Red Ink Diary

As we proceed at a gallop towards the end of the year with the accompanying delights of inventory and annual account finalization looming, this is the moment to look back. Today let’s review the Red Ink Diary posts this year on PayPal, and we will save eBay for later.

PayPal Squeeze

I have written extensively all year on the subject of PayPal’s squeeze tactics:

• PayPal’s New Trick August 27th, 2009
• Fighting PayPal’s Rolling Reserves July 2nd, 2009
• PayPal’s Rolling Reserves Start To Bite In USA June 26th, 2009
• PayPal Rolling Reserves - Straight Talk June 12th, 2009
• Russian Roulette with PayPal June 9th, 2009
• The Superglue Factor eBay and PayPal February 19th, 2009

Sue Bailey at TameBay wrote “Paypal reserves heres whats really happening” on February 16th 2009 about increasing implementation of PayPal’s reserve policy in the UK. Read the comments on that article from UK sellers showing increasing implementation of reserves up to a month later when comments closed. What happens overseas is generally a good precursor of what is planned in the USA.

In Australia PayPal was rapped over the knuckles, again, and got a new Managing Director, one who knows the rules do not apply to him because he is special.

The Cash Cow

CEO John Donohoe increasingly looks to PayPal as the prime eBay Inc revenue generator as he struggles to regain the annual growth momentum of the boom years. Although unfavorable comparison to the growth related performance of previous CEO Meg Whitman is inevitable, some of the current stagnation is directly attributable to shortsighted policy planning of earlier management. This has not changed with the new management. As eBay (the venue) has shown, a corporation can only grow so far with quarterly “lever pulling” before losing the ka-ching.

How long before the cash cow becomes the crash cow?

The Status Quo

PayPal has done a superb job convincing consumers that it is “the faster safer way to pay and get paid online.”

Merchant Services (off eBay) have been marketed heavily off eBay this year resulting in acquisition of several big name customers, e.g. SouthWest Airlines, Omaha Steaks, Smart Bargains.

So far as I can tell no market analyst has asked what fee discounts or concessions were made to gain the big name accounts.

Actual growth figures according to the Q3-09 report:

• PayPal (the whole not just Merchant Services) shows total revenue up 15%,
• 31% growth year over year
• Total Payment Volume TPV (number of payments) up 19%
• TPV growth was 14% in the U.S.
• TPV growth 30% internationally.
• Merchant Services account for 56% of total TPV
• TPV Merchant Services grew 47% .

The legal camouflage of permitting sellers to use carefully chosen uncompetitive alternative payment systems on eBay while simultaneously heavily promoting PayPal to buyers on listing pages has just about maximized any possible gain from that venue.

The main growth opportunities are overseas and general e-commerce within the USA. If and when Google Checkout expands to include Canada and Australia then PayPal will have to work a lot harder for growth.

The Crystal Ball

PayPal is perceived by buyers as being very safe, up to and until they have an off eBay claim. Then they find out that they have far less protection than they thought they had, or would have had if they had paid by credit card.

The ease of setting up PayPal on a website (for sellers) combined with the name recognition and trust factor for buyers ensures that the vast majority of websites operated by small sellers will offer PayPal as their sole payment processor.

If PayPal imposes rolling reserves on small independent websites I predict a rapid and extensive switch to Google Checkout (in the USA) or other payment methods elsewhere.

Sooner or later, when enough complaints are received by the FTC and individual State’s Attorneys General someone will note that PayPal is only licensed as a money transmitter and is required by law to transmit monies within a legally defined period of time, usually 10 days. Not one State’s statute that I have read mentions the permissibility of holding reserves or freezing accounts for 180 days.

Auntie May says “The higher the climb the harder the fall” Hmm, makes sense to me.

Finally

I ran a trial the first three months of this year in which I removed the PayPal button on my Bonanzle booth, while stating that I would accept PayPal if asked. My sales conversion ratio dropped by about 40%. I put the PayPal button back.

I am seeing increasing acceptance of Google Checkout from buyers. Checkout is truly safer for buyers because they have all the protection of using a credit card without exposing the information to sellers. My figures for 2009 show 60% PayPal to 40% Google Checkout with my website being 100% PayPal (something I hope to change very soon.)

Y’all come back!

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

PayPal is not a bank in the USA, that would subject PayPal to federal regulation.

PayPal is licensed as a Money Transmitter in most states, or Money Service Business (Vermont), but state laws vary, as do their definitions of banks, money services businesses and money transmitters. PayPal is not subject to the provisions of the Electronic Funds Transfer Act and Regulation E (EFTA/E). Consumers using PayPal with a credit card (not debit card) are covered by the provisions of the Truth In Lending Act and Regulation Z, (TILA/Z) through the card issuing bank.  If you would like to see exactly how PayPal is licensed in your state, if your state even requires licensing, click here, PayPal log-in is not required.

