September 25, 2004

PayPal's Singapore Sling

ON-LINE PAYMENT service PayPal has apparently started acting as if it was the Government of Singapore. We recently learned that PayPal has informed users it may start levying fines on them, should the users buy naughty goods and services over the Internet using their PayPal accouint. According to a news report, these $500 fines may be imposed on anyone who buys prescription drugs from unauthorized pharmacies, who engages in on-line gambling, or who purchases adult materials.

This report comes just as the blogosphere is steaming over news that PayPal has limited -- whatever that means -- noted blogger Bill Quick's account with the service. See Mr Quick's site for more details on that matter.

Now, we personally feel that PayPal, as a private concern, has the right to act however it wishes -- provided that it violates no laws or regulations which Government has imposed on it. It also, in line with the prior proviso, has the right to deny or accept business as it sees fit.

That said, we can't for the life of us understand why PayPal is acting this way. Obviously, they don't want trouble from the Government -- but their policies are much broader than those necessary to avoid such trouble. Furthermore, actually fining users -- as opposed to merely closing their accounts -- has the potential to cause amazing negative repercussions. If PayPal should ever err in levying those fines, the public-relations impact alone could be devastating, to say nothing of the potential ramifications from litigation or arbitration.

But even Mr Quick's situation has stirred up furious anger and general scorn in the blogosphere, which makes great use of the service. Over 30 blogs, including many heavy hitters, have written their own irate posts on the matter in response. Furthermore, because bloggers love causing trouble and showing solidarity with their compatriots -- look how much help a blogger gets when he loses his job -- there is the potential for widespread alienation among this very large and very natural market for PayPal.

It may be that PayPal has grown to the point where even the blogosphere matters little for their present business. However, a key part of any firm's success -- especially if they are publicly traded -- is continued growth over time. Annoying current and potential users will not help generate new business. And as competition to PayPal is already emerging in the marketplace, we think it's pretty dumb for PayPal to act so heavy-handed and be so patronizing in dealing with its customers.

Posted by Benjamin Kepple at September 25, 2004 11:06 AM | TrackBack
Comments

Ben,

I agree completely. I shall not use PayPal again unless absolutely necessary. They have the right to impose whatever restrictions they want on their users, and I have the related right to stop giving them my business whenever those restrictions become too heavy-handed.

This has to be the stupidest business decision I have seen in years. With the present boom in online poker sites -- most of which are fully legitimate, and enjoyed by millions of people including myself -- I cannot see why PayPal would voluntarily recuse themselves from this potentially lucrative market.

In solidarity,

Schwartz

Posted by: Matthew S. Schwartz at September 25, 2004 06:50 PM

Well, there is a good reason for PayPal to ban gambling activity: namely, the Government will stomp on them if they don't. The Feds can't go after the users under law, so they go after those who transfer the money, or accept advertising from the sites, etc. So there is good business rationale for that.

But as for everything else -- especially pharmaceuticals and pornography -- I can't see why PayPal would act so heavy-handed. It's not merely that it has no business caring, it's that it's bad for the underlying business for them to play morality cop. And the firm's just asking for trouble with this matter of fines.

Finally, as for the whole issue of solidarity, I must say I have never used PayPal's service.

Posted by: Benjamin Kepple at September 25, 2004 07:23 PM

As an aside, I must say I have always had a soft spot for the idea of using gold as an on-line payment mechanism. Sadly, though, the present services offer no way for one to cash out and get one's hands on the metal. A good idea too soon, perhaps.

Posted by: Benjamin Kepple at September 25, 2004 07:27 PM