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2010 November | Red Ink Diary

Posts from November 2010.

Saturday Silliness - Strange Cat

How does your cat drink water? I am betting not like this one!
If there is no video please refresh the page.

Y’all come back!
Henrietta!

Auntie May Speaks About Modern eBanking

My first retail store was in a country town with two banks, three bars and a whole lot of churches. We had some tourist trade. We paid over $300 to buy a huge clunky credit card machine and $75 a month to use it for about ten transactions a week. If we got a check from the ‘other’ bank it took five business days to clear. Heaven forbid we got an out of state check, that was fifteen business days.

How things have changed! We are living in the electronic age. A paper check no longer takes even a few business days to get processed. It is the modern miracle of the intertubes, E-commerce is an option for anybody with common sense and basic business and packing skills.

PayPal deserves credit for opening the door to inexpensive online payment processing for everyone, but the PayPal of ten years ago is not the PayPal of today. The November 1st 2010 changes to the User Agreement essentially forces eBay’s Buyer Protection Policy on small off eBay sellers, while exempting off eBay sellers who use PayPal’s higher cost subscription services. PayPal’s transaction loss rate is already higher than industry average, it now increases the risk for those small sellers to unacceptable levels.

There were some comments on a recent post about PayPal placing a temporary hold on a refund to a buyer that showed unfamiliarity with how the system really works as opposed to what PayPal would like you to believe. So, (as we say on eBay,) let’s take a quick tour to examine the choices and their risk protections.

An instant transfer from a bank account to an established and verified PayPal account works the same as a debit card transaction. Key words: established, verified.

PayPal already has the authorization and routing codes, the bank has the authorization, this is why it is called instant. The function of the debit card is to provide those codes and the authorizations in a portable format via the magnetic strip on the back of the card, otherwise the process is the same.

Risk

If there are insufficient funds in the account to cover the instant transaction it is rejected, instantly.

Risk is

  • negligible on bank transfers,
  • higher on debit cards,
  • higher yet on credit cards for in person transactions
  • and highest of all on remote (internet or telephone) transactions.

That is one of the reasons why Merchant Credit Processors charge higher rates for online or internet accounts. Another reason is that they can because they all do it, the higher rate and the reserve account have become ’standard and customary’ for web transactions.

Credit cards have statutory consumer protection allowing reversal in case of fraud or unauthorized use which is why the risk level for payment processors and vendors is highest and for consumers lowest.

Fraud Protection for Merchants

Google Checkout offers real verification and anti fraud measures to vendors which include age of account, card expiration date, (AVS) and card verification (CVV2) checks. There is a Payment Guarantee Policy and chargeback resolution, Google Checkout will actually fight for you rather than rolling over and playing dead.

PayPal’s basic level accounts, that is personal and business accounts like you use on eBay or other venues seem to limit fraud prevention to protecting PayPal, not the vendor. The red flag appears if the account making payment is unverified or if there is an anomaly (def.# 1,3,4) with the address verified through USPS type data (eg. an address 123 Main Street, at a zip code where there is no Main Street would get a red flag.)

PayPal Website Payments Standard is used with either an independent cart eg. Zen or the PayPal cart, customers pay on the PayPal site, sellers pay normal transaction fees. Fraud protection is parallel to basic PayPal accounts.

PayPal Website Payments Pro, used with either an independent cart eg. Zen or the PayPal cart, customers pay on your site, monthly subscription.

PayFlow Gateway accounts which require a compatible internet merchant account are offered Fraud Protection services for a monthly subscription fee.

  • Basic $19.95 a month plus $29.95 set up fee
  • Advanced $49.95 a month plus 89.95 set up fee
  • Buyer Authentication is an add on service to either Basic or Advanced subscription levels. Cost $9.95 a month with a $150 set up fee.

Virtual Terminal is an alternative to swipe machines, does not require an internet merchant account or separate merchant account; carries a monthly fee of $30 and transaction charges slightly higher than standard PayPal, chart below. Fraud protection is address (AVS) and card verification (CVV2) checks.

PayPal regulation

PayPal is licensed in most states as a money transmitter. In the USA it is not a bank. As of this date PayPal is not directly regulated by the U.S. federal government, because it serves as a payment intermediary. The law is unclear as to whether PayPal is a bank, narrow bank, money services business or money transmitter.

Regulation of money transmitters is infinitely looser than that for banks and of course varies from state to state as do the definitions of banks, narrow banks, money services businesses and money transmitters, most of which classifications have been applied to PayPal at some time, somewhere, not all at once of course. Some states have no practical regulation except as required by the Bank Secrecy Act modified by the Patriot Act (2001). Most states regulate by statute how long a money transmitter may take to transmit the money. These laws were often written pre-internet, which means the time frame is generous.

