A few of you who follow me on twitter know I’ve been dealing with a nightmare with PayPal the last few weeks. After dealing with my own agony and reading scores upon scores of other heartbreaking and horrible stories written by other paypal customers/victims I finally decided to write about it here and warn my followers about the current dangers of using paypal.
Lots of people use paypal. It’s easy to use, free to set up, and feels great when you see that money pop into your account. It’s great for small businesses, great for photographers, and even great for family members. It’s been great for me, a loyal customer for over 6 years.
It’s great that is until you wake up one morning to withdraw your money from your account and see a ‘pending balance’ that looks like this:
And then when you click on the ‘view your reserve’, it takes you to this:
And then when you keep clicking further it takes you to this page, telling you when you’ll have access to your funds:
You see the explanation there in the image above under ‘account reserves’, that the reserves are to cover chargebacks and reversals. Ok, fine and dandy, except the payments I received through paypal above were for services. Services I have already rendered. There will be no products returned or exchanged, no customers waiting 90 days to contact their CC companies and say “I never received that service”, no shipping issues or delays, for these services, already rendered, that I received payment for. That PayPal is now holding.
Paypal, in the past year, has started placing 20-50% holds, for 90-180 days, on most of their customers’ money. If this hasn’t happened to you yet, just wait a few days/weeks- it WILL.
This brings me to my next point, which is really the most important one. This is a comment I left on the CNN Money blog.
I regards to their holds and rolling reserves, Paypal spokeswoman Amanda Pires says: “Obviously, it’s legal. We wouldn’t do it if it wasn’t” , noting that the right to temporarily hold funds is reserved in PayPal’s user agreement.”
WRONG.
It’s not legal. It’s ILLEGAL. And just because a major corporation has a term in their user agreement that users agree to does NOT make it legal. Nor would that term ever be binding in court. I think I’ll put a term in my T&C that says “I have the right to kick your dog in the head during our photo shoot”. My client might agree to it, but does that make it legal? Absolutely not.
I’ll make this very simple.
Paypal is not a bank or a merchant account or what one person referred to as a “deposit broker”. They do NOT have the rights of these types of businesses.
PayPal’s business type is: “Money Transmitter”.
This is by their own admission via their money transmitters licenses (many expired) in each state. See the links on their about page:
https://www.paypal-media.com/state_licenses.cfm
A quick scan down the page shows that their licenses are Money Transmitter licenses.
BY LAW, PayPal is required to operate according to Money Transmitter laws in each state.
In Washington State, RCW 19.230.330 reads:
“(1) Every money transmitter licensee and its authorized delegates shall transmit the monetary equivalent of all money or equivalent value received from a customer for transmission, net of any fees, or issue instructions committing the money or its monetary equivalent, to the person designated by the customer within ten business days after receiving the money or equivalent value, unless otherwise ordered by the customer or unless the licensee or its authorized delegate has reason to believe that a crime has occurred, is occurring, or may occur as a result of transmitting the money.”
(I imagine the laws in each state are similar.)
Without just cause of witholding money (i.e. a VERIFIABLE crime has occurred), paypal’s practices are ILLEGAL, pure and simple. Their sidestepping demands to show proof a crime has occurred, their lack of any formal documentation justifying witholding their customer’s funds and their practices of updating their policies without notifying members are all- ILLEGAL.
I have absolutely no problems paying my $29 fee and making a couple of appearances to take them to small claims court to get my $1500 they are illegally holding without just cause. I will also be charging them for lost revenue, calculated by each hour I have wasted battling this issue with them. And once I get my money, they will never make a dime in interest (or fees) off me ever again. I am delighted at this point to take my annual revenue elsewhere. I’d pay $1,000 for a CC processing machine to never have to utter their business name again.
I wish everyone else felt the same way too. If more people stood up for themselves and actually took legal action, we might be able to stop a wicked corrupt conglomerate like PP from ruining countless others businesses and lives. It HAS to stop.”
Regardless of their user agreement, or their ‘logic’ and ‘reasoning’ behind their policies, they are breaking state laws, pure and simple.
