
Paypal froze our funds, then offered us a business loan - caser
https://medium.com/@casey_rosengren/paypal-froze-our-funds-then-offered-us-a-business-loan-49a078310fb#.qk525l23e
======
jusben1369
There's very little thought put into a discussion on "why" PayPal froze those
funds. PayPal says "based on what we've seen in the past there's a high
probability that you'll collect a lot of money for an event and then not
execute that event. If that happens, we PayPal will be on the hook to make
those payments to those disgruntled end users. So we can either 1) Simply
refuse to work with you or 2) risk share with you by keeping enough in your
account so that we can reduce our exposure to those types of claims"

If you chose a business model with an elevated level of risk then you'll have
extra expenses associated with that.

I really dug that email. It's encouraging that it triggered what sounds like a
very real internal discussion amongst multiple people there vs being getting
completely ignored.

I know I sound like a PayPal apologist - I'm not! I know there are some very
real horror stories out there. It's just that they're probably one of the few
payment companies that would enable this business to actually be a business
and asking $20K in surety when you're _on the hook too_ isn't as mean spirited
as it first appears.

~~~
caser
This is totally fair. We knew this was something we might have to deal with
given the nature of the business.

Still, things change when they then turn around and offer you a business loan.
It's hard to argue that they need to freeze your funds for collateral when
they then deem you credible enough to lend you money.

It's not so much that our accounts got frozen that makes this interesting.
It's the fact that they froze our accounts _and then offered us a loan._

~~~
URSpider94
See my separate comment -- a hold plus a loan is not the same as just not
holding the money, from a risk point of view. Although it would look the same
to your bank balance, the two look nothing alike to PayPal's accountants and
auditors. If you think there's a potential liability between two parties, it's
much better to formalize it as a loan agreement than to just carry it as a
risk.

This is why, for example, the cable and cell phone companies show up on your
credit reports. When you pay them in arrears for your service each month, you
are in effect borrowing money from them.

~~~
caser
Interesting point. From that perspective, you could argue that giving a loan
against the collateral is a way to account for some of the risk on Paypal's
side while still giving us some funds.

Still, we've been with Stripe since then and have had no problems.

~~~
URSpider94
Exactly. To give another example, I was at Lucent in the late 90's, just
before the telcom collapse. Ultimately, Lucent stock collapsed by 90% and the
company was bought by Alcatel (which was just bought by the remaining parts of
Nokia that Microsoft didn't grind into dust, but I digress). A big part of
what brought Lucent down was not just that sales of communications equipment
plummeted, but also that Lucent _had extended financing to its customers so
they could buy more equipment_ , and then those same customers defaulted on
their loans.

Ultimately, it's important to make sure that a loan-granting organization is
run separately from your core business, to avoid people making poor-quality
loans just to goose sales numbers.

 _Still, we 've been with Stripe since then and have had no problems._

yet ...

There was a recent article on how hoverboard sellers have suffered massive
fraud losses, that specifically talked about how Stripe is trying to chase
people to recover hundreds of thousands of dollars in chargebacks. That can't
happen too many times, given the thin margins of payment processing, before
they have to do something to protect themselves.

~~~
tim333
I just googled that:

>In one case, hoverboard vendor IO Hawk had a reported $900,000 negative
balance. Stripe’s documents call it “one of our largest losses ever.”

You'd think there'd be some way to delay shipping for a couple of days while
someone checks if the card is stolen. Maybe they could have some way of just
calling the card owner and asking if they ordered a hoverboard?

------
quasse
I'm just starting to need a real solution for taking regular payments and
Paypal didn't even cross my mind as a serious contender. The business model
they've cultivated engenders similar levels of trust to car salesmen and the
people who charge lost equipment fees at Comcast.

I'm looking at Paysimple for their integrated invoicing and transaction
handling but I'd love to hear what other people use.