PayPal has always claimed that the Electronic Fund Transfer Act (”EFTA”), 15 U.S.C. §§ 1693 et seq., does not apply to their business. This is a similar defense to eBay’s “We are only a venue” and it has met with varying success in the courts.

PayPal makes money from using funds sitting in the system (the pool) on the short term (high rate of return) interbank overnight money market. The longer PayPal can keep the money sitting in the pool the more income is generated for the pool.

After eBay Inc. bought PayPal the ‘delay transmittal’ game was played with vigor. Delays and the concurrent consumer abuse became so rampant that PayPal was sued by consumers and fined by at least two states (that I can verify) plus Louisiana shut them down until they obtained a license which subjected them to some regulation.

The Competition Google Checkout

Google Checkout is able to sweep funds & deposit to your bank account within 24 - 48 hours of the merchant charging the transaction, it is automatic, you don’t have to request a withdrawal.

The downside is you (the merchant) have to process or charge the transaction(s) and have a method of generating packing slips and mailing labels.

The upside, for an honest merchant, you get a better class of customer who is aware of the protections they receive by using a credit card which in my experience often equals higher ASP.

Why I Will No Longer Use PayPal as a Buyer Updated

UPDATE: 11/05/10 bottom of the post.

I recently detailed why I will no longer accept PayPal in my Bonanza booth.

Today I will explain why I will no longer use PayPal as a buyer.

On Sunday I bought something on Bonanza, I paid for it immediately with an instant transfer through PayPal, which was the only option the seller offered. The next day I received an email from the seller saying that they did not ship to Hawaii and that I had been refunded.

I was miffed. Rereading the listing I saw there is no mention of not shipping to Hawaii. Presumably Alaska is included in the ban but there is no mention of that either. Resigned to my fate, I went to PayPal and logged in to transfer the refund back to my bank.

Imagine my surprise when I saw this, (Note: I have redacted some information)  click image to enlarge

PayPal placed a temporary hold on my refund!

I have had a PayPal account since before eBay bought it. I remember when it was free! Over the years my personal account changed to a Premier, became verified and later changed again to a Business Account. In all those years I have

  • Never had a chargeback
  • Never had to be asked for a refund.
  • Never had a dispute opened against me

Now PayPal is holding on to my freaking refund?

Undaunted

I laced up my bovver boots and dialed up the PayPal help line. Nineteen minutes later I had played the ‘give us all your information by pressing buttons on your phone’ game and was on hold waiting for a real person.

My real person was a delightful lady in the Philippines who’s eBay moniker is ‘Sheila’. I think they have to choose Americanized names so as not to rattle our delicate American sensibilities.

Poor ‘Sheila’ got shaken right off her script in short order, but she was very polite and had excellent English language skills, both speaking and comprehension. She was also talented at defusing, to the point I started feeling a little guilty about being outraged at PayPal.

After putting me on hold, briefly, she returned to explain that PayPal was returning my money to my bank and this would take four to five days.If I waited patiently, by Friday I would have my money.

Riiiiiiiight!

I don’t blame ‘Sheila’, she is powerless and doesn’t know any better but I know and you know this is not true.

PayPal does not return money to your bank unless you specifically withdraw it. They keep it in your PayPal account for a long as they can to squeeze as much use out of it as possible.

Imagine how a new PayPal user would feel!

What kind of buyer protection program places a temporary hold on a refund to the buyer when a transaction is canceled by the seller?

UPDATE: 11/05/10

My refund is now sitting in my PayPal account making money for PayPal, at 0.14% interest it’s not making much money for me. Of course it was NOT returned to my bank account as ‘Sheila’ thought it would be. A withdrawal request will take 3 - 4 days plus the weekend, which in effect means PayPal has had use of my $50 for between nine and ten days. Multiply that by thousands of users and the float is substantial.

Please read Uncle Joe’s comment below.

I am speechless, but
Y’all come back!
Henrietta!

Full disclosure: I am an ex-eBay seller currently selling on my own website and Bonanza.com

California Negs Meg in 2010

This is not a political post. Shall I repeat that? This is not a political post, it is about karma, (def.# 2 - 4) and Auntie May’s favorite cosmic theory, “What goes around comes around.”

Meg Whitman, billionaire former CEO of eBay Inc., was rejected in her $142 million dollar bid to buy the Governorship of the State of California, but don’t feel sad for her, it’s only money and she has lots more.

I have never met Meg Whitman. I am told by those who have that she is a warm and charming, witty and very likable person. Unfortunately for Meg, this was not the message California voters absorbed in a solid year of advertising spin by the Whitman campaign.

