PayPal – Friend or Foe?

Is Paypal good for business?

“I have used paypal now for a while. They limit your account without any notice! I have a furniture business and need to pay suppliers. PayPal have limited my account for 4 weeks now! It has been a stressful and depressing time.” – Review from www.aboutpaypal.org

We, like many other small businesses, use PayPal to pay for business expenses and to accept payment for services from our clients. For the most part we have had no problems with the service, however there are lots of downsides to using Paypal which many people aren’t aware of despite the fact that they could have a massive financial impact on their business.

We have recently been reviewing the pros and cons of PayPal to decide once and for all whether we are going to continue using their services and have turned that research into this week’s blog post. Read on to find out what we ultimately decided.

What is PayPal?

PayPal is an international e-commerce company which allows for both payments and money transfers to be made securely via the internet. This online payment method is designed as an alternative to traditional payment methods such as cash, cheque and bank transfers.

It’s free to sign up to PayPal and all you need to set up an account is an e-mail address. It costs nothing to pay people with your PayPal account however a fee is charged on all sums received. The current fee is 3.4% + 20p which means that to receive £10 you have to pay 54p.

PayPal is owned by Ebay following their high profile purchase of the company in 2002 for a cool $1.5 billion and this is why PayPal is so popular on Ebay – they get to charge you three times (to list the item for sale, a commission on the sale price and then a PayPal fee for you to receive the cash) – but our thoughts on Ebay will be reserved for a whole other blog post!

What we like about PayPal

“PayPal makes shopping convenient, and gives me confidence to buy on eBay even when I don’t know the seller.” – eBay shopper, 2013

It probably won’t surprise you that the above quote was taken from the PayPal website. It’s very convenient for them to advertise Ebay at the same time as giving a great review of PayPal given that we know they are owned by the same company! Having said that, the review is correct. PayPal does add a well needed layer of security for buyers and they give rights of recourse against the seller should anything go wrong. These same rights are a nightmare for sellers however but we will touch on that more below.

Actually, almost everything we like about Paypal is from a buyers point of view;

  • It’s free to send money
  • It’s easy and convenient to send and receive money
  • PayPal can manage recurring payments. Like a direct debit, if you need to pay for something regularly you can set up a recurring payment and then forget about it
  • It gives you instant access to your money – you can login at any time and any money you have received can be spent or withdrawn as you please
  • You can shop without sharing your financial information
  • For a small fee, you can transfer money abroad

What we don’t like about PayPal

“I will never use Paypal again. After being a loyal customer for over 3 years, one day they decided to place a 6 month hold on my money for no reason. I couldn’t access over 20k in my account which I needed to pay my bills!” – Owner of a frozen account

  • Chargeback – This is a small business’s worst fear. Chargeback allows for a buyer to reverse their payment to you and whilst this is great for buyers if their seller has let them down, it is also used by dishonest people as a way to receive goods from a seller for free. They will claim that the order didn’t arrive or that there was something wrong with it and then ask for their funds to be returned. As a seller we have no way to stop a chargeback and so ultimately we are left out of pocket. This is largely not PayPal’s fault as the request is carried out by the buyer’s bank but Paypal doesn’t have the power to stop it – they can only assist you to dispute the chargeback but this really involves fighting a losing battle – you are unlikely to win. Whilst the odd chargeback can be accounted for, if this happens to you regularly you will quickly find that you are losing money and in severe cases could leave your business bankrupt.
  • Account freezing – Sorry PayPal, you probably don’t want us to tell people this but this is VERY IMPORTANT INFORMATION. PayPal can freeze or limit your account at any time for up to 6 months. This means that if you have £5,000 in your account, you will not be able to access if for 6 months! But you need that money to pay your bills, if you don’t get it your business will fold – tough. There are so many horror stories online about businesses that have suffered the wrath of PayPal via an account freeze and though there are ways to try to prevent this from happening to you, there are no guarantees. Whilst researching the topic we actually found 67 separate reasons for accounts being frozen. SIXTY SEVEN!? Wow.

Conclusion – will we continue to use PayPal?

First off – we do plan to keep our account. As a buyer we think PayPal is great and will continue to use it to pay for businesses expenses.

However as far as receiving money goes, we have decided to gradually move away from PayPal and will instead largely accept payment by bank transfer. We will keep the PayPal account for those of our clients who insist upon paying this way, however as soon as money comes in we intend to transfer it to our bank account so that if PayPal were to freeze our account, it wouldn’t have a large impact on our financial position.

Also we are now researching direct PayPal competitor Stripe. Rumour has it that Stripe is heavily invested in by the owners of PayPal and if they like it – we probably will too. They are a whole 1% cheaper than PayPal and are said to offer a much better service. We’ll check them out and report back.

Have you had any bad experiences with PayPal? Will you continue to use their services? Let us know in the comments below.

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