~~~
skylark
I'm working at a startup that processes millions of dollars per month in
payments. If you don't offer PayPal, you're shooting yourself in the foot. In
many countries, PayPal is the defacto way people conduct online transactions.
As much love as Stripe gets because of how developer friendly it is, in the
real world people use what they know. And what they know is PayPal. I don't
see a compelling reason not to offer it as an option.

~~~
mcv
This is what pains me the most: the fact that PayPal is considered the biggest
standard, when they are really terrible.

Netherland has proper internet payment infrastructure called iDeal: it goes
directly from one bank account to the other, with no sleazy middlemen in
between. That's what the rest of the world should be using, but Netherland
just doesn't have the weight to push its solutions on the rest of the world,
so we're stuck with crap like PayPal, Visa and Mastercard.

(I suspect many other countries also have well-working payment systems within
their borders, but none have any international reach. I'd expect that SEPA
would lead to a reliable internet payment system on a European scale, but that
hasn't happened yet.)

------
sageabilly
Is PayPal still around simply because, as one of the earliest and one of the
biggest payment facilitators on the Internet, it's become ubiquitous enough to
not have to worry about being displaced? I cannot for the life of me
understand how it's still a thing since every week there's yet another story
of "PayPay did Shady Thing that a bank couldn't do and now I have no money and
no way to get my money back."

 _Why is PayPal not dead?_ In all my research I have never been able to come
up with a good answer to that question.

[ _edited to add_ ] Aside from consumer ignorance of other options, that is.

~~~
omfg
We've been using PayPal for over 10 years. High volume. No complaints. Their
dispute resolution service is better than others we've tried in the past
(Braintree, BluePay). Fees are solid. Customer support team are pretty on top
of things (if you feel like picking up a phone).

Seems like people like to pick on PayPal because they want to see the new
'startups' win. But PayPal doesn't have to lose for them to win.

To expand. We thought about switching to Stripe once. Implementation was
fairly annoying compared to PayPal's which was surprising considering how
loved they are by the dev community. Their fees were much higher. Support
couldn't answer some relatively easy questions. Stupid turnaround time for
bank deposits.

I can understand how getting setup with a Stripe branded payment form is easy
and saves some hassle for a new project. But as an established business they
don't bring much to the table. We passed and skipped the obligatory 'X Sucks
Because Y' article.

~~~
mrweasel
We've had pretty much the opposite experience. We've used PayPal for a little
less than a year. Setup is magnificently complex and perplexing. They assume
that companies are people. There's no way in hell the CEO/owner of a business
would spend 1.5 hour on the phone with an account manager, setting up the
account. Want PayPal to transfer british pound to an non-british bank-account,
then prepare for a world of pain.

Their dispute resolution service is annoying a hell. Not that we don't want to
resolve disputes with our customers, but we want to do it using our existing
customer support channels. Not via PayPal. Having customers just randomly
getting their money back without having contacted the business they bought the
product from first isn't acceptable.

It's the most expensive of all the payment solutions we offer our customer.
Developer support is okay, but not helpful when their stuff doesn't work. We
randomly get 500 errors from their REST api, which doesn't handle any sort of
real volume. Black Friday pretty much killed PayPal.

The PayPal web interface is the worst I've ever used. It's slow and almost
impossible to search in. Searching using your own order numbers almost never
works and you fall back to searching for customers last name, which is pretty
much the only search that consistently work.

We wouldn't use PayPal if our German customers didn't expect it.

~~~
gamblor956
_There 's no way in hell the CEO/owner of a business would spend 1.5 hour on
the phone with an account manager, setting up the account._

That's actually a legal requirement in many countries, including the US--
either the CEO or CFO of the company must directly deal with a financial
institution when setting up a financial institution account (i.e., bank
account--note that Paypal is a registered financial institution in nearly all
of the jurisdictions in which it operates). My clients run into this all the
time. It's a hassle, but it's one you simply have to accept as the cost of
doing business in the big leagues.

 _Want PayPal to transfer british pound to an non-british bank-account, then
prepare for a world of pain_

Legally, yes. Because British law has rules about this, and as a financial
institution Paypal is required to follow those rules. Those rules are
deliberately onerous because the type of transaction you are describing was
once widely used in tax evasion and money laundering schemes.

~~~
MitchellKnight
> That's actually a legal requirement in many countries, including the US--
> either the CEO or CFO of the company must directly deal with a financial
> institution when setting up a financial institution account (i.e., bank
> account--note that Paypal is a registered financial institution in nearly
> all of the jurisdictions in which it operates). My clients run into this all
> the time. It's a hassle, but it's one you simply have to accept as the cost
> of doing business in the big leagues.

What U.S. law is this?

~~~
gamblor956
As we're talking about cross-border bank accounts, the Patriot Act, when
applied to foreign persons (individuals or corporations) attempting to open US
bank accounts.

