More on PayPal Settlement Agreements

An Assurance of Voluntary Compliance filed by Texas and 27 other states sets forth strict disclosure and customer service standards the company must follow. Failure to comply with the new requirements would allow states to take further legal action against PayPal.

“In an age when online commerce is an integral part of our economy, those providing the tools that move billions of dollars in daily Internet transactions must do so by dealing fairly with the public,” said Attorney General Abbott. “We hope this agreement with an industry leader will set standard best practices for Internet businesses across the country to follow. Consumers across the State of Texas will benefit from PayPal’s promise to conduct itself with transparency and integrity .”

The agreement addresses numerous business practices, including PayPal’s failure to provide customers with adequate disclosures regarding key components of its service, including dispute resolution and chargeback practices, selection of funding sources, buyer and seller protection programs, and the freezing of vendor accounts.

According to the company, PayPal, which is owned by the online auction site eBay, has grown to a membership of over 100 million accounts worldwide since being founded in the late 1990s.

Among users’ chief grievances addressed by the attorneys general is PayPal’s failure to clearly disclose the consumer’s funding source for a given transaction. Consumers complained that the company did not clearly disclose the funding source for each purchase, and thereby withdrew money from a consumer’s bank account, even if users submitted their credit card information when signing up. As a result, many consumers learned that money had been withdrawn from their bank accounts only when they received their monthly bank statements, even though their intention had been to use a credit card.

Other consumers complained that during pending disputes with PayPal, the company would freeze funds held in the user’s PayPal account. Consumers’ complaints also reflected confusion about the difference between PayPal’s in-house dispute resolution programs and chargeback rights granted by federal law to consumers using electronic banking, debit and credit cards to make purchases.

Under the agreement, PayPal must present consumers with a clear choice regarding the form of payment, and, prior to finalizing the consumer’s payment, must clearly and conspicuously disclose whether the payment is being funded from the consumer’s bank account or their credit card. Additionally, any Webpage that promotes a PayPal buyer protection program where a user can make a payment must provide clear and conspicuous disclosures about the limitations or conditions that apply to that program.

The agreement also spells out new requirements for freezing customer accounts, including limiting access to funds only in such amounts as are deemed reasonably necessary to protect against risk. Prior to this agreement, PayPal would simply freeze the entire account.

Finally, the agreement provides relief to consumers who complained about their ability to reach PayPal by telephone in order to resolve problems with their transactions. Under the terms of the agreement, PayPal will establish a conspicuous “Contact Us” link on all of its Webpages, provide a customer support number which is operational at least 18 hours each day during the week (14 on weekend days) and answer calls promptly.