How PayPal Works

Problems with PayPal

Though PayPal does have millions of customers, not all users have had such a pleasant experience. In fact, so many people have felt slighted by PayPal that entire websites exist to discuss problems about PayPal and mock its business practices. Perhaps the most prominent is PayPal Sucks.

One of the biggest criticisms of PayPal is that it acts like a bank, but it isn't regulated like one. Critics maintain that PayPal offers none of the protection that real banks offer, and it isn't required to maintain any of the security, customer service or dispute resolution services that banks provide. At the same time, PayPal holds large amounts of their customers' money, makes millions of financial transactions and even offers credit and debit cards.

So why isn't it considered a bank? In 2002, the Federal Deposit Insurance Corporation (FDIC) declared that because PayPal didn't meet the federal definition of an entity accepting deposits as a bank, hold any physical money or have a bank charter, it was not a bank [source: Wolverton]. In other words, PayPal isn't a bank because it doesn't call itself a bank. As a result, most states license PayPal as a "money service."

One of the most common problems encountered by PayPal users is the sudden and inexplicable freezing of their accounts. If your PayPal account is frozen, you can't add or withdraw any funds from your account, and you're required to go through a long, complicated process to verify your identity. Some users claim that PayPal has simply seized their funds and never returned them. Other complaints against PayPal include rude customer service representatives, a long and confusing user agreement and loose hiring practices that may have led to account fraud [source: PayPal Community].

Despite these criticisms, PayPal continues to be the most popular money transfer service for online transactions. For more information on PayPal and related topics, check out the links below.

Last editorial update on May 3, 2019 10:23:21 am.

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More Great Links


  • Balko, Radley. "Who killed PayPal?" Reason Magazine. August/September 2005. (Apr. 24, 2019)
  • Carnegie Mellon University (CMU). "CAPTCHA: Telling Humans and Computers Apart Automatically." (Apr. 24, 2019)
  • Ellis, Blake. "Why banks are fighting over 12 cents." CNN Money. Cable News Network. March 11, 2011. (Apr. 21, 2019)
  • Jackson, Eric M. "The PayPal Wars: Battles with eBay, the Media, the Mafia, and the Rest of Planet Earth." World Ahead Publishing, Inc. 2004.
  • Kane, Margaret. "PayPal shares make strong debut." CNET. CBS Interactive. Feb. 15, 2002. (Apr. 24, 2019)
  • PayPal. "About." (Dec. 20, 2011)
  • PayPal. "What is the PayPal Security Key?" (Apr. 21, 2019)
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  • PayPal. "Who We Are." (Apr. 22, 2019)
  • PayPal. "Purchase Protection: Transaction Monitoring." (Apr. 29, 2019)
  • PayPal Community. "PayPal Community Help Forum: Disputes and claims." (Apr. 24, 2019)
  • Wolverton, Troy. "Billpoint failure a lesson for eBay?" CNET. CBS Interactive. July 8, 2002. (Apr. 24, 2019)
  • Wolverton, Troy. "Feds: PayPal not a bank." CNET. CBS Interactive. March 12, 2002. (Apr. 24, 2019)