Also, FATCA. Though FATCA technically only applies to the financial
institutions and not their customers, its information gathering requirements
have the same effect as requiring bank customers to disclose certain
information.

There are state level laws that may govern US persons attempting to open US
bank accounts, both those vary by state.

------
URSpider94
This is not surprising to me at all, nor do I see anything nefarious in this.
PayPal operates two different business units, a payments processing business
and a commercial loan business. Both operate on separate P&L's, and with
different risk requirements.

Let's consider two different situations:

1\. PayPal's payments processing group worries about the risk of your account,
and thinks about applying a hold on your funds. Just before doing so, they
call the loans group, who says that they'd be perfectly happy to give you a
loan for the amount of the hold, you're good for it. So, Paypal as a whole
decides not to place a hold.

2\. Paypal's payment processing department worries about the risk of your
account, so they place a hold on your deposits. In parallel, the loan
department decides you're a good credit risk, and so you apply for and receive
a loan for the same amount as the hold.

In case 1, if those payments do indeed get charged back, Paypal is forced to
try to come after you for the balance. Unfortunately, this debt won't have
very strong legal standing, because it's not backed by a loan agreement. They
might or might not get their money back. It also puts them in the position of
having to chase you for the money.

In case 2, if the payments get charged back, Paypal is sitting on the funds
already, and can just claim them. This might cause you to default on the loan,
but that's your problem now, not PayPal's. They are also making interest on
the amount of the loan.

It's pretty clear that Case 2 is MUCH better for PayPal, and only marginally
worse for you, assuming that you are right about the payments all being good
-- you are only out the interest cost on the money. What you seem to be
arguing is that PayPal should be "nice" to you and go with Case 1.

The other fact that you might be missing is that nearly all traditional
payment processors would require some kind of reserve account in situations
like this, and even if they weren't holding the money, they require that they
have withdrawal privileges on the account into which the funds deposit so that
they can claw back money if needed. PayPal is by no means unusual or abusive
in holding funds, it just seems that way because they don't pitch this as part
of their up-front marketing.

~~~
nickpsecurity
Well-put. A parallel here is the pre-approvals for credit cards that people
receive in the mail. It's not uncommon for a person to get those who is
regularly turned down by offers or even in collections. There's just some
algorithm or set of criteria by a certain company that says "send the offer"
while others with different information or criteria would refuse it. Simple as
that most of the time.

------
CPLX
The OP of this story was collecting money in the U.S. for events and lodging
that had not yet happened in third world countries, and presumably was
remitting a healthy amount of money from those transactions to multiple small
accounts in said third world countries.

Their business was brand new and had no extensive transaction history with
Paypal or anyone else. The customers providing the funds in question were most
likely paying with credit cards and would be able to charge back the funds if
the events didn't take place or were unsatisfactory.

I find it impressive that Paypal was willing to work with them at all given
the above fact pattern. Many, many payment processors simply wouldn't be
usable at all.

------
Osiris
I have a small side business that does < $1000 a month in PayPal transactions,
but I regularly withdraw money from my PayPal account to my bank account
specifically because I don't trust leaving my money in PayPal.

Why don't larger business do more frequent withdrawals from PayPal to a proper
bank?

~~~
kentt
It's happened to me. The issue is, you aren't allowed to withdraw your money.
Like you, when I get paid in Paypal, I want it out of Paypal as soon as
possible. I've request the transfer to my bank account the same day and as per
usual but then found that the funds were frozen.

In my case, I guess I looked sketchy because I had surges of sales (no sales
most months, 5k one month).

I did eventually get my money.

~~~
mcv
Did they pay interest over your money? Getting your money late can still be
very costly for some businesses.

~~~
kentt
Sorry, just saw this now. Nope, they just released it after a period of time
expired (a month?).

------
maxmcd
The fraud department at PayPal has to exercise a large amount of caution
because if they make a mistake they lose more money.

The lending department at PayPal can be more opportunistic because they can
potentially turn a profit with a successful loan.

