com/webapps/mpp/brc/account-reserves-tick...
shorsusan1 11y ago
I am considering on using Paypal in my startup business. How do you feel about it? I attended a startup conference 6 months ago. Paypal was also there claiming that there will be solutions for startup business. I don't know if this is a special case. How can I avoid my capital from being frozen? Singing "Let it go"?
timshivcc 11y ago
Honestly, I just went stealth and operate numerous accounts. If PayPal wants to freeze my funds, let them. Play with fire, your going to get burned.
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299 points by caser 11y ago

I am in a position to hear a lot of comments on Paypal from freelance artists, and I often hear of them freezing someone's account over some transaction or for no expressed reason at all. I often wonder how they can get away with this, I would imagine if a bank did this they would be in hot water quickly with a regulator. It all seems a bit shady.

rodgerd 11y ago
> I often wonder how they can get away with this, Regulation bad! Disruption good! Magic of the marketplace!
URSpider94 11y ago
Merchant account banks do this ALL THE TIME. It's standard business. See here: https://www.reddit.com/r/smallbusiness/comments/320bbd/my_merchant_account_provider_is_holding_over/ https://www.reddit.com/r/smallbusiness/comments/320bbd/my_me... or here: https://chargebacks911.com/knowledge-base/what-is-a-merchant-account-reserve/ https://chargebacks911.com/knowledge-base/what-is-a-merchant... or here: http://www.cardfellow.com/merchant-account-holds/ http://www.cardfellow.com/merchant-account-holds/
- scott_s 11y ago
  This is the key point: PayPal is not your checking account. PayPal is more like a merchant account which voluntarily takes on much more risk than most banks are willing to in their merchant accounts.

Osiris 11y ago

I have a small side business that does < $1000 a month in PayPal transactions, but I regularly withdraw money from my PayPal account to my bank account specifically because I don't trust leaving my money in PayPal. Why don't larger business do more frequent withdrawals from PayPal to a proper bank?

JTon 11y ago
Probably due to withdrawal limits (x dollars/month)
frandroid 11y ago
There's kind of a "sour spot" with PayPal where you make enough money to be a serious liability but not enough to have an account manager. I used to work for an organization that went through $100k's per month on PayPal and we had an account manager who could solve problems for us fairly quickly. Also unlike the story here, all of our customers were in Canada so there was probably a lot less automatic risk-flagging happening on our account...
kentt 11y ago
It's happened to me. The issue is, you aren't allowed to withdraw your money. Like you, when I get paid in Paypal, I want it out of Paypal as soon as possible. I've request the transfer to my bank account the same day and as per usual but then found that the funds were frozen. In my case, I guess I looked sketchy because I had surges of sales (no sales most months, 5k one month). I did eventually get my money.
- mcv 11y ago
  Did they pay interest over your money? Getting your money late can still be very costly for some businesses.
  - kentt 11y ago
    Sorry, just saw this now. Nope, they just released it after a period of time expired (a month?).
mrweasel 11y ago
We had an account manager from PayPal at a meeting, a rather unpleasant person, not that I blame that on PayPal. He didn't take it to well that I told him that they are the last company I would entrust with my money. We use them out of necessity, not because we want to.

iaw 11y ago

I've avoided having to trust PayPal with any sum of money since I first heard of their freezing practices years ago. Back then (not sure if this has changed) they weren't regulated like a bank so they could get away with some pretty shady behaviors. I always suspected that they were taking the collateral and making short-term investments, this is the first time I've ever seen them try to do both with the same company at the same time...

quasse 11y ago

I'm just starting to need a real solution for taking regular payments and Paypal didn't even cross my mind as a serious contender. The business model they've cultivated engenders similar levels of trust to car salesmen and the people who charge lost equipment fees at Comcast. I'm looking at Paysimple for their integrated invoicing and transaction handling but I'd love to hear what other people use.

pc86 11y ago
The last project I worked on required integrating with clients' existing payment infrastructure, including merchant accounts, and processing their customers' payments for them in addition to billing them a small monthly fee (we didn't take any piece of customer payments). We used Chargify. It was pricey, I think about $120/mo to support ACH for a few hundred clients, but the API is solid and well-documented. They've got several employees whose job it is to work on the official libraries, as well. I am no longer a Chargify customer because that project never really panned out. I don't have any official relationship with them.
- jakejake 11y ago
  The one-stop-shops are definitely slick and easy to get started. But when you start doing serious amounts of transactions you really have to shop for competitive rates and consider other less sexy gateway providers. I don't know anything about chargify but even stripe will negotiate with you if you reach a certain volume. Once you start paying tens or hundreds of thousands in fees, those percentage point fractions become a big deal!
  - pc86 11y ago
    Absolutely! One thing I liked about Chargify was that you used whatever payment gateway[0] you wanted, including Stripe. I don't know if you can negotiate with the gateway directly at large volume even if you're going through Chargify - I suspect not, but it'd be worth a shot. [0] https://www.chargify.com/payment-gateways/ https://www.chargify.com/payment-gateways/
11y ago