Now here is something you didn’t know about PayPal (and something I certainly never knew until recently).
They were sued in 2002 for this very issue, and settled out of court to the tune of $9 million, which is a drop in the bucket to a company that pulls in BILLIONS in annual revenue. (More on lawsuits later on).
Now, back to the reserves. This seems to be happening to so many PP customers (keep reading to the end for proof), that I did a little math to figure out what kind of interest they must be generating from holding my, and thousands of others’, money.
They say on their site they have 220,355,645 accounts worldwide (that number ticks up every second or two).
That’s 220 million+ users.
Let’s say they are deciding to arbitrarily (check out the links at the end for proof of this arbitrariness), withhold 30% of only 10% their customers’ funds for 90 days (many are being hit by 180 day holds and reserves- as much as 50% of their revenue).
10% of 220 million customers is 22 million. (I’m being generous with them here as I suspect the percentage is closer to 50% or even higher).
Now, there are PP customers who bring in $50 per month, and those who bring in $50,000 per month. Let’s say the average amount of money held by PP is only $2500 (again, I’m being very generous, which you will see when you do your own research).
$2500 x 22 million users = $55,000,000,000.
Hmm, what’s that number?
$55 BILLION. $55 Billion dollars they are holding. For their own use. For any amount of time they decide.
How much interest do you think this company could make off of $55 billion dollars? How much for 3 months? How much for 6 months? How much for a year or more?
Now since I’m being very generous (there are currently PP customers who have $30,000 or MORE locked in their PP accounts), let’s double this and make it an even $100 billion dollars they are just ‘holding onto’ for whatever length of time they decide.
Now you start to see the issue.
They are not, as they say, protecting their buyers and sellers from fraud, they are not covering chargbacks (refunds and chargebacks do NOT get processed from the RESERVED funds- they get processed from AVAILABLE funds), they are not in any way working in the interests of their customers on either side, and in many cases, they are NEVER. EVEN. RELEASING. THE. FUNDS.
Scared yet? Angry yet? You should be.
Now, many of you may be thinking “But Jamie, where did you get this information?”. “Where’s the proof?”. The proof lies in the vast amount of information out there in the great world wide web.
Here are just a few links I can give you to do your own research on PayPal’s customers’ collective experiences. Please note that some of the articles are old (because this issue has been going on unchecked for years), but many of the comments are not. Read through the comments and look for those left in 2009 and 2010.
1. The PayPal blog
2. CNN Money blog
3. Businessweek
4. PayPal community forum (more, and more)
5. Red Ink Diary (great tips on what you can do if you are in this situation)
6. Cryptome’s experience with PayPal holding $5300 in money donated for Haitian relief
7. Ebay discussion board thread on PayPal
8. Paypalwarning.com (hundreds of horror stories- these stories will make you sick)
9. PayPal sucks forums (455 horror stories threads)
10. Aboutpaypal.org forums
(a general web search will turn up thousands more websites you can learn from)
Ok, so, as if that’s not enough, it gets worse. (“Worse Jamie?”). Yes, worse.
A couple of months ago, before I learned all of this, my colleague Nichole and I were needing a payment option for our workshops registration payments for our Passport NYC workshop. “Paypal- perfect!”, we thought.
So we collected the registration payments, and about 3/4 of the way through, all of this sh*t hit the fan.
“Oh my god they could lock our account arbitrarily or place a 30-50% hold on our funds for 90 days- which is PAST the workshop date. We’d be screwed!!”.
“Ok, no problem” we thought. We’ll just transfer our funds into a bank account to get them out of there.
Only, there was a teensy little problem with doing that.
Upon attempting to withdraw our funds from our account, we received an on-screen message saying “you have a $500 monthly withdrawal limit”.
$500 MONTHLY. MONTHLY.
“Ok, don’t panic, we’ll call them to find out what we need to do to get our money out”.
