January 16, 2001
PayPal's Popular Service Gets Some Complaints From Users
WSJ.COM (Wall Street Journal)

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PayPal, which provides a popular way to send and receive money online, is getting an angry message from some users: Your money is no good here.

Take Jim Kramer, who used to be a fan but this month stopped doing business with the electronic-payment company. A plumbing-supply salesman based in Seattle, Mr. Kramer conducts two or three auctions a week on eBay Inc. and used to accept money e-mailed via PayPal. But earlier this month, PayPal froze his account because "fraudulent credit-card use" was reported from one buyer, he says. Unable to access $500 in his account, Mr. Kramer says he sent an e-mail inquiry to PayPal but never heard back. Then this weekend, the restrictions were lifted without explanations, he says.

"There's no excuse for not being able to have direct communication with someone who has your money locked in a jail cell."

Mr. Kramer isn't the only one taking issue with PayPal, owned by closely held X.com in Palo Alto, Calif. The company, which has taken early command of the online person-to-person payment industry, has generated many complaints about the way it handles customer accounts when a dispute arises. "They have a pattern of complaints, and they're failing to take care of the problem," says Sharon D'Amico, president of the Better Business Bureau of Silicon Valley.

Adding to many customers' frustrations is that PayPal and its competitors, which include Wells Fargo & Co. and eBay's Billpoint, Citigroup Inc.'s c2it and Bank One Corp.'s eMoneyMail, fall outside banking regulations, says Avivah Litan, vice president of payment services for the Gartner Group, a technology-research and consulting firm. This means users are often unsure about what consumer-protection measures are in place.

"It is a little bit of the Wild West," Ms. Litan says. "If anything, the regulators should step in and at least force them to issue a statement on guidelines on consumer protection."

PayPal, based in Palo Alto, Calif., has grown to 5.5 million users and processes about 150,000 transactions and about $6 million to $7 million in payments each day, the company says. Most of its accounts are free, but even after it started charging a fee averaging 2% of payments received for business accounts, the company says it adds 20,000 new accounts each day.

"With a service that is this large with this many members, there are going to be some accounts or some payments that have to be reviewed," says Vincent Sollitto, a spokesman for X.com, which expects to be profitable by the end of 2001. "We attempt to do so as expeditiously as possible."

Most of PayPal's cash transfers go through without a hitch, Mr. Sollitto says. Fewer than one-half of 1% of transactions processed by PayPal are disputed and investigated for fraud or other misconduct, he says, which can result in a customer's account being restricted. The industry average for credit cards is greater than 1%, he says.

"Retailers are getting a robust, secure system that delivers a far more secure antifraud-payment system than online retailers as a whole," Mr. Sollitto says.

PayPal confirms that its policy has been to freeze an entire account if the company was investigating a particular transaction. But in cases like Mr. Kramer's, a system has been in place since October 2000 to isolate questionable transactions and leave the rest of an account accessible, says Mr. Sollitto, who declined to comment on Mr. Kramer's specific situation.

The Better Business Bureau's Ms. D'Amico says X.com applied for an Internet privacy seal, which signifies that an online merchant has met requirements for standards of protecting personal information collected about customers. But the company didn't get the seal, Ms. D'Amico says, because of its record with dealing with customer complaints.

Erin McCool, a customer-service representative with the Silicon Valley bureau, says PayPal generates about 30 to 40 complaints a month. Ms. D'Amico says despite the fact that PayPal has more than 5.5 million customers, other companies with larger client bases generate only a handful of complaints a month. Ms. D'Amico says PayPal should develop better internal measures for dealing with complaints so customers aren't forced to contact the bureau.

Mr. Sollitto says officials from PayPal meet regularly with the bureau and respond quickly when it passes on complaints. PayPal also has a staff member working as a liaison with the bureau. PayPal has a large customer-service facility in Omaha, Neb., where more than 500 representatives deal with customers and their problems and questions, Mr. Sollitto adds.

Billpoint, PayPal's largest competitor, has a better record of dealing with customer complaints, according to the Better Business Bureau of Silicon Valley. Its Web site says Billpoint has been responsive to consumer complaints flagged by the bureau. Ms. D'Amico says the bureau has only received one complaint about Billpoint, which was answered quickly by the company.

Officials from Billpoint couldn't immediately be reached for comment. But the company handles fewer transactions than PayPal, according to Ms. Litan. PayPal receives the bulk of the attention -- and heat -- because it is the most widely used, she says.

Services such as PayPal aren't banks, and their accounts aren't insured by any government agency. As a result, electronic-payment services fall under the auspices of the Federal Trade Commission, which is still evaluating how to regulate these nascent services.

"Whether or not the new electronic-payment industry fits under the banking statutes is an open question, and it's going to take some thought and analysis by the industry and the government," says Tracy Thorleifson, an attorney in Northwest region for the Federal Trade Commission.

Getting legislators and regulators to consider the question could prove difficult, analysts say, because they don't want to stifle entrepreneurial ventures.

"When it comes to new online companies and methodologies that are available to people, government agencies are reticent to enact new regulation if they are at all unsure of what the implications of that might be," says James Van Dyke, an online financial services analyst with Jupiter Research in New York.

Write to Stacy Forster at stacy.forster@wsj.com