The impending death of paypal.

From: BigBooster (f-prime@buildfreedom.com)
Date: Thu Oct 18 2001 - 17:02:44 MDT


 From another list:

>I have started this message about a dozen times and cannot seem to get the
>wording just the way I want it. I suppose it is because every time I start
>I become angry. Angry at a company whose gross incompetence leaves me in awe.
>
>I think a bit of history is in order first off.
>
>I am not really sure what prompted me to setup an E-Gold account. I know
>that it was sometime in early 1999. I did my first in-exchange on 4/30/99.
>This might qualify me as an early adopter since the batch number was 4723.
>
>There were two things that impressed me about E-Gold, one was that it is a
>cash based system. Not credit. It also did not rely on any national
>currency. You could deposit a gold bar, silver coin or just about anything
>that constitutes real money. It was a great way to make liquid a hard currency.
>
>But something happened. E-Gold split itself into G&SR and Omnipay. G&SR
>became the holder of E-Gold and Omnipay was the company used to fund
>E-Gold accounts. With this split came what I felt was a greater barrier to
>entry for E-Gold and suggested there had to be a better way to do it.
>
>About this same time came a new player on the market. A little company
>called paypal was started like most dot com startups. They had an idea for
>a payment service and brought it online.
>
>It is unfortunate, but the guys starting paypal had zero experience in the
>net world. The scam artists caught on quickly. Douglas Jackson spotted the
>problem right away and contacted paypal to help get the fraud under
>control. He writes about this at
>http://www.standardtransactions.com/en/douglasjacksononpaypal.htm
>
>I have always felt that paypal has had a good idea. I also believe it can
>be profitable if done correctly. Maybe someday that will happen, but it is
>not going to be paypal doing it. They wont last that long.
>
>I felt that payment service such as paypal could be used to fund E-Gold
>accounts. After several discussions with Jim Ray I decided that I need to
>prove him wrong. He told me I could not do it. He was partially right.
>
>I set up my exchange service the first part of this year. I bought some
>gold from a few friends that had gold sitting in their accounts. I started
>with paypal and an ACH service to take online checks. The checks turned
>out to be a real bad idea. The company I used did zero verification even
>though I was paying for that service. So that left me with paypal.
>
>My theory was that if I validated customers properly I would not run into
>fraud problems with paypal. I also felt I could automate the whole process
>to make funding clean and simple.
>
>I was able to automate the process. I could take a paypal order online and
>transfer E-Gold funds into an account with total automation. Problem is
>that paypal really sucks at validating accounts. I cut my automation to
>only marking orders as paid, but I have to click a button to actually do
>the funding. Any more than this was too risky. Paypal was hit with the
>famous paypal clone site. The last thing I needed was to become the
>laundering tool for this scammer.
>
>Now I had one more hurdle. I had to verify each and every customer. I did
>this by requiring them to give a phone number with the order. Paypal will
>not provide me with a contact phone number as part of an order. A big
>gaping hole in security on their part. I would check the phone number
>against the address on file with paypal using a reverse directory service.
>If they matched I would call to confirm the order. I caught several fraud
>attempts with this alone. If the number was unlisted the user would be
>required to provide a utility bill showing their name and address. Most
>identity theft crooks don't have this available.
>
>This was a great concept, but I still failed to miss one type of scammer.
>The one that is who they say they are, but reverses charges because they
>lost money. The first chargeback I received on my paypal account was just
>such a person. He bought E-Gold, dumped it in a ponzi and lost it. His
>solution was to reverse the charges done with paypal. Paypal of course hit
>me with those charges.
>
>With a chargeback on my account paypal notified me after the fact that I
>was now subject to a rolling reserve and would have to pay almost 4% per
>transaction in fees. The rolling reserve was 10% of my last 30 days gross
>revenue. This alone nearly shut me down.
>
>During this time I would try to contact paypal and have funds reversed
>when I found a bogus account. I could have stopped more fraud than the
>entire fraud department at paypal. What I mean by could have is that they
>never shut down any of the accounts I found as fraudulent.
>
>I tried working with them to get a system in place where I would be
>protected. After all they have a seller protection plan that is supposed
>to protect me from fraud. (right).
>
>I changed my service to require a pre-verification before an order could
>be placed. I setup my existing paypal account to only accept orders from
>verified account holders and had a verification request form on my
>website. When I received a request I would send out a signature form that
>had to be faxed or mailed back to me. I setup a new paypal account to
>handle only those customers. This new procedure resulted in a ZERO
>chargeback rate. This meant I could offer a lower rate to my customers.
>This was all setup after conversations with the head of business
>development at paypal.
>
>Last week I received a note from paypal that my account had been frozen
>pending a fraud investigation. I called and finally spoke with the head of
>the fraud division. He did not like that I had 2 accounts setup. I
>informed him that the second account was under my wife's name, her bank
>account, her credit card etc... Since she is also listed on the business
>license that everything was perfectly legitimate and explained to him why
>it had been done and who I was working with at paypal.
>
>He did not care, he said he has ultimate control over accounts and he did
>not want anyone using paypal who was dealing with E-Gold. I tried
>explaining once again about the ZERO chargeback rate on my account, but he
>did not care. He wanted my account closed.
>
>So as of now I have notified all of my customers that paypal is no longer
>an option. You see Jim was partially right. Working with paypal was a bad
>idea, but if paypal had a clue it would not be.
>
>I have started receiving feedback from customers who received the notice
>this morning. It is interesting how many horror stories they have to tell.
>I am going to be devoting more space on my website to this issue.
>
>I believe that now paypal is in it's death throws. I have received
>numerous notes from businesses that it has shut down because of a
>perceived risk. It does not matter if there is any, but I think it is
>posturing for shareholders.
>
>In the year 2000 according to paypals own numbers they lost $169,506,000
>on revenues of $14,460,000. They don't tell us how much of that was due to
>fraud. I am sure it was a considerable portion. They are now trying to do
>an IPO. The underwriters have valued the offering at $80,500,000. That is
>not even enough money to cover operating losses. I think by making the
>appearance that they are getting tough on fraud they think they can get
>more funding. I have news for them, they are looking in the wrong
>direction. They are the ones committing fraud. Especially since they are
>trying to hold my money for 6 months before returning it.
>
>Thank you for reading this long tirade.

Name withheld by me.

Frederick Mann



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