Here is what we were told:
“You need to verify your account. In order to verify your account you need to: 1) associate a bank account number that is not already associated with another PayPal account, 2) associate a credit card number that is not already associated with another PayPal account, and 3) associate a social security number that isn’t already associated with another PayPal account.”
“Great, awesome!”
Except no, not awesome. Not awesome at all.
Nichole and I each already have a Paypal account, with all 3 of those items associated with each of them.
Before any of you get all snotty and say “well you should have known that before you set up the account for the workshops payments.”
Let me be clear on this: Nichole called them BEFORE she set the account up, and explained that we were partnering on a business venture, and needed a shared account that we could both access. They explained to her how to set it up, indicated we could have one debit card in one person’s name (but not both), and AT NO TIME during that conversation explained that it would be nearly impossible for us to withdraw/transfer our own money out of our new account.
Knowing what I know now, of course they didn’t. Every new account is like gold to them. They want to get you in. They don’t care about you once you are in. They just want your money.
The good news is that Nichole was able to make some changes to her existing PayPal account (I’m not sure what exactly) and get our money transfered out of PayPal before being hit with their holds and reserves. We check in several times a week now to make sure the account has a zero balance. (WHEW.)
So that problem is solved, but I have another problem coming up next week that pains me to no end. I have been having stomach cramps for days just thinking about this.
Starting on Monday, June 21st (a few days from now), I will be registering folks for my September workshop, and taking payments through my PayPal account, the one that currently has a 30% 90-day hold on it. Given what I’ve read in forums, one of the ‘triggers’ for having your account be completely locked-down is having a large amount of money come in at one time. When that happens, they can block access to your money for months and even years, requiring ‘paperwork’ to prove you aren’t a criminal. In most cases I have read that once paperwork is received, they do nothing. They decide arbitrarily when and IF they want to release funds. PayPal customers are completely powerless, which is the whole thread through everything I’ve read.
So right now I run the risk of collecting many thousands of dollars I might never see again. I can’t in fairness ask my attendees to pay me in cash, so that’s a risk I have to run. It’s too late to apply for a merchant account with another vendor as it would take too long and I need a system in place right now.
The good news is I have cash set aside in my bank to cover all of the expenses of the September workshop, should the worst-case scenario happen.
Next week I will be in my PP account every hour, transferring any available funds like a crazy person. Although I have read that there have been those who have enacted transfers to their bank accounts that have been reversed by PayPal, so that’s not even a guarantee I’ll get the money. Understand my stomach cramps now?
It’s BEYOND crazy-making to be having to deal with this, but I am thankful I am not one of the many who have had their livelihoods completely ruined by paypal, and forced to declare bankruptcy. I’m trying to see the silver lining and be positive.
But that’s not all I’ve done. Oh no, of course not (some of you know me well enough to know I won’t stand for this).
I have taken the advice of others online, and done this:
1. Submitted a formal complaint with my Secretary of State, the Washington State Department of Financial Services, to be exact. For those in Washington State, you will need PayPal’s contact info and license #, and you can find both in their licensee database here after checking the ‘money transmitter’ box on the search page and entering ‘paypal’ into the business name box.
2. Contacted the attorney’s Freed & Weiss in Chicago about adding my name to the class action lawsuit against PayPal they filed last month.
Which brings me to my last point.
Last month, on May 12th to be exact, a new Class Action Lawsuit was filed by a Chicago Law Firm, Freed and Weiss, against PayPal and Ebay, over the very issue I have detailed in this blog post- reserves and holds.
Freed & Weiss has a page on their site where you can read about the suit and contact them to get more information.
They also have a link to the entire suit as a pdf, which was filed in San Jose California, where PayPal are based.
(warning- it’s a very long legal document and not an easy read!)
Let me be clear- this is a current, and very recent, class action lawsuit, that has just started. If you’d like to read about other lawsuits brought against PayPal, see the Litigation section of their Wikipedia page.
If you are one of the many who have been a victim of paypal’s policies I urge you to contact Freed & Weiss and add your name to the suit.
