The Dark Side of PayPal

PayPal was first developed in 1998 by cryptography firm Cofinity, as a way to reconcile payments from Palm Pilot users. In February of 2000, Confinity merged with internet financial facilities company X.com, and the changes they made to the service allowed PayPal to take off at an alarming rate. By 1999 online auction service eBay was experiencing profound popularity and saw a pressing need for a payment system suited to online auctions. Since PayPal had not yet been launched, eBay purchased the best system available, Billpoint.

With Billpoint in place, eBay had a payment system that could accommodate the time sensitive needs required of an auction as well as the security of servicing online clients. Outside of eBay, shoppers were working with PayPal for their online purchases, so each client just used the same system for eBay. As the popularity of PayPal grew, and with the limitations of Billpoint (it was exclusive to eBay), the sales statistics for April of 2000 showed a clear trend. PayPal was used an average of 200,000 times daily for eBay auctions alone, while Billpoint had just 4000 uses. After surviving the fallout of 9/11 eBay was finally able to arrange the acquisition of PayPal in October of 2002. This time they did not make the same mistake, PayPal remained open for use anywhere on the web.

According to the 2010 end of year revenue report from eBay, the online auction site took in more than US$9 billion in that year. That makes PayPal a powerhouse acquirer of funds. Not only are they a household name, they are a household name with trust. Plus, with a big player like eBay as the parent there is comfort in choosing PayPal for your ecommerce services. Aside from the assumed security of PayPal, there are three other benefits that make it an easy choice for any online business owner. It is easy to use, cheap to manage and hugely convenient for everyone involved.

Low credit rating? No problem! No credit card? No problem! Can’t afford a monthly service fee? No problem! No dedicated IP? No problem! Live outside of North America? No problem! PayPal can assist everyone and anyone, either client or business owner. Therein lays the dark side of PayPal. Without sounding paranoid, if something is easy and shockingly accommodating then there is definitely a negative side. Consider the fact that PayPal sits on the lap of a US$22 billion (2010 assets) company. We are all very aware that money is power; therefore PayPal has the power to make the rules for selling within your business. Throughout your use of PayPal you are obligated to abide by their rules at all times. Now, their rules are not generally strange or stringent but they can decide a customer is fraudulent all on their own. Even if your customer is 100% legitimate. The result for the business owner is a lost sale and a lost customer.

Another dark side-effect of being owned by a multi-billion dollar company is everyone wants to get into your wallet. Every year hundreds of spammers send out thousands of fraudulent emails claiming to be from PayPal. Every year hundreds of people who receive those emails don’t carry out due diligence and give away their financial information to these bad kids on the block. The pessimistic crowd my say those who give up their vital information so easily deserve to learn a lesson. Others might think no one deserves to have their finances compromised. Whichever view you have, the solution is obviously to stop to security breaches. Stop the scammers and spammers. Perhaps this is point the where the power and money behind PayPal could do some good.

When PayPal was first launched it was available for anyone to use anywhere on the web. EBay hasn’t changed that policy, aside from a few bans on fraudulent sites. Any site selling anything can offer PayPal as their funds acquirer. Let’s say that again: any site selling anything can offer PayPal. If the site doesn’t have a dedicated IP address or an SSL certificate, they can still offer PayPal to their clients. The site doesn’t have to have TrustRank or even a brick and mortar address either. How does that look to the savvy online shopper? It looks untrustworthy, of course. What if it is your site that doesn’t have a dedicated IP or SSL certificate? What if you are just a stay at home parent selling homemade costumes over the web? The lack of trust could mean the difference between a successful home business and a failing one.

These are most definitely some of the darkest aspects of PayPal, but in the spirit of business and consumerism it would be prudent to mention their $0 Liability for Eligible Unauthorized Purchases (when meeting their requirements). Plus there is the obligatory “process for resolving problems” during which your PayPal account is frozen.

From a business point of view, PayPal makes sense financially. Your webmaster may tell you the service is amateur and will make your business look amateurish, but it really depends upon what you sell. PayPal is widely used and abused, but spending a few minutes looking over their security page shows the company is always looking for ways to prevent fraud and educate their customers. In the end, it is the impression clients will get of your website that will make the buying decision. If your site looks and acts like a legitimate entity and you back it up with live human customer service, then customers will be more likely to spend on your site.

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