The Hidden Risks of Accepting Paypal

Has this happened to you? One day you were shocked to discover your Paypal account frozen.  You found money removed from your account without authorization.  You received no warning; you discovered it accidentally.

You assumed it was a glitch so you called the company expecting a quick resolution.  Unable to talk with anyone to resolve the situation you were forced to leave a message.  When you finally reached a rep, they refused to return your funds and informed you the capital was frozen for an indefinite time, as long as six months.  How incredulous you were when the rep insisted you had no recourse.

Doubting the rep, you reviewed the lengthy electronic Terms of Service agreement you signed.  To your outrage you found you had authorized them to debit any of the bank or credit card accounts you provided when you enrolled.  Further terrifying was that you had granted them this right without appeal for any grounds they deemed acceptable.  Upon researching the matter online you discovered thousands of others who had incurred similar misfortunes, and some of the stories were horrifying!  One account holder served time in prison allegedly because Paypal denied him access to his money.  According to his story, he was going to buy merchandise he had pre-sold.

The story above is not fictional; there are some very real and hidden risks when you open one of these accounts regardless of whether you accept credit cards or not.

Banks refuse people from receiving payments via credit card (known as a merchant card account) because it needs collateral for when a customer disputes a charge.  To effect online transactions between people, companies like Paypal emerged.

Armed with just an email address, the ads seductively promise, a consumer can accept credit card payments just like a company.  The ability to make a payment by email is enticing.   However, by opening one of these accounts you become a merchant and must grant Paypal the freedom to take money from any bank accounts you provide them.  They insist upon this right so they have recourse in the event your customer disputes the transaction.  Even an individual with a Paypal account they never use incurs the risk of having their account balance – and that of all linked accounts – seized without appeal for up to six months.

Don’t get me wrong: consumer merchant providers aren’t evil.  Some of the terms of their agreements seem excessive, but the company must be hyper-vigilant. They’re dealing in an incredibly risky environment.  By agreeing to guarantee transactions between consumers, they are liable for the full cost of the transaction.  So they must guard against fraud and all sorts of risk.  And they need recourse.

When a merchant opens a merchant credit card account, the service provider puts a lien on their commercial checking account, and it can last for years after the company closes the account.  However, most people are unaware of commercial finance and the typical requirements to accept credit card payments.

One Solution

Most of our corporate clients sold goods online and some accepted Paypal or other consumer merchant payment types.  For a variety of reasons, some incurred frozen accounts.  To combat this, we devised a way to reduce the risk of having their capital seized while continuing to accept Paypal.

To protect yourself when opening one of these consumer merchant accounts:

  1. Provide only one bank account on the application.  We’ll call this the SOURCE.
  2. Open a second unattached bank account. We’ll call this the DESTINATION.
  3. Have all funds from SOURCE swept into DESTINATION each day.

You must make sure this is a one-way transfer.  Use two different banks if necessary.  Make sure an external entity like a merchant provider cannot reverse.

If you follow these steps you’ll limit the amount that Paypal can seize to one day’s receipts.   The remainder of your money will be transferred each day into your destination account to prevent unauthorized withdrawals.  As long as you give Paypal only that bank account when you apply, they will be unable to see and thus seize anything other than what remains in that account.

There are more safeguards to make sure your funds are completely safe but this simple process will be adequate for most peoples’ needs.

You are now aware of one danger of opening a consumer merchant account and how to decrease that hazard.  Next week I’ll show you how to train your customers by omitting the word no from your vocabulary.  Intrigued?  Then I invite you to subscribe by entering your email address in the box at the top of the page and never miss an edition.  We’ll deliver each column directly into your inbox as soon as its available.  Until later,

profitable business All!

8 thoughts on “The Hidden Risks of Accepting Paypal

  1. Richard D. Rolen

    This is priceless stuff. Too many of us assume that the companys we do business with have our best interests at heart. And after all, EVERYBODY uses PayPal now don't they? They must be a good company, or at least benign…

    The devil truly is in the details where such dealings are concerned, and I (like so many others) rarely give the fine print the good "going over" it deserves! Thanks for a great article!

    Reply
  2. Cricket

    Paypal is really overall a good website. They offer great features however they of course have risks just like any other company. I would make sure you read the whole TOS agreement before attempting to accumulate a large sum of money in your account.

    Reply
  3. Fergal, Business Advice Forum

    Thanks for sharing that warning with us, when handling or processing online payments it is important to be aware of the terms of the services you are using.

    I've seen lots of complaints regarding customer service provided by PayPal. However, my experience with them has always been very positive. On the small number of occasions when I had to contact PayPal, they were extremely helpful and accommodating. They took quick action to resolve the issue and were very friendly and professional in their dealings with me.

    Reply
  4. BizDoc Post author

    Yes, imagine how that fellow would have felt had his high balance been removed without his knowledge for six months! Scary indeed.

    Reply
  5. Patton

    Luckily in my experience with Paypal I have never had any trouble, I might take my chances however I will not allow too much money to sit in there. A while back I heard of a guy who had $1 million sitting in his paypal account apparently he had struck it rich with some of his new products.

    Reply
  6. BizDoc Post author

    Hi Jenn,
    Thanks for your comment and your readership. If your savings account is restricted you can use a free checking account or any banking account without withdrawal surcharges. Just make sure the account won't accept a forcible draft.
    Best of luck to you.
    Chris

    Reply
  7. Jenn

    I didn't realize that PayPal could do this or would do this. My dealings with paypal are limited…yet I wouldn't want this to EVER happen to me. I have to check because my bank has stict rules on withdrawls from Savings. I am limited to 3 or 4 a month…but it is a simple savings and I rarely withdrawl from it. Just wonder how that would work…but definitely worth talking to a banker about. Great information…I'll be passing this site along! Cheers, Jenn

    Reply

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