13,370 things to consider when using @PayPal.
Imagine this: You go to your bank to withdraw some money and the teller tells you, “I’m sorry, we feel like you are somewhat of a risk so we’re going to hold onto a large chunk of your money.” You laugh nervously and reply, “That’s funny, but seriously can I have my money?”
The teller looks at you and says, “No, you can’t, not right now. I am sorry, we are going hold it hostage for an unspecified period of time. If you would like to access any of it again soon, I will need 6 months of bank statements, tax returns, various business licenses, pictures of your children, proof you have been to the moon and 11 more annoying things that will take you endless hours to prepare.”
A dozen expletives run through your mind, but instead you say, “Close my account and give me money now – please.” The teller then looks at you and starts laughing! She says, “I’m sorry to laugh, but the funny thing is that I could close your account, however we have a policy I have to enforce, and that policy says we will keep your money for 6 months and at that point you can have it back….. hahahaha isn’t that funny?”
So you think to yourself, “Man, I really like this bank and I want to work with them, but this is a lot!” So you weigh the pros and cons and decide to deal with it because it’s an important option to many of your customers and hope that as your relationship develops they will lighten up on you.
You spend the next two days chasing down the requested items. You print and scan documents, search through boxes looking for that file that always evades you at times like this. You even contact NASA for a copy of that photo from your last visit to the moon.
You prepare all of your docs, deliver them to the bank, and wait. And then you wait some more. Finally after a couple days, you go into the bank to check the status of things and to see if you’re able to access your money. The same teller is there to greet you. “Oh hey, how are you?” You reply, “Great, can I have my money yet?” Still smiling, she says, “Sure! Well, sort of. After reviewing all of your information and documents, we have decided to keep a reserve of $10,000 and 35% of any new incoming funds, so your available balance of $15,730 has been reduced to $5,730.”
Naturally, you ask, “What about the $10,000? What happens to that?” She replies, “Well, we are going to be keeping it for now (invest it and earn some money from it – thanks), and after 6 months you can request to have it released or reduced and at that point we will reconsider and let you know.” you scratch your head for a minute and think of other options and then you say, “Wow, ok ….. well, what if I decide to end this relationship and close my account?” She replies, your free to do that, but we will still keep the $10,000 for 6 months”
She goes on to explain their reasoning, you counter with a valid argument and at the end of the day, you realize you’re arguing with a brick wall. “She who holds the money – wins.”
The above scenario is very real and could happen to you.
I know - because it happened to me.
I logged in to see if the $12,000 I had transferred from my business bank account to pay an affiliate had hit my PayPal account yet. I got a popup saying my account was suspended, with a contact email and phone number for more information. I then clicked around on my account and could see the $12,000 had successfully transferred. I tried to click the “Send money” button and it was disabled.
I went through the above described scenario, and it sucked. I was well aware of this scenario as I heard from a mentor that it could happen. In fact there is a story floating around somewhere about the formation of PowerPay – that was somewhat inspired or influenced by paypal holding hostage a marketers funds to the tune of around a million after a product launch. Can you imagine having a million dollars held for 6 months and affiliates who were expecting a paycheck in 30 days? Put that champagne away.
Why it happened – PayPal’s Reasoning:
- Why? – An increase in business over a short period of time. For many months we had been slowly climbing in sales – not much of a jump from month to month. The growth and corresponding incoming funds were consistent. Then we had a few huge partners promote our products & services and our incoming funds probably went up 500% – 1,000% over the space of a few months. This drew a red flag.
- Paypal’s main reasoning – No commercial business credit: We have almost zero business credit and therefore PayPal doesn’t have anything to gauge our credit worthiness. Not that were asking for credit, but it gives PayPal a warm and fuzzy feeling if they can see you pay your bills. Understandable, but not fair.
Nothing more – nothing less. I argued with my contact that we were a safe bet based on our history. I asked her to tell me how many refunds or disputes we had with purchases of our products or services that were done through PayPal. Her response – “zero”. Literally out of around 100 transactions we had ZERO refunds or disputes – yet that wasn’t good enough. It’s actually ironic as we average around a 7% return rate, but with PayPal we had zero.
Should I avoid PayPal altogether?
No – As bitter as I am regarding what happened, I still feel PayPal is good for your business. Many consumers only use PayPal, and others find comfort in using PayPal. The reality about the “held funds” is that it is still your money and you will get it back eventually. Also, when a consumer buys using PayPal, the money is available immediately. With just about every other type of merchant account you have to wait 2-4 business days for funds to clear and arrive in your bank account. Just be aware that if you don’t have a lot of business credit and your online business sees a sharp rise in incoming funds, you might have a sudden freeze of funds. How much you’d be able to access when the ice melts is completely up to PayPal. Truth be told , about 85% of our business goes through our merchant account. Only 15% of our buyers use PayPal. So the frozen funds don’t affect us as much as you might think.
In PayPal’s defense: I do have a friend who has been using Paypal for years without any issues. He has processed 7-figures+ and to date has had no problems. He does have business credit, and he has seen a slow steady rise in sales. The big difference between his business and mine is that he sells software, not a digital or information-based product or service.