PayPal is not a Merchant Credit Card Payment Processor. PayPal processes credit cards through Wells Fargo, PayPal is a service reseller or middleman.

In the USA, acceptance of any revisions, additions or amendments to any of PayPal’s Legal Agreements is automatic when you log in. In 2009 to date PayPal has made 8 amendments to their Legal Agreement, given in the order they were announced posted on the PayPal website.

1. January 22nd
2. February 11th
3. April 8th
4. July 1st
5. June 8th
6. June 3rd
7. June 3rd (two on this date)
8. August 19th

The amendment to PayPal’s user agreement which took effect February 11th 2009 added a new section which says:

“2.4 Credit Report Authorization for Premier and Business Accounts. If you open a Premier or Business Account, you are providing PayPal with your written instructions to obtain your personal and/or business credit report from a credit bureau. PayPal may obtain your credit report: (a) when you open (or upgrade to) a Premier or Business Account, or (b) any time thereafter if PayPal reasonably believes there may be an increased level of risk associated with your Account. An increased level of risk includes, but is not limited to, a high number of chargebacks or reversals, or suspicious activity associated with your Account.”

This will affect your credit rating.

There are two different types of credit check, a Hard Credit Inquiry affects your credit score, a Soft Credit Inquiry does not.

Soft Credit Inquiry:

Sometimes called an account review,

• When you check your own credit,
• background checks by a potential employer,
• mortgage pre-approval or qualifier,
• periodic checks by companies who have previously issued you credit.

Hard Credit Inquiry:

Each time a Hard Credit Inquiry is made your credit score can drop by 5 points for six months. The Hard Credit Inquiry remains on your credit report on all three credit bureaus and is visible to any potential lender for 2 years. Hard Inquiries tell potential lenders that you’ve been seeking loans and may cause them to consider you a poor credit risk. Your credit score or risk factor determines the interest rate you pay on a mortgage, car loan, credit cards, a lowered score could literally cost you thousands of dollars in higher interest payments over the life of a loan.

• Applications for a new credit card, cell phone contract,
• life insurance purchase,
• opening a new account at some banks and financial institutions.

Why is PayPal doing this?

Firstly, because they can, you authorized it.

What follows is speculation (def. #4) :

eBay bought Bill Me Later. This adds risk for eBay if buyers default on high value purchases and sellers do not have funds available for PayPal to take on behalf of the lender, Bill Me Later. The seller can loose both the goods and the payment but that is OK as long as PayPal does not loose on the deal. This is not a new risk for sellers, just more of the same.

Because the inquiry will drop your credit score this could make you look riskier, PayPal can use the credit reports to justify the rolling reserves.

Some thoughts

PayPal is not a bank, but they are acting like a bank, in fact they are playing at banking without having to abide by (def. #8, 9a, 9b) banking rules.

PayPal’s license as a money transmitter in most states is regulated by statute, they are legally required to transmit the money from the sender to the receiver within clearly defined periods of time. This is law.

PayPal is literally banking on your shrugging and saying “Oh well”. If unchallenged they will continue to grab more and more power and money, because they can.

Recourse, or what you can do

• Look up PayPal’s license in your state.
• Look up the applicable law in your state. See how many days are permitted for transmittal.
• Write to the Department which regulates Money Transmitters, I would send a copy to the State Attorney General too.
• Give them PayPal’s license number
• Print a copy of PayPal’s Legal Agreement, highlight your points of concern
• Tell them about the 21 day holds on eBay
• Tell them about the rolling reserves
• Tell them about the credit checks.
• Tell them about the Legal Agreement which permits PayPal to freeze your account for 180 days with no appeal.

You can read this, shake your head and carry on with your life until it comes down around your ears, or you can sit down and write a letter to challenge PayPal. State Regulatory Agencies are there to protect state residents, phone calls followed up by written complaints generate action.

As Auntie May says ” Why waste grease on a wheel that doesn’t squeak?”
Isn’t it about time we started squeaking?

Y’all come back!

There was a nice PR puff piece by Chris Crumb on WebProNews.com dated June 8th 2009, almost a word for word duplicate of one on The PayPal Blog by Bill Clark the same day.

Both articles employ the ‘there is nothing to worry about and don’t bother me with facts’ meme, using an example of a seller with a gross of $2500 a month having a 5% 30 day rolling reserve.

“Here’s an example to put it in perspective. If a merchant sells $2,500 per month, and has a 5%, 30-day rolling reserve, then about $125 per month will be held in reserve. This equals about $4 per day being held and released 30 days later.”

I can only think this approach is used because eBay and PayPal are so disliked and distrusted by their customers. The instinctive BaySpeak syndrome so embedded in their corporate culture simply does not allow them to deal with their customers truthfully and as adults.

Points To Ponder

We will start our exercise in pondering with a quote from Chris Dawson of TameBay on the subject of rolling reserves.

