Under U.S. federal law, PayPal is not a bank [1]. This is important. From the government's perspective, you give PayPal money and then PayPal gives you money. Between those events, it's not your money. PayPal has enormous discretion around what they can do with those funds, how and under what circumstances they get to decide to give it to you and if they get to keep it forever.
What state do you live in? Do you do business through an entity, e.g. an LLC? If so, where is it registered?
PayPal is, varyingly, registered as some form of a money transmitter in many states [2]. While your federal protections are probably limited to antifraud, protections you're probably outside of (PayPal has good lawyers--you agreed to surrender lots of privileges when you opened an account), there may be state regulations you can use to, if not force action, encourage it.
Going forward, I tend to consider any business using PayPal for mission critical processes as being negligent with important risks. If you can't avoid using PayPal for certain lines of business, set up a nightly sweep from PayPal to a proper bank account.
This works, until they put 'temporary' holds on you.
The holds seem reasonable at first (ID check, business verification, etc) - but can / will drag on for weeks / months.
All the while, the funds in your account add up - yet you can't touch them - and you have to deliver product to customers.
It can get very uncomfortable, very quickly.
I thought I was safe with your advice, but still found myself recently with 6 figures held in a PP account.
The problem is that PayPal is probably the easiest and safest payment way for a costumer, so if you are running e.shop or other e. commerce business, you will lose a lot of costumers neglecting PayPal. I won't enter my credit card details on random sites I've found while googling for a certain product and won't buy from e.shops that don't accept PayPal.
This thread offers good examples of what happens if you use paypal. Similar things have happened to me.
Even ignoring the fact that I don't like paypal's business practices, and I believe paypal as a service should not be needed at all, I cannot ignore the fact that if I use paypal, I will lose access to my money and I won't be able to do anything about it. Even when using paypal purely as a proxy for buying stuff (with no money in the paypal account itself), I've had accounts locked for no particular reason (with payments denied to the seller, but me losing the money), which meant I didn't get my product and precluded me from doing business with the same seller in the future.
Paypal is a huge liability. Fortunately, it can be avoided for almost anything that matters, sans Ebay.
Sometimes I need some obsolete, unique product that is available on both Ebay and Amazon (3rd party seller), but it's more expensive on Amazon. I buy it from Amazon each time just to avoid Ebay.
I'm not the previous commenter but I'm the same. It's because according to everything I heard about paypal if I put money in a paypal account it's a PITA to bring it back to my bank account so I need to spend it.
A lot of people refuse to buy with anything other than paypal. I don't sell things online very often, but I do regularly buy things from ebay. Here's the way I look at it.
Paypal has historically sided with the customer close to 100% of the time, mostly because they are not a bank and therefore are pretty much powerless when a customer issues a chargeback. That's why fraud is rampant. If its trivial for an unethical person to steal things on a regular basis using paypal, because sellers have no reliable form of recourse, I can be pretty certain that as an actual honest buyer I'll practically never have to worry about getting screwed over by a seller.
Stop taking payments via paypal while they hold up your account? Tell your customers ahead of time that paypal payments are slower and shipping may take longer if they choose to pay via paypal? As long as you have other options for your customers, they should be informed of the risks and limitations of the payment method they choose.
But they can withdraw from linked accounts as easily as they deposit to them. You give them permission to do so, even for disputed amounts, in the TOS.
The only safe mechanism is to close them off from the bank side (e.g. sever their access, close account, change account number).
I think you are misunderstanding the point of a sweep account here.
Paypal gets "swept" into the sweep account at your bank, and then that account gets "swept" into another account at your bank that paypal does not have access to.
Your sweep account should get a very low balance, and only acts a sortof public-facing proxy for your bank accounts.
A "sweep account" is a technical term and has a specific definition. The parent's comment makes absolute sense if you know what sweep accounts are used for in the more traditional sense. The parent is suggesting setting up a 0 balance sweep account and then having paypal deposit all funds into that account nightly.
PayPal wears many hats. During transit, you are correct.
If you're holding funds "in reserve" or otherwise "on deposit" with them, however, the rules are more flexible. For example, if they aren't certain you comply with their internal AML policy, they may have the power to indefinitely hold your funds. If they aren't certain you comply with their internal antifraud policy, they may have the power to indefinitely hold your funds. They may also be able to assess various fees, charges, et cetera against your "balances", whether free or restricted. I say "may" because this varies jurisdiction to jurisdiction.
> Paypals user agreement limits fund holds to 180 days
Search for the word "notwithstanding". It usually comes in the form "notwithstanding anything to the contrary in the rest of this agreement..." Remember that PayPal incorporates--and reserves the unilateral right to change--several policy documents into its agreements.
These agreements are necessarily complicated. They're also drafted by counsel working for PayPal. At least in the case of AML, I'm reasonably certain PayPal has to, under federal law, hold funds when it suspects money laundering. Unlike banks, which have their AML policies and definitions reviewed, PayPal is relatively free in constructing this policy.
Did you do your own search? Because "notwithstanding" only occurs twice in PayPal's agreements: one for the right to display your trademark; and another for arbitration.
Paypal's anti-money laundering rules comply with the rules set by each state that money transmitters are required to follow. The funds frozen for AML don't become paypal's -- they're seized by the government.
> Paypal's anti-money laundering rules comply with the rules set by each state that money transmitters are required to follow
It is complicated. For example, New York's Department of Financial Services "interposed no objection to PayPal offering certain of its payment processing services to New York customers without being licensed as a money transmitter" in 2002 [1]. These rules are complex alone, complex in their interrelations and subject to competing regulatory interests.
I work in a regulated financial forum. I've seen, or been relayed through regulators, accounts concerning money transmitters needing to hold funds for more than 180 days to finish an investigation per their internal policy. At that point, the contract doesn't matter--statute trumps. This might be unique to New York, but I doubt we're the only state or territory with these rules (usually, our laws are the most cutting).