Life before eBay

Meg Whitman did not have a particularly stellar career before eBay.

Her first CEO position was at FTD.com, it lasted two years. While Whitman was in control orders fell to a new low of 12 million, at it’s previous height FTD was taking 22 million orders a year. Next came a stint (def.#5) as head of toymaker Hasbro’s Playskool division for a year. No miracle turnaround there either, stock prices stagnated. Then came eBay, which was called AuctionWeb at the time.

Now Gimme Money (that’s what I want)

eBay made Meg Whitman rich. Her starting salary as CEO was a mere $175,000 with a $25,000 signing bonus, but the plan was to take eBay public and that opened the door to wealth.

As is standard in big business, executives get stock options as part of their compensation package. Ms Whitman’s initial option grant allowed her to buy 2,400,000 eBay shares at 20c with a January 20th 2008 expiration date and staggered vesting schedule. (eBay Inc SEC filings Form S-1/A Filed 8/19/1998 page 58)

  • 30,000 shares vested immediately,
  • 570,000 shares vested on February 14, 1999
  • and the balance vested at the rate of 50,000 shares at the end of each month thereafter.

Spin Baby Spin

When opportunity knocked on Ms Whitman’s door she was not slow to open it. As CEO of eBay, Whitman hired Goldman Sachs to handle the company’s IPO (initial public stock offering) at $18 a share in 1998 and the second stock offering at $170 per share in April 1999. At this point Meg’s options on 650,000 shares had fully vested.

In 2001 Goldman Sachs formally became eBay’s investment banking advisor and  Meg Whitman became a director of Goldman Sachs with an honorarium (def.#2) reputed to be in the range of $475,00 a year. As this 2004 legal action filed by eBay shareholders shows, there were other benefits, nicely summarized by the Sacramento Bee. Between 2001 and 2002 Goldman Sachs made $8 million in fees from eBay.

In fairness, I should point out that the spinning sweetheart deals were not illegal at the time they occurred and Whitman settled the shareholder lawsuit for a reputed $3 million, without admission of guilt.

Shop Shop Shop

Shortly after being appointed a Director of eBay Meg Whitman embarked on a shopping spree. eBay’s acquisition of Skype in 2005 is probably the most famously puzzling of Meg Whitman’s purchases but there have been others.

In April 1999 eBay announced the purchase of Butterfield & Butterfield, at the time one of the world’s largest and most prestigious auction houses for approximately $260 million. The 135-year-old company was preparing at the time to go public at a fraction of what eBay paid for it.

“This is a profitable company with a solid business plan and a first-rate management team. Butterfield & Butterfield also has strong relationships with major auction houses around the world.” Whitman said. “We will be able to bring fine and decorative art and collectibles online allowing eBay members unprecedented access to many of the world’s outstanding collections.”

By July 2002 scores of Butterfields staff had been laid off and eBay sold the company to the venerable British auction house Bonhams for $21.8 million.

In May of 1999 eBay announced the acquisition of Billpoint, the payment processing firm and Kruse International, a high end collectible auto auction house for a total of $275 million. Based on stock prices of May 18th 1999 Kruse cost eBay approximately $18.65 million. eBay phased out Billpoint early in 2003.

Kruse International, like Butterfields was a sad story. It was a 75-employee company based in Auburn, Indiana and had a premium name in the collectible car market with about 400,000 registered collectors. It helped locate parts for out-of-stock cars, and provided other information and services to car collectors.

At the time of acquisition eBay spokesman Kevin Pursglove said “No layoffs or personnel changes are planned, and Kruse will maintain its local charitable and civic activities. We will continue our commitment to the employees and to the community.” By the time eBay divested Kruse in October 2002 it had 40 employees, it never really recovered from the eBay experience and is now owned by a Canadian corporation.

Parallels

There are parallels between the blundering Whitman campaign strategy and the way eBay was run in Meg Whitman’s final years as CEO, perhaps the foremost being  the presumption that the worker bees are too dumb to fact check the BaySpeak.

Did this lead the average person to wonder how much grasp Whitman has of the differences between running a corporation and a State with a Democratic Legislature and unionized workforce?

Or did the majority of California voters see the other Meg, the Meg of whom Craigslist CEO Jim Buckmaster was warned “We would be best served to know that Meg could be a monster when she got angry and frustrated”?

Either way, for now, hopefully California is safe from eBay style management and Ms Whitman will find another hobby.

Y’all come back!
Henrietta!

Full disclosure: I am an ex-eBay seller currently selling on my own website and Bonanza.com