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Commentary > Wastler's Wanderings
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PayPal's quandary
Some people think the payment service goes too far, others not far enough.
August 7, 2004: 5:13 PM EDT

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NEW YORK (CNN/Money) - I feel for PayPal. I really do. The Internet payment service is stuck in a classic "damned if you do, damned if you don't" situation.

First, PayPal, which is owned by eBay, is damned for doing its part to help its users feel safe making transactions.

"In order to protect our users, PayPal does not allow the use of our service for pyramid schemes, multi-level marketing or 'get rich quick' plans," said a Paypal spokeswoman. "If we find people in violation, they are subject to immediate shutdown." (Of course, PayPal also is trying to shield itself from being held accountable for such nefarious deeds.)

The problem is that some folks think the company has a hair-trigger on its "freeze" button, unfairly holding up what prove to be legitimate transactions. A few people who were really burned about it went to court and soon a class action lawsuit was underway.

Paypal, without admitting any guilt, settled that lawsuit in June. In fact, if you are a PayPal customer you probably got an e-mail this past week directing you to a Web site where you can share in the settlement (which at $9.25 million won't amount to much for the millions of PayPal users.)

At the same time, however, PayPal is damned for not doing enough.

Who's on this case? Mostly folks campaigning against the various schemes invading the net ... like randomizers and matrix sellers. A randomizer operation promises you random payments in the future if you cough up some money and join now. Similarly, a matrix operation promises you a wonderful product at a stupid price if you join the club and make a payment up front.

Both are simple variations of a pyramid scheme, where the only people who profit are the ones who set up the operation and put themselves in the front of the line.

"There is a mathematical certainty that most people won't come out ahead," said a spokeswoman for the Federal Trade Commission.

The government frowns on such operations but hasn't launched a major campaign against them.

"There's less and less of the government actually enforcing pyramid scheme laws," said Robert Fitzpatrick, author of "False Profits" and president of Pyramid Scheme Alert.

So people are looking to PayPal.

"Most of these (matrix) Web sites will go out of business or disappear when you sue them, so we look to lay some of the liability with the (payment) processors," said Jeff Wilens, an attorney who has launched lawsuits against various matrix selling operations and payment companies, including PayPal.

Who's to blame?

Those suits haven't been too successful, though. Part of the reason is that PayPal is more than willing to cut off any sort of debatable operation, so it becomes hard to argue to a court that the payment service is abetting an illegal or immoral enterprise.

I know a guy who had that happen. He set up his randomizer at thedailyenron.com. We wrote about it. Then boom, PayPal shut down his account.

"Your articles ruined me," Sterling Davenport claimed. "I feel I was targeted by PayPal (because of the articles). And there's plenty of other randomizers out there. Just go to Google and type in 'paypal randomizer' and see what happens." (The guy still has his randomizer operation going, however, but using less popular payment services. This is not meant to give you the idea of going there and signing up.).

But Wilens the attorney argues that PayPal shouldn't wait for the media to point out problems.

"They (Paypal) don't seem to care unless somebody points it out to them," Wilens said. "... They don't want to shut them down because it's business for them."

For its part, PayPal thinks it is being pretty aggressive. And those people in the class action lawsuit I talked about earlier would seem to agree.

So what's a big Internet payment service to do?  Top of page


Allen Wastler is managing editor of CNN/Money and a commentator on CNNfn and CNN. He can be emailed at allen.wastler@turner.com.




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