If this happens to you in the future, the best things you can do are:
1. Save all communications with PayPal as PDF files.
2. Save all information in your account, including current and reserved balances, as either pdf files or screen grabs (I’ve noticed they have changed my account info several times since enacting this on me but thankfully had already saved the pages as pdfs).
3. File a formal complaint with the Secretary of State in your state, specifically to any division that deals with consumer complaints about financial companies (they take this very seriously).
4. Email Freed & Weiss about information on the lawsuit.
How can you PREVENT this from happening to you?
Easy (ok, well, sort of):
1. Set up a new merchant account. With anyone other than PayPal (I may end up using Costco’s merchant processor who I’ve heard great things about.) Yes the process will be more complicated, but the per transaction fees will be much lower, saving you time and money in the long run.
2. Withdraw any funds you have in paypal immediately. Make sure you have a zero balance.
3. Immediately disassociate any credit cards and bank accounts you have connected to your account (they don’t make this easy and will give you ‘can’t remove due to pending transactions’ BS). They can, and will, tap your bank account and credit cards for superfluous reasons *after* you have closed your account.
4. Close your PayPal account.
When they ask you why you want to close your account, simply state:
“Because your holds and reserves are illegal in my state according the laws that govern Money Transmitters. I do not wish to do business with, nor support, an unethical company who breaks laws and puts their customers’ livelihoods at risk in the process.”
Now, with that said, I need to go take some Tums. My stomach is killing me.
P.S. If I have anything more to report on this in the future, I’ll add it to the end of this post and say “updated to add” with the date. So bookmark it! And please, please pass it on!!
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6/23/10: Updated to add:
They are now holding $3800 of my funds, and I have a negative $1750 balance, because although the money was shown as available when I transferred it to my bank account, they are now placing a hold on $1750 retroactively. If you are in a position of having your money held, watch out for this! I’ll be anxious to see if they start taking money from my bank account, since they have that account number and according to their ‘policies’, they can do whatever the hell they want.
Also, I heard back from the attorneys at Freed & Weiss yesterday and will be sending all of my info to them shortly. A big thanks to one of the head litigants, Brian Pattee, for commenting on this post!
Lastly, I’ve had people ask why I didn’t try and resolve this with them by phone, to which I say, “duh”, of course I tried the phone route, which is why I waited 3 weeks to post anything about this.
Here is how the first conversation went down:
Me: “I’m curious to know what makes PayPal determine what percentage to hold and for how long, and if that ever changes.”
Him: “I can’t really tell you why, or when it will change, but I can tell you it’s to cover chargebacks and reversals”.
Those are the answers you get when you call CS. In other words, a non-answer. They are essentially reading from a script. PayPal CS is always very friendly (that’s never been an issue), but they don’t understand what’s going on with their company. Or they do, but given the weak economy, choose not to say anything for fear of losing their jobs.
And when I called last week to ask why, when I try to remove a credit card # from my account, it keeps saying “You may not remove your funding source while an authorization is still pending.”, they said “you have a pending transaction with Vonage”.
I changed my payment method with Vonage, and they were never on my pay list to begin with, in other words, that credit card was never a primary funding source, not even when I set up the Vonage account, so I still don’t have a reason why I can’t remove it. Wait, yes I do, so they can access my CC in the future if and when they want to. I’ll keep y’all updated as to if I am ever able to successfully remove it from my account.
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7/29/10 Updated to add:
I am very happy to report that I got my money back:
Immediately after receiving the complaint I filed with the Washington State Department of Financial Services, Paypal lifted the holds on my funds, reversed all reserves, and removed all indications from my account that any reserves had ever even been placed. Also, now when I transfer money from my paypal account into my bank account it takes only 2-3 days, whereas before it would take 7-10 days. I know this because I used to track on my calendar how long it would take.
To read the entire update, read this post from 7/29/10.
Oh, and to those commenters who claim paypal is breaking no laws, please explain to me why they would have lifted the hold on my funds after being contacted by the Washington State Department of Financial Institutions. Why would that have changed anything if what they were doing is perfectly legal?? I would love to hear your answer on that. Thank you.
