For SMBs, PayPal Could Mean Risky Business - InformationWeek

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2/8/2010
12:33 PM
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For SMBs, PayPal Could Mean Risky Business

Many small businesses that deal with PayPal do so because they don't see any viable alternatives. In some cases, however, I wonder if these companies are really aware of the risks they are taking.

Many small businesses that deal with PayPal do so because they don't see any viable alternatives. In some cases, however, I wonder if these companies are really aware of the risks they are taking.Do a little digging, and you will discover that PayPal's customer service record is nothing short of horrific. The company is notorious for quietly jacking up its transaction fees, and a small army of Web sites are dedicated to publicizing complaints about the service.

PayPal's pat response to such complaints reminds me of Lily Tomlin's spoof of The Phone Company: "We don't care. We don't have to."

For small businesses that rely upon PayPal, however, this is a deadly serious business. Many complaints involve cases where PayPal has frozen seller accounts without warning or explanation. These incidents can take weeks or months to sort out -- and if a cash-strapped business doesn't survive the appeals process, well, that's just too bad.

Contrary to popular belief, there are viable alternatives to using PayPal. These services differ considerably in their fee structures, usability, and terms of service. My goal here is not to identify an ideal alternative to PayPal; it is simply to note that PayPal's stranglehold on the payment-service market isn't as complete as it might appear to be.

Unfortunately, federal regulators have supported PayPal's claim that it is not a bank. Until that changes, remember that leaving any money in a PayPal account is an inherently risky activity. Sellers should always move PayPal funds immediately to a linked bank account.

Also, never authorize PayPal to withdraw "service fees" from a linked bank account -- use a credit card for this purpose. That way, if you have a dispute with PayPal involving service fees or other account debits, you still have the option of filing a dispute with the card issuer.

Even if you decide that there is no good alternative to using PayPal, look at other services and decide which one would be the most viable option in the event your PayPal account is suspended. As so many others have noted, disputes with PayPal can take months to settle; in the interim, your business may have to move quickly to get a next-best payment service option up and running.

What are the chances that your company will turn out to be the next PayPal horror story? In terms of sheer numbers, the odds may seem low. Yet until the government treats PayPal the way it should -- as a bank -- the consequences of running afoul of PayPal's capricious business practices are simply too dire not to take them seriously.

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