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Banking on the eBay/PayPal merger

Will eBay fix PayPal’s customer service?

The eBay and PayPal merger was approved last Thursday by shareholders. While most of the e-economy has been in the doldrums this past year, eBay has remained a profitable company, thanks in no small part to the existence of PayPal. Its popularity and profitability is very easy to understand, they have provided an easy way for people worldwide to buy and sell just about anything.

While some transactions on eBay total in the thousands of dollars or more, most fall into the range of $1-200 amounts between non-commercial parties. The seller does not typically have a way to process a credit card transaction, and most buyers are not comfortable handing their credit card information to people they don’t know. In addition, even frequent eBay sellers know that setting up a credit card system would mean they would be giving up 3-5 percent of their sale to the credit card company. Enter PayPal.

Like many traditional businesses, credit card companies were slow to realize the potential for profits on the Internet. They wanted to apply the same business model from the prior 40 years of department store counter transactions to e-commerce. Many systems were set up following this old model, but PayPal saw another way to address the need for quick electronic payments without the overhead of individual credit card merchant accounts. PayPal would act as an intermediary between buyer and seller, processing what are essentially electronic wire transfers. Buyer and seller would each have an account at PayPal linked to their respective bank accounts or credit cards. PayPal would collect the money from the seller and send it to the buyer without charging a fee. So how did they make their money? The same way banks do, by collecting interest on the “float,” the money that sits in PayPal accounts while transactions are waiting to clear. This float is typically tens of millions of dollars. (PayPal initiated per-transaction service fees before it filed for its IPO.)

But therein lies the rub. PayPal acts like a bank, makes money like a bank, but isn’t subject to the same regulations as a bank. There is no FDIC insurance, no consumer protections, and no branch to vent your complaints. Most PayPal users have never had any problems with the service, but when a problem does occur it seems to quickly reach epic proportions. Sites like NoPayPal have emerged to address the lack of accountability by PayPal. The site is loaded with stories from both buyers and sellers who have had their accounts locked by PayPal with little or no recourse. PayPal’s own spokesman admitted to making their phone number “difficult to find in order to save costs.”

These problems did not go unnoticed by Federal regulators. Investigations in many states, including New York, delayed PayPal’s IPO by months, and many of these concerns remain. It is thought the acquisition by eBay, a company renowned for excellent customer service, will help to resolve many of PayPal’s customer-service problems. In addition, I won’t be surprised if PayPal achieves a bank-like status in the next couple years, complete with FDIC insurance. I hope they do. PayPal, like eBay, is a rare Internet success story. A merger of the top auction site with the most popular method of online-payment appears on the surface to be a slam-dunk. We’ll see if eBay’s experience can lead this new team to new heights.

Garth Gillespie is the systems architect for ComputerUser web operations. He is currently the CTO of ICONOCAST.

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