akeck 11y ago

Friends who do a lot of Ebay transactions have always recommended getting a dedicated checking account for Paypal, and then setting up regular transfers out the account, so that one's ability to pay bills and vendors will not be impacted by a Paypal issue.

maxmcd 11y ago

The fraud department at PayPal has to exercise a large amount of caution because if they make a mistake they lose more money. The lending department at PayPal can be more opportunistic because they can potentially turn a profit with a successful loan. I'm not saying that either of those actual departments are correct or that their decisions are sound, but even at a perfectly run organization wouldn't this paradox be somewhat present?

mcphage 11y ago
I see what you're saying, but I wouldn't expect there to be overlap. I don't know how paypal chooses whose accounts to freeze, but let's say, for the riskiest 5% of accounts. Now, the lending department can handle a lot more risk than the fraud department (as you note). But I don't think they would be willing to extend that to the riskiest 5% of accounts. If there is overlap in "too risky to thaw funds" and "trustworthy enough to offer loans", then either their lending department offers loans to some seriously risky clients, or the fraud department freezes a huge % of accounts' funds. Neither seem like an acceptable situation.
- maxmcd 11y ago
  Sure, no disagreement here. I'm looking at it slightly from the other direction. Knowing PayPal's history, and how hard fraud is to nail down on the web, I'm assuming that the 5% is actually much larger, and that the fraud department is overcautious. If that's not the case, then you're right. But if I work in the loans department and I know that the fraud department tends to blow things out of proportion, because that's what's required to prevent fraud at PayPal scale, then I should expect a little overlap. I guess overlap might not be expected at a "perfect" organization as I mentioned, but I can imagine how it might happen at PayPal

sageabilly 11y ago

Is PayPal still around simply because, as one of the earliest and one of the biggest payment facilitators on the Internet, it's become ubiquitous enough to not have to worry about being displaced? I cannot for the life of me understand how it's still a thing since every week there's yet another story of "PayPay did Shady Thing that a bank couldn't do and now I have no money and no way to get my money back." Why is PayPal not dead? In all my research I have never been able to come up with a good answer to that question. [edited to add] Aside from consumer ignorance of other options, that is.

oxryly1 11y ago
I'd switch to square, but since I don't have a debit card I can't use it. I can still use paypal (and annoy my friends in the process.) EDIT: To answer your question, paypal still exists for the same reasons banks exist when people hate them, and for similar reasons to why you'd hire a tour company or local guide when visiting a different country. They are embedded -- they offer increased access via established agreements with more financial entities. They have more mastery of the regulatory landscape than their competitors (especially startups). Finance is in many ways very traditional business, and paypal has invested in traditional parts of business. I'd bet they employ more lawyers than any other payment startup out there, for example.
- sageabilly 11y ago
  What kinds of transactions are you doing? Friendly ones between people you know, selling stuff on CL, eCommerce? I'm curious.
  - oxryly1 11y ago
    Just paying friends back for dinner and such.
    - sageabilly 11y ago
      Venmo is your new best friend.

jamisteven 11y ago

Think OP is assuming Paypal has departments that understand how eachothers decisions affect the other, PP is a huge company and I doubt malice was actually intended, but nonetheless pointing it out to them was necessary.

jusben1369 11y ago

There's very little thought put into a discussion on "why" PayPal froze those funds. PayPal says "based on what we've seen in the past there's a high probability that you'll collect a lot of money for an event and then not execute that event. If that happens, we PayPal will be on the hook to make those payments to those disgruntled end users. So we can either 1) Simply refuse to work with you or 2) risk share with you by keeping enough in your account so that we can reduce our exposure to those types of claims" If you chose a business model with an elevated level of risk then you'll have extra expenses associated with that. I really dug that email. It's encouraging that it triggered what sounds like a very real internal discussion amongst multiple people there vs being getting completely ignored. I know I sound like a PayPal apologist - I'm not! I know there are some very real horror stories out there. It's just that they're probably one of the few payment companies that would enable this business to actually be a business and asking $20K in surety when you're _on the hook too_ isn't as mean spirited as it first appears.

