This is totally fair. We knew this was something we might have to deal with given the nature of the business.
Still, things change when they then turn around and offer you a business loan. It's hard to argue that they need to freeze your funds for collateral when they then deem you credible enough to lend you money.
It's not so much that our accounts got frozen that makes this interesting. It's the fact that they froze our accounts and then offered us a loan.
See my separate comment -- a hold plus a loan is not the same as just not holding the money, from a risk point of view. Although it would look the same to your bank balance, the two look nothing alike to PayPal's accountants and auditors. If you think there's a potential liability between two parties, it's much better to formalize it as a loan agreement than to just carry it as a risk.
This is why, for example, the cable and cell phone companies show up on your credit reports. When you pay them in arrears for your service each month, you are in effect borrowing money from them.
Interesting point. From that perspective, you could argue that giving a loan against the collateral is a way to account for some of the risk on Paypal's side while still giving us some funds.
Still, we've been with Stripe since then and have had no problems.
Exactly. To give another example, I was at Lucent in the late 90's, just before the telcom collapse. Ultimately, Lucent stock collapsed by 90% and the company was bought by Alcatel (which was just bought by the remaining parts of Nokia that Microsoft didn't grind into dust, but I digress). A big part of what brought Lucent down was not just that sales of communications equipment plummeted, but also that Lucent had extended financing to its customers so they could buy more equipment, and then those same customers defaulted on their loans.
Ultimately, it's important to make sure that a loan-granting organization is run separately from your core business, to avoid people making poor-quality loans just to goose sales numbers.
Still, we've been with Stripe since then and have had no problems.
yet ...
There was a recent article on how hoverboard sellers have suffered massive fraud losses, that specifically talked about how Stripe is trying to chase people to recover hundreds of thousands of dollars in chargebacks. That can't happen too many times, given the thin margins of payment processing, before they have to do something to protect themselves.
>In one case, hoverboard vendor IO Hawk had a reported $900,000 negative balance. Stripe’s documents call it “one of our largest losses ever.”
You'd think there'd be some way to delay shipping for a couple of days while someone checks if the card is stolen. Maybe they could have some way of just calling the card owner and asking if they ordered a hoverboard?
So now Stripe has that risk on their books? Don't you think they'll eventually need to do the same as Paypal did?
Maybe Stripe won't freeze your assets first, but they could notify you that they will only support a certain transaction volume unless you take a loan.
> If you think there's a potential liability between two parties, it's much better to formalize it as a loan agreement than to just carry it as a risk.
Such a clear and excellent point. This is the basis of the idea people are thinking when they tell someone to "get it in writing."
I have never seen a cable, cell phone, or utility account reported on my credit, other than the initial credit check to open the account. But it seems everyone around me thinks paying a power bill late will affect their credit.
Do companies in other areas typically report such accounts to the credit agencies?
Do companies in other areas typically report such accounts to the credit agencies?
Generally the companies themselves do not report to credit agencies. However, once the account is turned over to a collections company then that company will nearly always report the delinquency to the credit agencies. So from the consumer point of view, the statement "If I don't pay my bill, it will show up on my credit report" is true, but there is a middleman in the process.
I don't know. For a while, I'd forget to pay my electric bill every other month or so, and SDG&E never did anything but send a polite reminder with my next bill.
Utilities generally consider your account to be in good standing so long as you don't fall more than two or three payments behind. They may use a late fee and/or a deposit return agreement to incentivize on-time payments, but they're not going to go after you (such as disconnecting service) until usually the 3rd month that you fail to pay, sometimes (especially for municipal utilities) much longer.
Essentially, accounts paid late just aren't a big deal for them. They almost always get the money anyway.
It's basically a secured credit card. And you get the primary holders SSN (credit report) to have a credit relationship with. It actually makes a lot of sense.
Howdy again! (I think I met you personally in Tokyo if I'm mapping nicks to names correctly.)
Does it make a little more sense if you consider this decision as being generated by two separate entities? For marketing purposes, that loan appears to be originated by Paypal, but it actually comes from Webbank in Utah. They are one of the more tech-forward companies which actually has a banking license. It's tough to tell externally which tail is wagging which dog, but I'd bet you that a) Paypal the low-margin-fraud-kills-us AI company is institutionally very, very risk averse but b) Webbank is primarily thinking of not your business model but rather your existence in a pool of pre-vetted credit risks, and their risk model says "Approved without further need for clarification; this is probabilistically profitable."