I'm not saying that either of those actual departments are correct or that
their decisions are sound, but even at a perfectly run organization wouldn't
this paradox be somewhat present?

~~~
mcphage
I see what you're saying, but I wouldn't expect there to be overlap. I don't
know how paypal chooses whose accounts to freeze, but let's say, for the
riskiest 5% of accounts.

Now, the lending department can handle a lot more risk than the fraud
department (as you note). But I don't think they would be willing to extend
that to the riskiest 5% of accounts.

If there _is_ overlap in "too risky to thaw funds" and "trustworthy enough to
offer loans", then either their lending department offers loans to some
_seriously_ risky clients, or the fraud department freezes a huge % of
accounts' funds. Neither seem like an acceptable situation.

~~~
maxmcd
Sure, no disagreement here.

I'm looking at it slightly from the other direction. Knowing PayPal's history,
and how hard fraud is to nail down on the web, I'm assuming that the 5% is
actually much larger, and that the fraud department is overcautious.

If that's not the case, then you're right. But if I work in the loans
department and I know that the fraud department tends to blow things out of
proportion, because that's what's required to prevent fraud at PayPal scale,
then I should expect a little overlap.

I guess overlap might not be expected at a "perfect" organization as I
mentioned, but I can imagine how it might happen at PayPal

------
akeck
Friends who do a lot of Ebay transactions have always recommended getting a
dedicated checking account for Paypal, and then setting up regular transfers
out the account, so that one's ability to pay bills and vendors will not be
impacted by a Paypal issue.

------
Animats
Why use PayPal for credit card payment processing above the petty cash level?
If you're up to $30K, you should be getting merchant services from a real
bank, not an intermediary. If you're not using eBay, PayPal provides few
benefits.

~~~
rsync
I can't comment on the OP, but in addition to the "normal paypal stuff" that
paypal does and that we are all familiar with, paypal _also_ has a standard
bank-style card processing unit called "payflow".

Rates and policies and fees are very, very good with payflow - they are very
competitive - and it made very good sense for us to move from a traditional
card processing setup at wells fargo to paypal for this.

We made that switch three years ago and it's all worked out very well - and it
saved us a _lot_ vs. wells fargo, who was doing all of the "normal"
merchant/bank/processor tricks that distort the costs a lot.

------
iaw
I've avoided having to trust PayPal with any sum of money since I first heard
of their freezing practices years ago. Back then (not sure if this has
changed) they weren't regulated like a bank so they could get away with some
pretty shady behaviors.

I always suspected that they were taking the collateral and making short-term
investments, this is the first time I've ever seen them try to do both with
the same company at the same time...

------
ErikAugust
Speaking from a nightmarish personal experience moving hundreds of thousands
with PayPal over the years, it is astounding to me that it took so long for
someone like Stripe to come along.

It is not astounding they have quickly blossomed into a valuable company.

Why did it take so long?

And what about eBay? Someone should consider taking that on.

Letting a huge business being an incumbent without competition for 15+ years
in the web world seems so absurd.

~~~
TheOtherHobbes
My understanding is there are epic regulatory and bureaucratic blocks involved
in setting up international payment services - ironic given PP's reputation,
but so it goes.

------
kayfox
I am in a position to hear a lot of comments on Paypal from freelance artists,
and I often hear of them freezing someone's account over some transaction or
for no expressed reason at all. I often wonder how they can get away with
this, I would imagine if a bank did this they would be in hot water quickly
with a regulator. It all seems a bit shady.

~~~
URSpider94
Merchant account banks do this ALL THE TIME. It's standard business. See here:
[https://www.reddit.com/r/smallbusiness/comments/320bbd/my_me...](https://www.reddit.com/r/smallbusiness/comments/320bbd/my_merchant_account_provider_is_holding_over/)

or here: [https://chargebacks911.com/knowledge-base/what-is-a-
merchant...](https://chargebacks911.com/knowledge-base/what-is-a-merchant-
account-reserve/)

or here: [http://www.cardfellow.com/merchant-account-
holds/](http://www.cardfellow.com/merchant-account-holds/)

~~~
scott_s
This is the key point: PayPal is not your checking account. PayPal is more
like a merchant account which voluntarily takes on _much_ more risk than most
banks are willing to in their merchant accounts.

------
jadoti
Nice of them to loan you your money with interest... if they were an honest
company, maybe they'd offer to use the business LOC as collateral and free up
your funds, dipping into the credit should the risk become real and your funds
get charged back...

... if they were an honest company ...

------
ChuckMcM
Generally good advice when considering PayPal is to recite to yourself "PayPal
is not a bank, PayPal is not a bank, ..."

But they do like money, and they like to move it around creatively and create
ways to use other people's money to make money for them.