What I recommend:
Get a merchant account with PowerPay and offer your customers the option of paying with any credit card & PayPal as well. Most shopping carts will allow you to do just this.
PowerPay is a merchant account provider that understands Information and Internet Marketing. If you sell digital goods and plan on being successful, go with PowerPay.
I have heard story after story of banks & merchant account providers freezing funds, and every time the ending is not good. With PowerPay, your risk of this is minimized. They understand how your business works, and as long as you keep an open line of communication with them, life is gravy.
They may or may not hold a reserve on your account in the beginning or on an ongoing basis. They have several factors that will determine if a reserve is necessary or not. My account has a 5% reserve for 90 days, meaning 5% of all incoming funds are held for 90 days and then released into my account.
Aside from all of the benefits of using PowerPay, the thing I like most is that they care about your business and seeing you succeed. You are NOT just a number. In my experience (and all of my friends’ experiences) with them – they have been more than fair. I have two accounts reps – who are amazing. (Tina & Kevin – if you’re reading this, thanks for all your hard work! I appreciate you more than you know.)
When I called up Kevin & Tina to tell them what had happened with PayPal, they had my account reviewed by the underwriting team at PowerPay and had my reserve lowered from 10% to 5%. This reduction mitigated the actions of PayPal big time.
Here is a testimonial I found on their website from a great marketer, Jeff Johnson. It sums up my feelings and the thoughts I have heard from others perfectly:
“PowerPay is the Best Merchant Account Ever! They never let me down, and I always get paid. I wish I could say that about the other merchant account providers I’ve used, but I can’t. Only PowerPay has proven that they truly care about helping my business grow.”
“Sign up right now and you’ll soon know what I mean when I tell my clients that Powerpay is ‘The Best Merchant Account Ever.’ Highly Recommended!”
- Jeff Johnson
www.UndergroundTrainingLab.com
Conclusion:
My hope is that by sticking it out with PayPal and establishing a history with them, our account will someday go back to the way it was. I will appeal our reserve as often as they allow me to, and hopefully soon it will be returned as they are literally holding all of our profit margin from those sales and then some.
I hope this post is helpful to anyone else caught in this situation or who might find themselves in one similar. This has been swirling around in my head ever since that fateful day with the laughing teller. So I hope you enjoyed it & learned something that might help guide you on your path to success online. This is the kind of information I was privileged to learn early on because I had a great mentor, but after hearing one horror story after the next, I felt like you might benefit from knowing this as well.




{ 29 comments… read them below or add one }
I really loved this blog! I just ran into this problem with PayPal and didn’t understand why they were holding my money. I, too, endured waited until it was released and kept going.
Never did I once make a call and ask why it was being held hostage. Thank you so much for breaking down their policy with your scenario as well as providing a second option for us to use.
So this same exact thing happened to me. I laughed out loud when reading this. I am glad to see that I am not the only Paypal victim.
It frustrates me to see Paypal suspending successful websites. I guess the silver lining is the fact that you are doing well enough to be given a second look (lockdown)
I was actually told by paypal (and PowerPay) that if I anticipate a huge influx of funds from a product launch to notify Paypal in advance so that they don’t flag the account. So far, no hassles from paypal. It’s always frustrating when you want to ship an order but the funds haven’t cleared to your account. Customers don’t get it, and merchant accounts/banks don’t generally care.
The other thing you have to remember is that Paypal is adamant about the fact that they are NOT a bank. They act, look and smell like one, but in all their documents, they dub themselves a clearing house, and thus are not subject to banking terms and conditions. It’s a crazy grey area, but until something changes, you’re right, the people that hold the money win.
Thanks for the great reminder!
Ahh… I remember this day well. What a shock it was to hear it happen to both of you!
Sorry to hear that things still won’t be completely cleared up for some time. I agree with your thought process and getting rid of PayPal just wouldn’t be an option for your target audience.
Thanks for the blog post – great advice and info as always.
Now that’s really scary. I haven’t come close to having this kind of thing happen, but two years ago I had a series of payments come through to me with each being more than $5,000 at a shot. If they’d held even one of those bills wouldn’t have gotten paid, and I’d have freaked. Not having a recourse is a shame, almost bordering on bad customer service. I’m sorry that happened to you; now I might need to think about some things…
Powerpay is the way to go…My boy Sean has it all perfect. Powerpay is straight with you as long as you are straight with them. It pays a lot quicker and feels good to know that they aren’t just floating your money for 6 months like Paypal is. They are very reasonable people over there.
You could substitute PayPal with the name of any bank and your story would be equally true and equally likely. You just don’t think of your bank like that because you’re not using them for payment processing. If you opened a merchant account at any bank, they would be just as likely to do what PayPal did to you at any sign of increased risk. They would also hold your money for the exact same 6 months, even if you wanted to close your account. PayPal is acting like every other merchant account provider in the world. Every bank’s contract for merchant services reads the same because most of these policies follow directly from the card association (Visa/MC) rules. They all have the right to hold your money in a reserve account, they all hold your money for exactly 6 months if your account is suspended, etc.
