Does anyone have insider knowledge of why PayPal has been causing merchants so much trouble? It sure looks bad on the outside, but I'd be interested to hear their rationale.
To the extent this perception represents actual reality:
You know how every time a new payment provider comes up and people kvelch that it isn't available in their country and how no provider is? This is because every payment provider which attempts to hit as many countries as Paypal does dies. They're killed by fraud. (Fraud kills domestic ones, too, all the time, but it's marginally less frequent.)
Luckily, Paypal is an anti-fraud AI company which also happens to run credit cards sometimes. When in doubt, they will always come down on the conservative side. This is why they still exist. (Early in their corporate history they lost -- no kidding -- one hundred million dollars to fraud.)
This perception does not actually match reality, though: most people bitten by this are unaware that similar activity would get them shut down by the fraud department at e.g. a bank. See comments by dangrossman, etc.
My paypal account has been hacked twice, and both times I had to catch the ensuing fraud on my own. This was about 3 and 4 years ago. Two months ago they shut down my account because they think I'm high risk. I've had my Chase account frauded twice too (I know, I AM high risk) and Chase hasn't shut down my account.
IMO Paypal swung quickly from being too sloppy to being too conservative. The fraud they missed a few years ago was easy to catch - it was from sketchy sites and the products were being shipped to PO boxes nowhere close to where I live. Paypal is playing a dangerous game now by shutting down people's accounts because their strength comes from a network effect within a potential monopoly (unlike Chase); every person they ban from paypal removes the legitimacy of their service a little.
BTW Paypal's fraud team was only built up to a solid point in the past 3-4 years. I know this because I used to work in the industry.
Luckily, Paypal is an anti-fraud AI company which also happens to run credit cards sometimes
The thing is, it shouldn't take much in the way of "AI" to recognize that a company that has already been doing business for several months or even years is probably not going to wake up one morning and start defrauding people. Criminals are lazy, and running a business is a lot of work. It would take about 30 seconds' worth of review time on the part of a moderately low-paid staffer at PayPal to avoid most of these PayPal Media Debacle of the Week stories.
I simply cannot believe that it's that hard to distinguish between a fraudulent user and a real one, given the presence of a significant transaction history. New accounts opened by people with no discernible history? Yes, they should freeze/ban/lock first and ask questions later. Accounts that are clearly used as part of a business? Give the customer the benefit of the doubt, or at least a 5-minute phone call.
You're wrong. A common type of fraud on ebay is for an account to build up a reputation buying/selling low cost items (or high cost items between a group of criminal partners) before using the account to scam on high price items.
Criminals are perfectly willing to put time and effort to create fake accounts or just buy stolen accounts.
To accept your statement that I'm "wrong," I'd need to see some examples of false business fronts that were not obviously bogus from day 1.
On eBay, yes, it was pretty easy to play the "Sell a bunch of stuff for 99 cents and then pull the big scam" game. But none of the widely-publicized cases where PayPal has basically attempted to wreck the lives of startup founders fall into that pattern. These people have all had independent web sites selling actual products, and/or a background in other ventures that could be checked if PayPal were to spend 5 minutes doing due diligence on them.
Selection bias. You do not see all the times paypal has successfully frozen an actual criminal organisation (i have no idea the numbers). If paypal's accuracy was 99%, then there would be 1 innocent startup squashed for every 99 successful defections. Do you think paypal need 100% accuracy?
At the end of the day, letting criminals dictate how you do business with legitimate customers is not OK.
Simple due diligence will either eliminate the genuine criminals, or it will not. If five minutes' worth of due diligence by humans fails, then so will any conceivable AI algorithm.
Some criminals are after a quick buck. Some criminal organisations (eg Mafia) are a lot of work and go on for years. It's illogical to then assuming "There is lots of activity, ergo they must not be criminals".
Having a large base of clients willing to buy through their services is ultimately what matters, and I think they achieved that partially by siding with the customer most of the time. Making a purchase through their services, you know that you more or less protected, and if you start jumping up and down, you will probably get your money back. Businesses put up with their less-than-fair treatment because until recently, there weren't any alternatives on nearly the same level of "respectability", as far as buyers are concerned.
I'm willing to bet that in the beginning, when they were mainly trying to court businesses to implement their service, the situation was different.
Considering they have a quarter billion active users, a "horror story" once or twice a month is an amazingly, amazingly low dissatisfaction rate. I don't think PayPal is actually causing that many merchants much trouble. It just appears that way, because:
* At most merchant services providers, underwriting happens up front: you have to describe your business, what you're selling, expected volume, etc. on an application, and go back and forth with the bank, before you are allowed to accept credit cards. PayPal lets you start immediately, and only gets the information from you once you've started transacting some meaningful volume. So the risk problems are weeded out with other processors right at the start, where with PayPal it can come up suddenly.
