MSNBC reports that less than a week after its IPO, PayPal has been hit with a class action lawsuit filed on behalf of people who claim that the company wrongfully denied them access to their money. PayPal is an interesting experiment, but in the long term I think it is doomed.
Quite a few people seem to have had bad experiences with PayPal, but most people seem to ignore the fact that PayPal’s behavior is also one of the reasons it can offer such relatively good terms — i.e., it keeps its costs per transaction and the amount of fraud in its system extremely low. The problem is that in order to accomplish this, PayPal resorts to a whole host of customer unfriendly policies.
In that respect, PayPal is a lot like a small commuter air company. It’s not that PayPal couldn’t be nicer or have more reasonable policies, but rather that the second it does it will no longer have much of a competitive advantage in its market. The lawsuit against PayPal concedes this point, arguing that,
As a result of its inability to set up an adequate and effective anti-fraud mechanism and its attempt to compensate for such inability, PayPal adopts an aggressive and grossly over-broad anti-fraud policy that persistently causes erroneous and wrongful restrictions of access to be imposed on user accounts — causing economic damage and financial loss to a significant number of innocent PayPal account holders.
Between lawsuits and attempts by state and perhaps even federal officials to regulate PayPal as a bank, PayPal will have to raise its fees and institute more selective criteria for the accounts it takes on — i.e., it will have to become more like a traditional bank. And at that point, traditional banks who have been busy working on their own competitors to PayPal will likely eat it for lunch.
Source:
PayPal sued over frozen funds. Lisa Napoli, MSNBC, February 21, 2002.