ATLANTA — What is 'the PayPal monopoly'? It's a phrase I coined to describe any business that has become so large that you almost have no option but to use them whether you agree with their culture, ethics, rules and/or procedures.
There are plenty of monopolies in our economy, mostly to the disadvantage of the 28 million small businesses in the United States. Over the last half a century, businesses in the cable, banking, financial and media industries have consolidated to the point where a couple of large players control the culture and even pricing in their industries. For instance, large cable companies like Time Warner, Comcast and Charter almost never compete in overlapping markets. If they did it would create a price competition driving the costs lower for consumers and businesses who rely on their services. Such competition would force the other competitors to create more favorable policies and procedures that benefit customers and not just the provider.
In e-commerce, just one company dominates the payment processing of purchases from American small businesses. It's PayPal, which processes over 5 billion transactions annually. Their yearly transaction growth-rate has exceeded 15 percent multiple times in the past decade.
This means that if you're running a small business, and plan to sell your products online, 'the PayPal monopoly' requires you to accept their service as a payment option or you'll likely lose a lot of business.
The existential threat to businesses like PayPal is online fraud. Because of the 'PayPal money back guarantee' and other flaws in their business model, they almost didn't survive. In their early years, they were losing $2300 an hour to fraudsters.
As a result, their fees have increased dramatically over the past few years, charging as much as four to five percent of a transaction's costs to the businesses that use them. About half of PayPal's gross revenue is paid to credit card companies and outside costs (referred to as 'cost of goods sold').
According to Marketwatch.com PayPal has an average yearly net income of approximately $1 billion (on gross sales of over $10 billion), including over $3.3 billion in short-term investments, it's safe to assume that a substantial portion of PayPal's revenue is derived from holding small businesses' money and earning interest (not just processing fees).
PayPal has been involved in several class-action lawsuits because of their egregious policy of holding merchant and sellers’ funds for as long as six months based upon arbitrary decisions. When challenged by small business owners, they will refer them to PayPal's policies and procedures for which merchants are required to agree before using their service.
A comment on the site www.PayPalsucks.com says, "OMG do you hear yourself whining? Nobody is holding a gun to your head forcing you to use PayPal." This may be legally true but many small businesses have no choice because of the collusion between PayPal and other sales sites.
For instance, on eBay, merchantsdo not have an option of using but two companies in order to accept payments: PayPal and Authorize.net. If a business chooses to use authorize.net they will lose a significant percentage of sales due to unpaid orders resulting from buyers’ fears that only PayPal is the safe option. In my view, this is an illegal monopoly because there has been no effort by eBay to promote competition and payment processing (nor support the safety of it's alternative vendor).
The moment a buyer disputes a sale on sites like eBay, PayPal is notified to withhold money from the small business (even if they sell hundreds of items per month). Given that eBay sold its stake in PayPal in 2015, this seems to be a privacy violation (except that's allowed in the terms and conditions). However, many businesses have terms and conditions that are later determined to be unenforceable and illegal.
Additional class-action lawsuits have been filed in Russia, Israel, Canada and other countries for these behaviors. Dozens of countries have banned PayPal altogether. Many of the complaints cite the fact that while customers are required to rigidly follow their policies and procedures, PayPal is notorious for doing the opposite.
’Maryam' posted on 'consumeraffairs.org' that she had a PayPal account for several years with "several hundred 100 percent positive reviews." She booked a sale for $7600 and the company placed a 21-day hold on the funds. She asked PayPal to release a partial amount to pay for shipping of the sale. Instead, they limited her entire account which means her funds were held for the rest of her much smaller orders. 'Maryam' said "PayPal is definitely a small business enemy... They bully you, hold your funds and make unreasonable demands from their paying customers. Their petty management style forces you to think small, see small and be small."
Just a cursory research of the Internet will net tens of thousands of such stories from struggling small business owners who have been bulldozed by PayPal's egregious policy of holding funds.
PayPal has also been sued for misusing charity donations. In one case, Terry Kass claims that she used PayPal to get $3250 to 13 charities. Kass claims PayPal withheld $3150 of the money and did not send it to the intended recipients.
One anonymous comment on PayPalwarning.com says he threatened to contact the Attorney General of his state and his PayPal account was subsequently restored to unlimited status. Is it be possible that this entire business is operating illegally and no prosecutor has taken the time to actually bring it to justice?
In 2015, PayPal was ordered by the Consumer Financial Protection Bureau to pay $25 million in refunds and penalties after they illegally enrolled customers for an online credit program. The CFPB stated in a federal lawsuit that PayPal also used deceptive advertising in regards to the PayPal credit program. Moreover, the CFPB says that PayPal failed to honor advertised promotions, abusively charged consumers deferred interest fees (that the company practices made difficult to avoid), mishandled customer disputes and did not remove late fees and interest charges from bills when their own website was the result of the problem.
PayPal also settled 28 state probes and a federal suit that involved charging customers credit cards without permission and freezing money in customers’ accounts during billing and payment disputes.
With PayPal payment-hold issues, small business owners find themselves with no one for which they can discuss the matter. They are frequently met with rude and incompetent customer support staff who are not empowered to address their issue. Most of their financial decisions are made in what they call a "back-office" to which virtually no one can interact (including front-end PayPal staff). This is a sign of a shadow operation (within an operation) seeking to tightly control how decisions are made.
Shouldn't the CFPB and state attorneys general investigate what's really happening in this 'shadow operation' that's been the subject of such overwhelming angst of thousands of legitimate American small businesses?
PayPal's collusion with other websites, combined with limited payment processing options allows them to charge much higher fees than normal payment processors. Higher fees combined with payment holds have bankrupted many small businesses.
If you challenge or argue with PayPal, they can cancel your account and hold your funds for up to six months as punishment. I know this to be true because it happened to my small business and I had to threaten them in order to have my account reopened.
The culture at PayPal causes a repetitive and malicious misrepresentation of how accounts and money will be processed. When you call PayPal, it can result in three or four representations; none of which are ultimately true. This means that small business owners spend countless hours tracking down small amounts of money or attempting to understand an issue instead of serving their customers.
As a result of this egregious, monopolizing and abrasive culture, PayPal has created a pathway for consumers to rip off, scam and cheat small businesses across America. The moment a customer decides they want to gain leverage over a business owner for which they transacted via PayPal, they simply file a dispute, and the business owner’s money is held (and usually arbitrarily awarded back to the consumer). This allows consumers to use products for several months, break them or gain the benefit of services, file a dispute and still receive a refund.
Our government regulators are not focused on the real problems emerging in our country. The solution to PayPal is simple. It should be regulated like a financial institution. This would require PayPal to treat other people's money like a deposit in a bank. Problem solved!
My greatest concern about 'the PayPal monopoly' is that it’s just the tip of an iceberg. Whether it's cable television, cellular phones, financial services, banking, automotive purchases or a host of other necessities in today's culture, we are forced under duress to do business with unethical companies, agree to their terms or be punished/harmed financially.
We've been talking about 'draining the swamp' in Washington these past few months. We might need to also consider 'draining the swamp' of America's most egregious businesses that arbitrarily control our televisions, phones, finances and business lives with no accountability for decency, legality and ethics.
I don't care what some monopoly's policies and procedures say especially when they are designed (likely illegally) to take advantage of more vulnerable people.