smt88 11y ago
Freezing the account is not, in and of itself, what makes this incredibly unethical. It's trying to sell a loan after freezing the account. That creates an enormous conflict of interest for the people at PayPal who decide when to freeze/unfreeze an account.
- omfg 11y ago
  It's just an automated ad promoting a product. I'm sure that company saw other ads when logging in on different days. Is it silly that they advertise it on high risk accounts? Maybe.. but it's nothing nefarious.
  - PixelB 11y ago
    According to the article, PayPal claimed that it was not an automated ad and they were in fact eligible for it. "To paraphrase: “It may seem weird that we’re holding collateral on your account and offering you a loan, but that was not a mistake! You’re still eligible. Contact me if interested.”"

horsecaptin 11y ago

Clearly the used car sales department forgot to check with the customer service department whether the customer is actually happy with the ongoing relationship.

ChuckMcM 11y ago

Generally good advice when considering PayPal is to recite to yourself "PayPal is not a bank, PayPal is not a bank, ..." But they do like money, and they like to move it around creatively and create ways to use other people's money to make money for them. One of the reasons they aren't a bank is they don't do (and are not allowed to do AFAICT) fractional reserve lending. In that sort of scenario this story makes a lot of sense, you freeze(or seize) assets from your customers, and then loan them out to other customers who pay you interest on repaying that loan, and if they default you presumably keep the other customer's money to cover that "loss". Sort of 100% reserve banking.

pc86 11y ago
Do you have any evidence that freezing funds is related to lending? Because that's a pretty massive claim, particularly since they are supposedly two completely separate business units on separate budgets and P&Ls (fraud prevention and lending).

nqzero 11y ago

regardless of what division is making the determination, either the company is risky or they're not. charging them interest to access the money that is rightfully theirs is extortion, plain and simple

URSpider94 11y ago

This is not surprising to me at all, nor do I see anything nefarious in this. PayPal operates two different business units, a payments processing business and a commercial loan business. Both operate on separate P&L's, and with different risk requirements. Let's consider two different situations: 1. PayPal's payments processing group worries about the risk of your account, and thinks about applying a hold on your funds. Just before doing so, they call the loans group, who says that they'd be perfectly happy to give you a loan for the amount of the hold, you're good for it. So, Paypal as a whole decides not to place a hold. 2. Paypal's payment processing department worries about the risk of your account, so they place a hold on your deposits. In parallel, the loan department decides you're a good credit risk, and so you apply for and receive a loan for the same amount as the hold. In case 1, if those payments do indeed get charged back, Paypal is forced to try to come after you for the balance. Unfortunately, this debt won't have very strong legal standing, because it's not backed by a loan agreement. They might or might not get their money back. It also puts them in the position of having to chase you for the money. In case 2, if the payments get charged back, Paypal is sitting on the funds already, and can just claim them. This might cause you to default on the loan, but that's your problem now, not PayPal's. They are also making interest on the amount of the loan. It's pretty clear that Case 2 is MUCH better for PayPal, and only marginally worse for you, assuming that you are right about the payments all being good -- you are only out the interest cost on the money. What you seem to be arguing is that PayPal should be "nice" to you and go with Case 1. The other fact that you might be missing is that nearly all traditional payment processors would require some kind of reserve account in situations like this, and even if they weren't holding the money, they require that they have withdrawal privileges on the account into which the funds deposit so that they can claw back money if needed. PayPal is by no means unusual or abusive in holding funds, it just seems that way because they don't pitch this as part of their up-front marketing.

nickpsecurity 11y ago
Well-put. A parallel here is the pre-approvals for credit cards that people receive in the mail. It's not uncommon for a person to get those who is regularly turned down by offers or even in collections. There's just some algorithm or set of criteria by a certain company that says "send the offer" while others with different information or criteria would refuse it. Simple as that most of the time.

a3n 11y ago

> Since we were a risky account, they said they needed to hold on to the remaining $20,000 for up to six months. I would think just about any new business is some flavor of "risky." I don't see why any new business would use paypal knowing that.

ErikAugust 11y ago

Speaking from a nightmarish personal experience moving hundreds of thousands with PayPal over the years, it is astounding to me that it took so long for someone like Stripe to come along. It is not astounding they have quickly blossomed into a valuable company. Why did it take so long? And what about eBay? Someone should consider taking that on. Letting a huge business being an incumbent without competition for 15+ years in the web world seems so absurd.

TheOtherHobbes 11y ago
My understanding is there are epic regulatory and bureaucratic blocks involved in setting up international payment services - ironic given PP's reputation, but so it goes.