One of the reasons they aren't a bank is they don't do (and are not allowed to
do AFAICT) fractional reserve lending. In that sort of scenario this story
makes a lot of sense, you freeze(or seize) assets from your customers, and
then loan them out to other customers who pay you interest on repaying that
loan, and if they default you presumably keep the other customer's money to
cover that "loss". Sort of 100% reserve banking.

~~~
pc86
Do you have any evidence that freezing funds is related to lending? Because
that's a pretty massive claim, particularly since they are supposedly two
completely separate business units on separate budgets and P&Ls (fraud
prevention and lending).

------
patsplat
This is frustrating, but not necessarily a conflict of interest.

Any type of events business carries a significant risk to a payment processor.
Funds are paid up front before services are delivered. If the event doesn't
happen there will be a demand for refunds.

This isn't necessarily due to malfeasance on the part of the promoter. Imagine
there was a conference booked in the World Trade Center for September 12th.

Boil it all down and what PayPal is doing is charging a higher percentage fee
(aka the base fees plus the interest on the loan) for a business they deem to
be more risky. Entirely fair.

Now for the way they presented those fees - absolutely unacceptable customer
service.

~~~
patsplat
To clarify the comment about refunds. Participants would first go to the
promoter. But if they were unable to resolve the dispute, they could then go
to their bank and dispute the charge. My understanding of this is murky, but
in the end PayPal does carry a liability for those funds as a participant in
the transaction.

------
jamisteven
Think OP is assuming Paypal has departments that understand how eachothers
decisions affect the other, PP is a huge company and I doubt malice was
actually intended, but nonetheless pointing it out to them was necessary.

------
nqzero
regardless of what division is making the determination, either the company is
risky or they're not. charging them interest to access the money that is
rightfully theirs is extortion, plain and simple

------
shorsusan1
I am considering on using Paypal in my startup business. How do you feel about
it? I attended a startup conference 6 months ago. Paypal was also there
claiming that there will be solutions for startup business. I don't know if
this is a special case. How can I avoid my capital from being frozen? Singing
"Let it go"?

~~~
patio11
Will you have delivered the product/service at issue at the time you charge
the card or within a short period of time thereafter? If so, it is highly
likely you will not have any issue with Paypal. If you are accepting pre-
payment for something which cannot be delivered in full shortly after payment,
it is likely that you'll have to become conversant with Paypal's published
guidelines about this.

Spoiler alert: if you are in an events business, "We emailed a ticket" does
not constitute delivery of the purchase. Successful conclusion of the event
constitutes delivery. Most events businesses structurally need to pre-sell
tickets. They will, virtually inevitably, have more issues with collecting
payments than e.g. a software company which says "You give us a credit card we
give you a working download link." This is not a result of caprice by Paypal
-- more than 1% of scheduled events fail to actually happen; when that
happens, Paypal gets hit with hundreds of chargebacks.

More details: [https://www.paypal.com/webapps/mpp/brc/presale-policy-and-
re...](https://www.paypal.com/webapps/mpp/brc/presale-policy-and-reserves)

Events businesses: [https://www.paypal.com/webapps/mpp/brc/account-reserves-
tick...](https://www.paypal.com/webapps/mpp/brc/account-reserves-tickets-and-
reserves)

------
a3n
> Since we were a risky account, they said they needed to hold on to the
> remaining $20,000 for up to six months.

I would think just about any new business is some flavor of "risky." I don't
see why any new business would use paypal knowing that.

------
pmontra
Partially off topic but what would you recommend for transactions in the 1 to
10 Euros range in Europe? PayPal and Stripe have fixed costs per transactions
that are quite substantials on the amounts at lower bound of that range.
Thanks.

------
horsecaptin
Clearly the used car sales department forgot to check with the customer
service department whether the customer is actually happy with the ongoing
relationship.

------
timshivcc
Honestly, I just went stealth and operate numerous accounts.

If PayPal wants to freeze my funds, let them. Play with fire, your going to
get burned.

------
Kinnard
I think this is more common than people might realize. In fact, I think it's
fundamental to how the predatory lending industry(READ: banking industry)
operates. David Graeber's DEBT is a good read:
[http://libcom.org/files/__Debt__The_First_5_000_Years.pdf](http://libcom.org/files/__Debt__The_First_5_000_Years.pdf)