“- for most sellers it’s better a rolling reserve than telling you you’re too big a risk to have an account which would mean you can’t trade on eBay”

The facts are that for the average small internet seller PayPal’s rolling reserves are infinitely more favorable than reserves required by Merchant Credit Account processors for internet business. Keywords here are small and internet. Pay attention, there will be a quiz.

What are Rolling Reserves?

A reserve account is a risk management tool for payment processing services.  A specified amount of money, calculated by a formula which includes trading volume, perceived risk, customer satisfaction, and rate of goods returned, is deposited into an account and held to cover the possibility of future liability. Liability would include credit card chargebacks, reversals due to fraudulent use of credit cards and the fees incurred and imposed by the payment processor, for example declined transactions. A rolling reserve is that same account in which the money is held for a period of time before being made available for withdrawal. In a 30 day rolling reserve account, on the 31st day the monies held on the first day are released as they are replaced by money held in reserve on the 31st day.

Reserve Accounts Generally

Terms for merchant processing services are different in every country and different from provider to provider. There are gazillions of ‘providers’ most of whom are agents or affiliates of the half dozen or so large corporations who are the ‘real thing’ and do the actual processing. Every layer between you the merchant, and the true processor is making money on the deal.

If you are an established and incorporated business with a good credit rating and good trading track record, with a bricks and mortar business in addition to an internet business you may be considered ‘low risk’ and not be required to have a reserve account. This is more likely if your processing is done through the bank which holds your business account, they know you. Because the reserve account is solely designed to protect the card processor, in the form of ’secured assets’ (your assets secured for them) most US processors do require a reserve account. The amount varies, 20% of your projected gross is on the high side of normal. Some will require the reserve account to be held during the entire period of your business association and for a specified period after you terminate your contract, anywhere from 180 to 270 days.

Reserves on PayPal

The somewhat improbable example given by Bill Clark above, of the apocryphal seller grossing $2500 a month with a 5% 30 day rolling reserve of $125 is a model case illustrating why eBay and PayPal are so distrusted and disliked.

Chosen precisely for its sheer insignificance, crafted for maximum “give me a break” quality, $125 a month, sheesh! In the real world, why bother? Simply suspending the account would produce payment if needed, more likely it would be paid promptly on demand. It is quite trivial and ridiculous, but, be careful and don’t assume! This is a first class example of what Auntie May calls the “No stone is to small to be left unsqueezed” mentality we have all come to know and love with eBay and PayPal.

A more realistic example is the UK seller of laptop computers who was told their reserve would be 5000 pounds sterling plus 5% for six months. Turnover is about 100,000 per month and the reserve will amount to 35,000 before it starts rolling. One pound is approximately $1.66 at today’s rate of exchange, call it $58,000. Adding insult to injury, in the UK no interest is paid on reserve accounts.

The laptop seller’s reserve amounts to 58% of his monthly gross, extraordinarily high by any standards. He would surely be better off at his volume level going through a Merchant Processor. However, by eBay’s TOS he must continue to offer PayPal and may not discourage buyers from using it so inevitably he will have some PayPal volume. In my opinion this smells of ‘forcing’ in the legal sense.

I believe there is legislation pending in the EU requiring vendors to provide a two year warranty on sold items. That would be an ongoing liability validating a need for higher reserves but having a Merchant Processing agreement with a bank would presumably allow the reserve to be kept in an interest bearing account at that institution. Hopefully someone with knowledge will comment on that.

Industry Standards

The phrase ‘Industry Standards’ is an oxymoron when discussing terms in Merchant Credit Card Processing services. “Caveat Emptor” which is Latin for “let the buyer beware” applies here. You should remember that nothing is ‘free’, if the charge is not specified you can be 100% certain it is built in or hidden. As a rule of thumb, free is usually often more expensive than paying for it up front.

Crystal Ball Department

The Crystal Ball Department contains no facts. Educated guesses, gut feelings and opinions work here.

BaySpeak moment “We’re requiring reserves for a very small percentage of our sellers – currently less than 1%.” keyword here is ‘currently’. As PayPal works through the ranks of smaller sellers, not necessarily those who are covered by the 21 day holds but those below Gold PowerSellers, the ‘current percentage will rise and the pool of funds available for use in the short term interbank loan market increases to a staggering amount. Estimated revenue from float in 2008 was a relatively miniscule $10 million per quarter, the rolling reserve policy will guarantee double digit growth in that area.

• PayPal which is 100% owned by eBay acquired Fraud Science, an Israeli company that markets fraud management technology in January 2008 for $170 million in cash. This purchase has to be justified.
• John Donohoe has stated on several occasions that he has big plans for PayPal and thinks PayPal could be bigger than eBay some day.
• Has ’some day’ arrived for PayPal?
• Will this encourage a further exodus of the despised and distrusted small sellers?

Share your thoughts in the comments please.

Y’all come back!

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