If it's customer versus compliance, the customer almost always has to engage regulators or sue to make progress. When using money transmitters like PayPal to not only move funds but also hold them you're giving up a lot of the regulatory protection and venue-provisioning you get with more sophisticated services. If a business relies on PayPal, its management needs to talk to a lawyer and do more research.
An End User License Agreement only holds when it is in the best interests of the company issuing it and never at any other time. I'm pretty sure that's in there somewhere. Looking at those jokes as an actual contract is laughable.
They can do whatever they want with your money while, as you mention down thread, you contact authorities or take them to court.
They probably won't do anything particularly nefarious as far as the law is concerned, but that doesn't prevent this situation from becoming an unmitigated disaster for the small business owner who doesn't have their own floor of lawyers.
Nothing in his post suggests PayPal has violated their agreements.
In fact, nothing here would be out of line for any merchant account (except maybe the customer service issues).
2% chargeback rate is extremely high. It would get you shutdown pretty much everywhere. MSP agreements usually say between 0.25% to 1% for the chargeback rate limit. This is 10x what i've seen some banks specify as an acceptable chargeback rate.
And if you exceed it.. you get warnings, reserve lines and longer holding periods, and eventually the termination of your account. Exactly what happened to OP.
Each one of those actions should have been a red flag to the merchant tellling them they have a serious problem they need to address.
Sorry for the delayed reply, HN wasn't letting me comment. You don't seem to understand that Paypal agreed to my 2% chargeback rate, in fact they came up with the $5000 set reserve + 10% rolling reserve in order to let me run. Not once did Paypal tell me I'm at risk of losing my account or getting my funds frozen for 6 months. I have had 0 warnings. The issue here is bigger than that, it's the inconsistency in what they request, it's Paypal requesting information but not letting me provide it, it's Paypal's inner departments not speaking to each other and every time you call in you get different information. When I log into my account it still says it's limited because Paypal needs more information regarding recent sales, but guess what, they don't tell you which information they need or how to provide it. Paypal was aware of my high dispute rate and agreed to work with me based on the reserve they wanted which I accepted. Not once did I receive a warning contrarily to what you may think.
I hear from my MSP all the time about security improvements that need to be made, changes to visa/etc networks, rate changes, etc.
The number of times I've had an MSP call me to discuss fraud in the past 14 years I've had one or more merchant accounts: 0
The number of times I've had an MSP establish a reserve line for my account: 0
The chargeback rate for an ecommerce site I've run for 14 years: 0.1% (about 1 every 1000 orders)
MSPs don't normally contact their customers to discuss fraud. They don't normally require reserves.
Every time they contacted you about the chargeback rate was a warning. When they set the reserve line that was a warning. You didn't negotiate the right to the chargeback rate.. you negotiated how severely their anti-fraud control would impact your business.
These were HUGE red flags. Possibly the biggest red flags you could have gotten, short of a legal notice or the immediate closure of the account.
And while it sounds like PayPal should have been more direct with you about the consequences here... I can tell you that every MSP agreement I've ever seen specially talks about these actions as negative actions they may take to mitigate the risk of fraud.
The EU bank status might explain why Paypal e-mails me each month to remind me that I have money in my account; it's only a penny, but I don't remember such notifications back in the early 2000s when they were only a California-based company.
It's quite plausible that brexit won't/couldn't change anything - depending on how exactly brexit is handled, UK may stay as a part of the relevant treaties so the licencing of financial institutions across EU/UK border will stay the same.
When you give money to a bank, it's no longer yours. It's registered on the bank's books as its own asset, offset against a liability to pay the money back when you ask for it. If the bank goes under, you're just another creditor.
> When you give money to a bank, it's no longer yours
The cash is no longer yours, but the "money" certainly is. It's just taking the form of a demand deposit at a depository institution. We can quibble about the definition of "money". By the Federal Reserve's definition (and the bulk of international and American case law), bank deposits are your money [1]. Claims against money transmitters aren't even M2.
> If the bank goes under, you're just another creditor
If the bank goes under, you're a super-senior creditor partially or fully insured by the FDIC. PayPal, itself, isn't FDIC insured [2].
> if the bank suspects you're a human trafficker or a money launderer, they will freeze your money even if they can pay you back
If a bank freezes your funds, you have regulatory recourse to ensure they're doing it per the law. If a money transmitter does this, you need to pay for your own lawyers and enforcement.
PayPal doesn't need FDIC insurance because it's not in the money lending business. In fact, to my knowledge, PayPal had no trouble weathering the financial meltdown of 2007, whereas many regulated banks went under and had to be bailed out.
FDIC insurance is not only for financial meltdowns and saving customers money out of assets that deemed to be too risky. It would protect money if the whole PayPal would go down too. Which realistically probably wouldn't happen, but still insurance is insurance
What state do you live in? Do you do business through an entity, e.g. an LLC? If so, where is it registered?
PayPal is, varyingly, registered as some form of a money transmitter in many states [2]. While your federal protections are probably limited to antifraud, protections you're probably outside of (PayPal has good lawyers--you agreed to surrender lots of privileges when you opened an account), there may be state regulations you can use to, if not force action, encourage it.
Going forward, I tend to consider any business using PayPal for mission critical processes as being negligent with important risks. If you can't avoid using PayPal for certain lines of business, set up a nightly sweep from PayPal to a proper bank account.
[1] http://www.zdnet.com/article/fdic-decides-paypals-no-bank/
[2] http://law.bepress.com/cgi/viewcontent.cgi?article=1153&cont...
Disclaimer: I am not a lawyer. Only a lawyer can give you good legal advice. Don't take legal advice from Internet comments.