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Credit card fraud help policies vary

It matters which card you use when using PayPal to buy something online. Visa and Mastercard allow chargebacks when fraud occurs, Discover and American Express don’t. By Bob Sullivan.
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Last month, both Charles Bowman and Kelly Smith were scammed out of $2,200 by the same eBay con artist. Both paid for a new laptop computer that never came. Both used PayPal to send the money. But Smith got a full refund a few days later, while Bowman is still out $2,200. The only difference? Smith used a Visa card to fund her PayPal account, while Bowman used a Discover card. And that’s only one point of confusion surrounding credit card transactions and PayPal fraud.

California-based PayPal is easily the Internet’s largest electronic payment system, claiming over 15 million members. The system has become so pervasive that some say it’s nearly impossible to actively trade in Internet auctions without a PayPal account, which is part of the reason that auction giant acquired PayPal last year.

But the company is also a frequent target of fraud complaints, and customers quickly discover that consumer regulations which protect bank and credit card consumers don’t apply to PayPal or other Internet-only payment systems. PayPal is also the target of a high-profile class action suit which claims the firm indiscriminately freezes customer accounts during billing disputes and fraud investigations.

PayPal critics say some of those investigations are the result of consumers like Smith, who seek refunds from their credit cards, known as “chargebacks”, after a con artist steals their money. PayPal’s terms of service says customers must go to PayPal — and not directly to credit card companies — when seeking to recover money after fraud. Customers who bypass PayPal can have their accounts shut down, the policy says.

EBay and PayPal spokesman Kevin Pursglove said the company doesn’t take that option unless there is a pattern of abuse by the customer.

“A user’s account will not be frozen simply for using the chargeback system,” he said. “The only reason there would be a freeze is if there seems to be a persistent pattern of chargebacks.”

But Smith and several other PayPal consumers dispute that, saying accounts are regularly frozen as a consequence of seeking a refund through their credit card companies.

“Paypal did send me an e-mail stating that they were supposed to handle the chargeback, and me canceling my payment through Visa may cause them to suspend my account,” Smith said.

Costly for PayPal
Gail Koff, the Jacoby & Myers lawyer who is leading the class action suit against PayPal, said the company was trying to bully customers into not exercising their consumer rights.

“They kind of leave me speechless in terms of how they’ve handled consumers,” Koff said.

Consumer credit card chargebacks can be costly for PayPal. When a fraud occurs, if a consumer disputes the charge with his or her credit card company, the financial institution makes PayPal cover the cost. Effectively, when Smith filed a complaint with Visa, the con artist’s $2,200 bill was handed to PayPal.

So PayPal, like many merchants, tries to keep anti-fraud measures in-house, offering consumers its own fraud protection program, which includes insurance. But even when combined with eBay’s similar insurance program, refunds are limited to $400, less a $25 processing fee.

Filing a chargeback with the credit card company is much easier, and promises 100 percent recovery.

The card you pick matters
But many consumers, like Bowman, don’t know that the card you use to fund your PayPal account helps to determine your ability to recover money lost to a con artist. Visa and Mastercard transactions can be disputed when PayPal customers suffer fraud. But similar Discover and American Express transactions can’t be disputed. The distinction doesn’t appear on PayPal’s Web site.

The difference is due to the merchant agreements signed by PayPal with the various credit card networks. Visa and Mastercard require PayPal to accept responsibility as the “merchant of record” in its transactions. That means PayPal is liable to foot the bill when a customer does not receive the merchandise and disputes the transaction, according to Janet Yang, spokesperson for Visa USA Inc.

But Discover treats PayPal transactions differently. Discover Financial Services Inc. spokesperson Cathy Edwards said PayPal is just a middleman, which has effectively performed the service asked of it: It has moved the money. What happens after that is a dispute between buyer and seller.

“It’s similar to a cash advance,” Edwards said. “If a card member gets a cash advance .... then they use that cash to buy a computer, and the computer doesn’t work, they don’t go back to the credit card company.”

