PayPal Settles N.Y. Probe, Faces Others
Mon Mar 8, 5:12 PM ET
By Andy Sullivan
WASHINGTON (Reuters) - Online payment service PayPal has agreed to pay $150,000 to settle charges that it misled customers who expected refunds when purchases went awry, New York Attorney General Eliot Spitzer said on Monday.
The payment service also faces inquiries from the U.S. Federal Trade Commission and several states, parent company eBay Inc. (NasdaqNM:EBAY - news) said in its annual report.
The settlement with Spitzer's office clarifies that consumers should not expect the same level of fraud protection that credit-card companies provide, a Spitzer aide said.
Meanwhile, PayPal's practice of freezing customer accounts as it investigates suspicious transactions has drawn federal and state scrutiny, eBay said.
An eBay spokesman said the FTC had asked the company a number of questions last year but did not open a formal investigation. Other states are currently asking questions as well but have not launched investigations, eBay spokesman Chris Donlay said.
Internet fraud (news - web sites) has grown in recent years as scam artists sometimes use auction services like eBay to sell nonexistent products.
The rate of fraudulent PayPal transactions is less than one-half of one percent, Donlay said. But due to the sheer volume of transactions it handles -- more than $12.2 billion last year, according to eBay's annual report -- the online service is frequently caught in the middle of disputes.
PayPal is not a credit-card company and is not required by law to provide "chargebacks" to consumers should a transaction go wrong, a Spitzer aide said, but the company's customer service agreement had led consumers to believe they enjoyed such protection.
The company offers protection on purchases up to $500, Donlay said.
PayPal agreed to change its user agreement to more clearly describe consumer rights, and will pay New York $150,000 in penalties and investigation costs, Spitzer's office said.
Consumer complaints have also prompted the FTC and other states to investigate.
"As a result of customer complaints, PayPal has ... received inquiries regarding its restriction and disclosure practices from the Federal Trade Commission and the attorneys general of a number of states," eBay said in its annual report.
"If PayPal's processes are found to violate federal or state law on consumer protection and unfair business practices, it could be subject to an enforcement action or fines."
An FTC spokeswoman declined to comment.
Disgruntled buyers in irate postings on Internet message boards have said that PayPal does not deal with complaints promptly, while sellers say the payment service is too quick to side with consumers.
One critic said PayPal holds onto the disputed funds as long as possible for its own gain.
"They only seem to freeze accounts that have thousands of dollars in them, and then when they freeze them they hold them for six months, so that gives them six months' free use of other people's money," said Izzy Goodman, a computer programer whose Web site collects PayPal complaints.
PayPal has recently streamlined the process, Donlay said, and holds onto the money to make sure that it can be recovered.
"We need to do that to make sure the money is safe while we do the investigations," Donlay said.
Credit-card companies American Express Co. (NYSE:AXP - news) and Discover, a division of Morgan Stanley (NYSE:MWD - news), agreed last year to provide chargebacks for consumers who used their cards in PayPal transactions but did not receive the goods they ordered. . .
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