* These people have never even thought about underwriting and risk assessment. They treat PayPal as if it's a consumer service, when PayPal has to treat it seriously -- they're essentially making a rolling loan in the amount of 6 months of your transaction volume -- because if you disappear, they're on the hook for the chargebacks for all your past payments. People do stuff no other processor would let them do -- like taking massive donations with no prior approval, selling pre-orders to software that hasn't been written yet -- and PayPal isn't OK with it either once they find out.
* PayPal merchants are disproportionately more often individuals than actual businesses compared to what other processors see... because it's so easy to open an account, and everyone that's used eBay already has one.
* Because the merchants are individuals, and have no experience with underwriting at other processors, and have previously used accounts suddenly limited or frozen, they're confused and surprised. Add to that customer service that won't really tell you much once an account's been closed, and you end up with a couple really angry people a month: cue blog post about how PayPal is evil and if only it were a bank, they couldn't do this.
Even given that, I think PayPal has done a poor customer service job.
They long ago could have introduced some sort of premier business account that drags serious merchants through a proper vetting process.
Then they could have made the "we're scared of you" experience for non-premier users much less confusing. They clearly have a lot of internal structure and rules. They want to keep some of that hidden, to minimize fraud hackery. But they could expose the broad strokes to users, make clear what state they're in, and offer them the opportunity to upgrade to properly vetted merchant accounts at any time. People aren't upset about the restrictions; it's their arbitrary, opaque nature that makes them seem so unfair.
I think the real problem here is that PayPal is owned by EBay. I hear EBay is getting better, but the place used to be a nightmare to work at, and one glance at their website tells you how thoroughly they're focusing on exploiting their existing model at the expense of trying anything new. With that kind of ownership, I figure anybody with a desire for innovation long ago left PayPal.
My impression is that the barrier to entry of working with PayPal (in comparison to having a meeting with a bank and going through formal underwriting) is sufficiently low that people begin working with PayPal without knowing much about how financial systems work: they don't know how holds work, they don't understand how the credit system works, and in general they believe that the system should work identically to cash transactions (as in, the money is yours immediately when it hits your account).
The result is that the system is treating them identically to how a bank would treat a more organized company; however, with an accountant on hand and an understanding of the rules, the organized company is much less likely to make silly mistakes (such as selling people a product that is shipped more than 48 hours later, already in violation of VISA's rules, to a third-party's address and then claiming that it is a "donation" and not a "purchase" <- an example from earlier this year).
There are also simply more players, as we are now talking about a bunch of couple-person companies that are using PayPal to accept credit cards, and even individuals who may not be incorporated at all but are using it to launch and sell products on their websites. These kinds of people are also much more likely to decide to attempt "lynch-mob" as their primary means of recourse against a company doing something they disliked, so we are doubly more likely to hear about situations.
However, as a merchant who operates something that many people (incorrectly) call sketchy, and one who has spent much too long learning all of the relevant tax regulations, reading up on credit cards, talking to people with real merchant accounts, and having meetings with banks about possibly using their service instead, my opinion is: PayPal is not that difficult to talk to and they are not actually unreasonable; there are things they are incompetent at, but this isn't one of them.
I have no insider knowledge, but here is the obvious answer: fraud is an existential threat to their business.
Paypal's profit margin is a small percentage of the value of a transaction. The potential losses due to fraud can go as high as 100% of the value of the transaction. I.e. their losses can be 50-100x as big as their gains.
Further, the selling point of Paypal is they let anyone who wants to set up shop and use Paypal for money transfers. The tradeoff you make by using Paypal is much lower setup costs (relative to a merchant account) for much higher risk.
You know how every time a new payment provider comes up and people kvelch that it isn't available in their country and how no provider is? This is because every payment provider which attempts to hit as many countries as Paypal does dies. They're killed by fraud. (Fraud kills domestic ones, too, all the time, but it's marginally less frequent.)
Luckily, Paypal is an anti-fraud AI company which also happens to run credit cards sometimes. When in doubt, they will always come down on the conservative side. This is why they still exist. (Early in their corporate history they lost -- no kidding -- one hundred million dollars to fraud.)
This perception does not actually match reality, though: most people bitten by this are unaware that similar activity would get them shut down by the fraud department at e.g. a bank. See comments by dangrossman, etc.