It may seem like a nuanced distinction, but the difference is hardly subtle to Bowman, who doesn’t understand why he’s out $2,200, while fellow victim Smith has received a full refund.

He listened to the conventional wisdom, and plenty of credit card company marketing, which says that Internet consumers are protected against fraud when they use a credit card online.

“This was my first experience buying anything through eBay,” Bowman said. “I did lots of research, thinking I was 100 percent protected, and nowhere can you find that you are not protected if you work through a third party.

“If I had known this up front, you can bet I wouldn’t have made that bid.”

Confusing disclaimers
Notices on eBay and PayPal sites didn’t clear things up for him.

EBay’s site says “Most credit card issuers provide 100 percent consumer protection in instances of online fraud or misrepresentation.” There is no mention of the differing chargeback rights of Discover and American Express users.

Pursglove conceded the statement wasn’t very specific. “We can certainly do more in the area of educating the consumers,” he said.

Part of the reason for the confusion, Pursglove said, is that initially, most credit cards didn’t allow chargebacks against PayPal transactions. He said it was taking time for word to get out about the relatively new Visa and Mastercard policies. Pursglove said he didn’t recall when the change occurred, but that it was over a year ago.

“But consumers ... have to accept responsibility, too,” Pursglove said. “Some may find out it’s more advantageous to use one type of credit card than another. Consumers should be willing to take the initiative in understanding their credit cards’ terms and conditions.”

PayPal’s site says users have “the rights and privileges expected of a credit card transaction.” On the other hand, it insists that customers work through PayPal’s “dispute resolution” process before approaching their credit card companies. The penalty for not doing so: account termination.

Rosalinda Baldwin, who runs auction watchdog site, said PayPal’s dispute process can take days or weeks to complete, and since consumers only have 60 days to file a chargeback request with their credit card companies, timing can be critical.

Smith didn’t want to wait and see if PayPal could recover her $2,200, so she immediately called her Visa card issuer: First National Bank of Omaha. The bank reversed the charge, and she saw a credit on her bill immediately. But not before PayPal threatened to freeze her account and remove the $2,200 from it.

“But I never keep a balance in there,” Smith said. “I think there was $5 in the account, so [the threat] doesn’t have teeth. What can they do, freeze an account for $5?”.

PayPal chases after the money
But other PayPal customers are not so lucky, said Eric Gray, who runs a consumer complaint Web site called The firm’s threats do have teeth with frequent auction buyers and sellers, who regularly leave large balances in their accounts. These people thus often forgo chargeback rights.

“People who think, ‘I really need my PayPal account, I use it all the time.’ Those people have to bite (the loss),” Gray said.

Consumers who do file chargebacks regularly complain that PayPal chases after the money, he said. If there isn’t enough in the PayPal account to fund the chargeback, the firm tries to access funds in the customers’ checking or savings accounts, he said.

“Their terms of service says you authorize them to recover that money,” Gray said. “I know people who had their accounts put into collection agencies because they reversed a credit card charge.”

Pursglove challenged that assertion, saying PayPal only takes drastic steps like that in cases where chargebacks are habitual.

“I talked to the PayPal folks and nobody can remember a case where a users’ account has been frozen for (filing a chargeback),” he said. “The reality is [that] many times PayPal does eat the amount.”

PayPal will take steps to recover amounts lost to chargebacks only “if the user has a history of abusing the chargeback system,” Pursglove said. “If PayPal feels the user has abused the system, then PayPal feels it has the right to recover the money. ... Any company would do that.”

But Koff, who last summer won a small legal battle against PayPal when a federal judge refused to dismiss her class-action lawsuit, claims to have a lengthy list of consumers who had their accounts frozen under just such arbitrary circumstances.

“It’s scary what they’ve done,” she said. Consumers shouldn’t be bullied into giving up their credit card chargeback rights, she said. “There’s no credible legal hook for them to be doing that.”