You’ve probably heard the news: PayPal gets sued for freezing customer accounts without explanation. It’s no longer speculation, it’s a fact. The class action has been filed and it will be interesting to see how it all shakes out in the end. But it raises some important questions about your own online business and how you’re funded.
This isn’t the first time they’ve been threatened regarding PayPal freezing accounts suddenly or withheld funds. But in the case of Chris Moneymaker, they immediately returned his as soon as he started drumming up some noise.
This time, it seems they’ve lost this cruel game of chicken. PayPal account holders are speaking out and loud about these unfair practices.
What Exactly Are They Being Sued for in This PayPal Lawsuit?
In this particular PayPal lawsuit, the company is being sued for 3 things.
In the simplest terms possible, conversion is stealing. Someone else’s property is converted and now owned by someone else. It’s wrongfully taking control over someone’s belongings, land, amount of money, etc.
In this case, PayPal freezes accounts but refuses to give those funds back. The plaintiffs are claiming this is theft, therefore they are committing conversion.
This also goes beyond just the frozen funds. PayPal is accused of conversion in relation to RICO, the federal Racketeer Influenced and Corrupt Organizations Act. This means they not only froze PayPal account funds, but they also refused to explain why. The definition of thievery.
On top of this, PayPal required plaintiffs get a subpoena to learn why their funds were taken.
Breach of Contract
The PayPal user agreement is 65 pages long. Usually, they freeze account funds for violating those terms for up to 6 months. However, the tables have turned. PayPal is on the being sued for breaching their own contract with users.
News articles about the lawsuit haven’t explicitly stated what part of the contract was violated, likely because lawyers don’t want to reveal their arguments before trial.
Going along with the conversion aspect, PayPal is accused of being unjustly enriched at the expense of another by taking advantage of that other’s vulnerability. Basically, they’ve benefited from someone else’s work (or money, in this case).
How Does This Affect Other Payment Aggregators?
Stripe is another big online payment aggregator like PayPal, and they are equally accused (though not legally, yet) of freezing account funds suddenly. They could be next if the dominoes continue to fall.
Terms of Service Updates in Tow
If you’re a Stripe business account holder or a PayPal business account holder, you should expect a big update to their terms of service. This also goes for any other payment processing service. They want to protect themselves from meeting the same fate, and the best way to do that is put it in writing.
If you run a high-risk online store and you use one of these companies, now is the time to make the switch over to your own high-risk merchant account. DirectPayNet can help you in this endeavor. The reason is because payment aggregators like PayPal and Stripe cannot operate with high-risk businesses. They are leasing out a sub-merchant account to you under their own, meaning they’re bound by the terms of their merchant account and can’t make exceptions for you.
If you operate a low-risk e-commerce store, then you can continue to use your preferred processor like you do now. But the acceptable use policy will only get stricter and even if that isn’t affecting you right now, it could in the future.
Aggregators Are Allowed to Withhold Funds for 6 Months
Don’t get confused about what PayPal did wrong. They are legally allowed to withhold funds for up to 6 months.
Funds are withheld for up to 6 months for merchants who experience a high number of chargebacks. This is called a reserve, and payment processors can choose to withhold up to 100% of disputed items if they wish.
The reason for this is simple. If a merchant has many chargebacks or refunds, the payment processor is concerned that the merchant may be involved in fraud or some other kind of illegal activity. They don’t want to process payments for that merchant, but they also don’t want to get stuck with a bunch of unpaid chargebacks either.
This makes sense in theory, but it causes big problems for merchants who have legitimate disputes and chargebacks. If your business isn’t doing anything wrong (and you haven’t been accused of fraud), then there’s no reason for you to have an unusually high rate of chargebacks, and these funds should be released immediately.
In the PayPal lawsuit, the funds are withheld without reason. It isn’t explicitly stated that frozen PayPal accounts are due to chargebacks or fraud risk. The problem is also that they do this in an instant. No notification at all, with nothing hinting at this happening in your business or personal account information. And if it’s under the premise of investigation, then is that really lawful to freeze 100% of a business’ funds because they think someone fishy might be going on without any hard proof?
Abusive Policies Toward Businesses
You’d think if a big payment aggregator like PayPal would want to protect the businesses that use their service daily. That’s how PayPal makes money. But that simply isn’t the case.
PayPal and Stripe have a long history of abusive policies towards small businesses who use their services. The most notable of these practices is the company’s requirement that users pay extra fees in order to protect themselves from fraudulent activity. In order to get their money back from PayPal or any credit card company, you must prove that the charge was fraudulent (a scam or phishing). This means you have to pay for shipping on goods that never arrive or make a purchase and then wait 30 days for your money back — even if the item is fully functional and never arrives at all. Without this extra protection, you’re out of luck.
Another reason why PayPal is bad news for small businesses is because it allows customers to file chargebacks with no proof at all. Chargebacks occur when a customer says they didn’t receive an item they paid for, and they can be filed months after the transaction occurred. If a customer files a chargeback against you, PayPal will freeze your account until you can prove they are wrong; while this is happening, you can’t access your money at all — even if you shipped out the item right away and it’s still en route.
Harm to Small Businesses
How long do they really need to withhold funds? 6 months is a quite a while but can be reasoned. The bigger question is why does it always take 6 months, or 180 business days? It seems they think you’ll forget about the lost funds by the end of that period of time and PayPal will keep it for themselves. Or the PayPal customer resolution center is so inefficient that they can’t organize a complete investigation in a timely manner.
This is incredibly harmful to the small businesses that rely on these payment services. It can shut a business down completely, put business owners in serious debt, empty bank accounts, and cause permanent financial and physical stress on those parties. And what if at the end of the investigation, there was no cause for the frozen funds? How does PayPal help those businesses recover? To us, it seems they send a simple, “Sorry!” and that’s the end of the story.
Make the Switch NOW to Your Own Merchant Account and Avoid Frozen Funds for Good
This investigation has brought to light a lot of the wrongdoings of big payment aggregators. PayPal freezing funds, Stripe making accounts inaccessible, both withholding money for 6 months–it’s unfair and unjust.
PayPal might be convenient, allowing you to start selling the next day after opening an account. This is one of the most common reasons businesses use them, but it isn’t worth it. There are several account limitations that hinder growth and can instantly snag large sums of money from you. Your best bet is to avoid aggregators in the first place.
The solution is to get your own merchant account. No matter what you sell, or the risk factor involved, there is a merchant account for you and a payment processor willing to take you on. And with that, you can continue to accept credit cards like Visa and MasterCard, debit cards, and other payment types without worry.
DirectPayNet will connect you with the right processor and set you up with a shopping cart that works for your business, along with terms you can get behind. Speak with our customer service reps to open a new account today.