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PayPal, eBay and the Buyer Protection Guarantee

This post is a tip on how you can greatly reduce the risk of being ripped off when purchasing goods on eBay using PayPal.

In the eBay checkout process, the PayPal “funding source” seems to always default to a bank account. There is an obscure link in the “Payment method” box on the right which says “More funding options” and allows you to use a credit card instead. Click this, and you’ll see a ”Funding confirmation” page. This tries to convince you to stick with bank account funding, and, conveniently for PayPal, the default (orange) button is “Don’t Change”. What you should do is click the “Change” button, which appears to be greyed out, and you will be able to use a credit card.

Obviously using a credit card has the advantage that you can collect rewards points, but there is a much more serious reason why you should always pay with a credit card when using PayPal, which I will explain.

Paying with a bank account instead of a credit card is in the interest of PayPal, but not the buyer. The lengths to which eBay and PayPal have obviously gone to make it difficult to pay with your credit card (the obscure link, and the nag screen described above) annoy me particularly, because I believe that the statements provided by PayPal are misleading, and their own financial interest in the matter is certainly not explained at all.

The main reason that paying by bank transfer is clearly in PayPal’s interest is that the fees charged to them would be much lower than the multiple fees charged when processing a credit card transaction (which could include the bank receiving the payment, the credit card company, a credit card merchant facility, and possibly payment gateway service). Despite the lower fee, PayPal still charge the seller the same transaction fee. In addition, PayPal’s risk of being the party which “loses out” if the transaction goes wrong seems to be greatly reduced, at least in Australia.

Whilst PayPal claim to have “100% protection against unauthorized payments” on the “Funding Confirmation” page, my personal experience is that this only applies if it means that PayPal wouldn’t lose out on the transaction. If the seller closes or overdraws their bank account and PayPal can’t recover the funds from them by any means, they won’t refund the buyer. I encountered a situation where counterfeit goods were returned with proof of postage, with the promise of a full refund, but the fraudulent seller went out of business and ignored all correspondence at that point. The email I received from PayPal stated: “We have decided in your favour, however, we were unable to recover any funds from the seller's account. As stated in the PayPal User Agreement, recovery of funds associated with a Buyer Complaint cannot be guaranteed.” So much for that "guarantee"!

Fortunately, because I had paid with a credit card, I was able to request a chargeback through the bank who had issued the credit card, who refunded the amount in full. I could only assume that the bank then issued a chargeback to PayPal, who processed the card, and PayPal then lost all of the money involved in the transaction unless they later found a way to recover it from the seller. I am fairly certain that even if the bank couldn’t recover the funds, in Australia, they would have been required refund the buyer. This risk would also explain why banks require a number of credit checks to open a merchant facility, unlike PayPal, who will give it to almost anyone.

PayPal really don’t like losing out, and seem to be exempt from this requirement. If it had been a bank transfer payment through PayPal, it would have been game over at the point of the Buyer Complaint being resolved without a refund. I have been told by two Australian banks that all they can do is send a letter to the other bank, asking nicely for the return of the funds. This incurs a significant fee and there is absolutely no guarantee of getting anything back.

There is one final word of warning, however. I have read that issuing chargebacks through your credit card company which cause PayPal to lose out in the transaction often cause PayPal to close your account. In my case, it didn’t. So make sure you leave the chargeback as your last resort option when paying by credit card. Try the PayPal complaint process first, and if that doesn’t lead to a satisfactory outcome, you can decide if it’s worth the risk of losing the PayPal account, and request a chargeback through your bank. If the transaction involves a material amount of money, losing your account is probably worth it! Just make sure you don’t leave any funds in your PayPal account which they may not return to you. You could always open a new PayPal account with a different credit card, if you lost your account, too.

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