Client : PayPal Country : SingaporePublication : The Business TimesDate : 2 November 2012Topic : Customers forcing changes at PayPalURL : http://www.businesstimes.com.sg/breaking-news/technology/customers-forcing- changes-paypal-20121102Visitorship : 65,401Customers forcing changes at PayPalSAN FRANCISCO - A backlash by some customers who have seen PayPal freeze their funds,sometimes for weeks at a time, is forcing the payments unit of eBay Inc to change its anti-fraudpolicies.PayPal is testing new, relaxed policies that may expose the dominant online payment service tomore risk as it tries to tackle an issue that has dented its reputation.Alex Stultz of Red Star Merchandise used the companys PayPal Here mobile service to accept cardpayments at the Outside Lands music festival in San Francisco in August.The arrangement was part of a promotion by PayPal at the festival. Despite that, Mr Stultz said someof his funds were held up by PayPal following the event. The issue was cleared up after a couple ofemails and one phone call, he noted."Im glad to hear they are working on it for everyone else," Mr Stultz said. "Holding funds is tough onmerchants because they need the cash flow." PayPal says such account holds affect a smallpercentage of users and are needed to protect the company from big losses. But complaints haveincreased this year and some users are considering other ways to accept payments.A plethora of rival payments start-ups, including Square, Stripe, Braintree and WePay, provide moreoptions for PayPal users now, putting pressure on the company to change. "In the past, we tooksteps to protect customers and ourselves. Unfortunately, sometimes we catch a dolphin in our nets,"said PayPals new President David Marcus."Now that we have better technology than a few years ago, better algorithms, we can do things alittle differently." Braintree said on Wednesday that the next 1,000 businesses to sign up for itspayments service would have processing fees waved on their first US$50,000 worth of transactions.With some types of transactions, involving things like event ticket sales, PayPal said it is exposed to alot of potential fraud. An organizer could sell thousands of tickets ahead of time and then cancel theevent, leaving PayPal on the hook.
"Where we have had a lot of losses in the past and we strengthened our rules, were going to tryfigure out how to do a better job and potentially take more risk for the benefit of our customers,"Mr Marcus said.PayPal is testing new, relaxed policies with a limited number of users and is monitoring the impactbefore deciding whether to roll them out more widely. Mr Marcus declined to give details of theresults so far.In September, PayPal emailed some of its top-performing business users that it would no longer putholds on their funds when there was a dispute, claim or chargeback. In the past, money was placedin a "pending balance" until PayPal resolved such issues, according to the company.WePay specializes in helping users collect payments from multiple people, making it useful for eventorganizers. In 2010, the start-up dumped a 600-pound block of ice outside a PayPal conference witha sign saying "PayPal freezes your accounts." Square, led by Twitter co-founder Jack Dorsey, hasgained a lot of small merchant customers by helping them accept card payments through a smallswipe device that attaches to smartphones.Stripe focuses on making it easier for website and app developers to accept payments.PayPals moves are part of a broader push by Marcus to make the companys payment service morecustomer-focused, according to Gil Luria, an analyst at Wedbush Securities."In terms of providing better customer service and holding funds, theres certainly a change ofphilosophy at PayPal and Mr Marcus is behind a lot of that," he added.HIGHER LOSSESThe tests may increase PayPals losses in the short term. PayPals loss rate was 0.30 per cent in thethird quarter, up from 0.26 per cent in the previous quarter.That means for every US$100 of purchases PayPal processes, it paid 30 cents to cover losses. In thethird quarter, PayPal handled more than US$35 billion worth of transactions, up 20 per cent from ayear earlier. The business has about 117 million users in 190 countries."If the loss rate rose on its own without a corresponding return, that would be a concern forinvestors," Mr Luria said.But the changes should improve customer service and increase revenue growth by encouragingmore merchants to use PayPal, he added."Even if theres a little higher loss rate, the incremental revenue from this will fall to the bottom linepretty quickly,"Mr Luria said. A typical loss rate for online transactions is 1 per cent or more, henoted.PayPals policy changes may also be needed as the company expands from its online roots to try toprocess more transactions in the physical world, said Rick Oglesby, a payments expert at consultingfirm Aite Group.As the company works more with small merchants, like Stultz of Red Star Merchandise, there will bemore spikes in payment volumes. Such spikes are often an early sign of potential fraud, which canlead to account holds, Mr Oglesby explained.
"If PayPal treats all these offline transactions the same, their new products and services will not beworkable," he added. - REUTERS