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CPLX 11y ago

The OP of this story was collecting money in the U.S. for events and lodging that had not yet happened in third world countries, and presumably was remitting a healthy amount of money from those transactions to multiple small accounts in said third world countries. Their business was brand new and had no extensive transaction history with Paypal or anyone else. The customers providing the funds in question were most likely paying with credit cards and would be able to charge back the funds if the events didn't take place or were unsatisfactory. I find it impressive that Paypal was willing to work with them at all given the above fact pattern. Many, many payment processors simply wouldn't be usable at all.

Animats 11y ago

Why use PayPal for credit card payment processing above the petty cash level? If you're up to $30K, you should be getting merchant services from a real bank, not an intermediary. If you're not using eBay, PayPal provides few benefits.

rsync 11y ago
I can't comment on the OP, but in addition to the "normal paypal stuff" that paypal does and that we are all familiar with, paypal also has a standard bank-style card processing unit called "payflow". Rates and policies and fees are very, very good with payflow - they are very competitive - and it made very good sense for us to move from a traditional card processing setup at wells fargo to paypal for this. We made that switch three years ago and it's all worked out very well - and it saved us a lot vs. wells fargo, who was doing all of the "normal" merchant/bank/processor tricks that distort the costs a lot.

Kinnard 11y ago

I think this is more common than people might realize. In fact, I think it's fundamental to how the predatory lending industry(READ: banking industry) operates. David Graeber's DEBT is a good read: http://libcom.org/files/__Debt__The_First_5_000_Years.pdf http://libcom.org/files/__Debt__The_First_5_000_Years.pdf

pmontra 11y ago

Partially off topic but what would you recommend for transactions in the 1 to 10 Euros range in Europe? PayPal and Stripe have fixed costs per transactions that are quite substantials on the amounts at lower bound of that range. Thanks.

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patsplat 11y ago

This is frustrating, but not necessarily a conflict of interest. Any type of events business carries a significant risk to a payment processor. Funds are paid up front before services are delivered. If the event doesn't happen there will be a demand for refunds. This isn't necessarily due to malfeasance on the part of the promoter. Imagine there was a conference booked in the World Trade Center for September 12th. Boil it all down and what PayPal is doing is charging a higher percentage fee (aka the base fees plus the interest on the loan) for a business they deem to be more risky. Entirely fair. Now for the way they presented those fees - absolutely unacceptable customer service.

patsplat 11y ago
To clarify the comment about refunds. Participants would first go to the promoter. But if they were unable to resolve the dispute, they could then go to their bank and dispute the charge. My understanding of this is murky, but in the end PayPal does carry a liability for those funds as a participant in the transaction.

jadoti 11y ago

Nice of them to loan you your money with interest... if they were an honest company, maybe they'd offer to use the business LOC as collateral and free up your funds, dipping into the credit should the risk become real and your funds get charged back... ... if they were an honest company ...

shorsusan1 11y ago

I am considering on using Paypal in my startup business. How do you feel about it? I attended a startup conference 6 months ago. Paypal was also there claiming that there will be solutions for startup business. I don't know if this is a special case. How can I avoid my capital from being frozen? Singing "Let it go"?

patio11 11y ago
Will you have delivered the product/service at issue at the time you charge the card or within a short period of time thereafter? If so, it is highly likely you will not have any issue with Paypal. If you are accepting pre-payment for something which cannot be delivered in full shortly after payment, it is likely that you'll have to become conversant with Paypal's published guidelines about this. Spoiler alert: if you are in an events business, "We emailed a ticket" does not constitute delivery of the purchase. Successful conclusion of the event constitutes delivery. Most events businesses structurally need to pre-sell tickets. They will, virtually inevitably, have more issues with collecting payments than e.g. a software company which says "You give us a credit card we give you a working download link." This is not a result of caprice by Paypal -- more than 1% of scheduled events fail to actually happen; when that happens, Paypal gets hit with hundreds of chargebacks. More details: https://www.paypal.com/webapps/mpp/brc/presale-policy-and-reserves https://www.paypal.com/webapps/mpp/brc/presale-policy-and-re... Events businesses: https://www.paypal.com/webapps/mpp/brc/account-reserves-tickets-and-reserves https://www.paypal.com/webapps/mpp/brc/account-reserves-tick...

shorsusan1 11y ago

timshivcc 11y ago

Honestly, I just went stealth and operate numerous accounts. If PayPal wants to freeze my funds, let them. Play with fire, your going to get burned.

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