(To the extent that a bank would view Paypal having a reserve against your account as a plus or minus in deciding to grant you a loan: it's an obvious plus, right? Heads you pay them back; tails they have recourse against an identifiable pile of money sitting at an affiliated entity!)
Assuming that the monetary terms they offered you were roughly in line with what Paypal offered me back in the day: they make substantially more money lending to you than Paypal does through payment services (one's expensive, risky to them, and cheap to you; one is inexpensive, not terribly risky to them, and not terribly cheap to you).
It doesn't change the analysis much if you think of it as two groups with competing imperatives within Paypal, either. (And who knows, perhaps Webbank has substantially delegated decisionmaking authority to a model developed by Paypal. I'd bet somewhere in the midpoint -- Paypal provided a model, Webbank agreed to robostamp most loans consistent with the model insofar as regulations allow them to do so, and then Webbank got Paypal to agree that if performance across the pool was below $FOO then Paypal would pay Webbank $BAR.)
I didn't tackle the apparent contradiction because I think others here did a good job. But let me try then based on your follow up:
1) Your business, without a balance of funds, is an unacceptable risk and not worth them supporting
2) Your business, with the appropriate balance of funds in reserve, is now not risky to them
I understand it seems contradictory/hypocritical. But it's all about whether you view it as a "freeze" (which has much more dramatic connotations) or simply a risk mitigation strategy on their behalf. Once you solve for the risk mitigation they're comfortable doing normal business with you.
The issue is that they generate the need for you to take out a loan with them by securing "the appropriate balance of funds." If they did not hold the 20k, his business would not need a 20k loan. Would paypal be on the hook if the business withdrew the 20k and they were hit by a bunch or refunds? Sure, but thats the risk they take by being a "bank." They make interest off your capital. Thats the exchange they agree to. This is them trying to make double interest off your capital by locking your funds and offering a loan for the same amount.
Put another way, would you be okay with your bank holding 20k to make sure you can pay for housing/bills, and then offering you a 20k personal loan that generated them interest? No, because that would be unreasonable. Its your money. If they think you are a risky client, they should stop working with you.
Its a conflict of interest, and a blatant one that could be heavily abused.
Taking money that isn't yours isn't a risk mitigation strategy; it's theft. Calling it a freeze is pretty mild. It is not PayPal's money. The customer didn't intend that money for PayPal, but for the merchant. By freezing that money, PayPal is endangering the transaction that they should be enabling.
> Still, things change when they then turn around and offer you a business loan
> It's the fact that they froze our accounts and then offered us a loan
How? Those are surely separate departments at PayPal (possibly even another [sub]company).
Not to mention loaning you money has other strings attached to it which makes it less risky-ish on PayPal's part (they have a clear legal proceeding to take if you default on the loan). If you screw over all your customers and run with the money, PayPal will take the major hit (because your customers will go after PayPal to get reimbursed).
Freezing your funds, and offering you a loan are very clearly "apples and oranges".
Nonetheless, you should have known this was a risk and was likely to occur before it became a critical issue for your business. Clearly you were not prepared nor did your homework on how to operate in this climate.
This sounds harsh, but it needs to be heard. It's difficult to feel sympathy for someone who put all their eggs in a single basket, and was too naive to understand the risks.
Lesson learned - don't put every penny you have into a single account administered by a company you have only recently begun a relationship with. You are a high risk customer for any banking institution. If it wasn't PayPal, surely a similar situation would have occurred elsewhere.
I don't understand why customers would go after PayPal if the merchant doesn't deliver. They should be going after the merchant. PayPal should not be the merchant here. If PayPal does insist on acting like the merchant, then real merchants should use a different payment provider.
I've got to admit, though, I'm not American. The way payments work in the US often seems completely backwards to me. But I really dislike that that backwards way of handling financial transactions gets exported by companies like PayPal, Visa and Mastercard to Europe, where banks do offer reliable payment infrastructure: when I pay someone money, the money ends up with them, not with some middleman.
Still, things change when they then turn around and offer you a business loan. It's hard to argue that they need to freeze your funds for collateral when they then deem you credible enough to lend you money.
It's not so much that our accounts got frozen that makes this interesting. It's the fact that they froze our accounts and then offered us a loan.