BTW, about that reserve account… they won’t be investing it and earning any money. That’s another thing that’s actually spelled out in most merchant agreements. The money is held in a non-interest-bearing account so there’s no incentive for them to create such accounts without reason.
PayPal is not a bank, thus it is not regulated like a bank. I’m a moron and I realize this, how is it others do not?
PayPal is the worst. I haven’t heard one decent thing about them. This reminds me of a stunt WePay played on them about a month ago. They froze a ton of money in blocks of ice and parked it outside of their developers conference here in SF. Link: http://techcrunch.com/2010/10/26/wepay-ice-paypal/ Maybe consider using them as well! Great article.
Thank you for this post. I had no idea this could happen and it’s nice to know ahead of time how to prepare and my options! Thanks!
Thanks for sharing, Sean. Makes me happy that I only use PayPal to pay for stuff.
I’ve actually heard other stories like yours from PayPal users. Another option I have explored is WePay.com. Companies like these are going to have to be careful now that there are options…
“You are NOT just a number.” How about 901920, your PowerPay affiliate number (in those links)?
Thanks for this info. I have not had good experience with PayPal and have never managed to get my money from them. Someone charged something on my account- they alerted me that the transaction was suspicious but it ended up costingm me $400 which I was never able to get back. I have delayed setting up my shopping cart because of my dread of losing more money to Paypal. Nice to knwo there are alternatives. Thanks again.
Paypal just announced a new withdrawal feature. Now we can supposedly withdraw directly to our VISA cards. Maybe it’ll turn to be a way out for those with hostage funds. Can’t say for sure. Here’s the announcement:
http://pages.ebay.com.sg/sea/paypal/withdraw.html
Could be a nice feature to pay for oversees outsourcing. Before this post I was seriously considering setting my guys in India up with their own debit card and transferring their money to them from PayPal. Now I’m wondering if that’s such a good idea…
Thanks for taking the time to write this well written blog. You rock! I’ve been using paypal for a while and they are the only ones I use for a merchant and all though I haven’t had any problems with them holding my money it’s still smart not to put all your eggs in one basket. You’re the man.
Sean,
I’ve gone through this a few times selling items on ebay. PayPal is a crazy dictatorship of idiots, and eBay is responsible for most of their near illegal practices. They both have gotten way to big for their own good, and taking away their business is really the only way it will change. I’ve been selling on ebay for years, and have gone through all kinds of crap to satisfy them both multiple times. I’ve even gone BlackHat in order to keep selling, and process payments through Google Checkout under eBay/PayPal nose.
Needless to say, I feel your pain.
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Interesting information for businesses who use Paypal. Thanks for sharing!
I consider Paypal my source for mad money.
I’ve been stung time and again by Paypal. In my case, I had a transaction where somehow the depositer scammed Paypal. They reversed his transactions, including my payment. A short time later, my wife– using our account– was scammed by an eBay seller. We pressed for a refund and Paypal said there was no way they could reverse a transaction, having done that to me a few months earlier.
I have seen this fast income climb create problem where Paypal freezes an account. Thanks for giving us word of an alternative, PowerPay. I’ll definitely check them out.
For the record this has actually happened with my ‘telephone’ bank around 8years ago – Cahoot in the UK. They blocked access to my account just after I had been paid and refused to give access until I proved my current employement to them.
Eventually I had no choice and then switftly took my business elsewhere – to a bank with actual staff I could see.
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PayPal premier or business account? Yikes! I just signed up for PayPal merchant. We expect our sales to drastically increase during the first 6 months – I can’t have all my money tied up with them!
Yeah, paypal are a bunch of ###### (insert appropriate expletive) not only do they screw the person who’s account it is they also screw the affiliate who is waiting for payment. Right now I am waiting for payment for two promotions that have been put in the Paypal sandbox for the same reasons. It sickens me that there is no other viable alternative solution that has the convenience, reach and trust of paypal. I wonder how many good businesses have ended up going bankrupt because paypal have destroyed their cashflow.
Great blog post Sean, would love to chat on skype sometime soon
I’m one of those guys who has never had a problem with Paypal and been processing 20k per month or more for about 6 years now.
PowerPay is not free of their problems and I’d be careful which testimonials you choose to use. Not everyone thinks highly of all the IM crowd guys. In fact powerpay has been recently shutting down the same IM guys who raved about them years ago.
Once you get past $250k per month they just turn you off because you’re now too risky for them. I haven’t found a merchant account, payment processor, or shopping cart in the last 7 years that doesn’t have at least one big problem.
However, there are lots of workarounds.
Paypal = Don’t withdraw or deposit abnormal amounts of money unexpectedly.
PowerPay = Use a cart that lets you rotate multiple merchant accounts so you don’t blow one out
Etc. etc.
I have never used PayPal. You given some nice things to consider if i ever have to use the service. Thanks for that.
Very quiet but amazon has been known to do the same thing. Not, I don’t believe, to their affiliates, but to their sellers.
I use PayPal for my business and currently find it invaluable. I have it linked to my billing system so that my clients can use “one-click” pay.
I also have a card (similar to a bank card), which I use to access my PayPal funds immediately rather than wait for bank transfers.
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