Market Pioneer PayPal Must Deal With Disgruntled Users

First came the notices to customers that their primary e-mail account addresses had been changed. Then the money was drained from their PayPal accounts. When that was gone, their credit cards were maxed out. Then the thief hit their debit cards.

When Carl Koresdoski, Michelle D'Souza and at least four others alerted PayPal Inc. and stopped payments on Jan. 26, PayPal's fraud-prevention system sprang into action. It froze their accounts and the funds within them (the charges had been successfully reversed off their credit cards) and told the victims to fax copies of their driver's licenses, bank statements and other proof-of-identity documents. They did so multiple times, but so far only half have resolved their problems.

"It's now mid-March, and PayPal's just reimbursed my full $700," said D'Souza, who uses PayPal to buy and sell Beanie Babies. "I wrote them, e-mailed them and tried to find every number I could to reach them."

At issue is Palo Alto, Calif.-based PayPal's homegrown antifraud system -- something it needs if it's to be successful.

But judging from the thousands of postings on at least five PayPal complaint Web sites, too many innocent users are getting caught in the middle of an overly aggressive antifraud system and an ineffective customer service setup.

PayPal's nonpaying customers, who generate the bulk of online complaints, are encouraged to seek help through PayPal's Web site and self-help links. Users who hold free accounts say the toll phone support number that the company offers them is hard to find and subjects them to long waits, which is the reason for a lawsuit filed March 13 in San Francisco claiming that PayPal violates the Electronic Funds Transfer Act's customer service requirements.

A PayPal executive acknowledged that the toll line may require "a wait time" on the part of callers. But he said that any customer can make use of the number, which is posted on the company's Web site.

Customers have complained of PayPal locking them out of their accounts and of their inability to reach anyone to resolve the problems or to provide an explanation about what's going on. And some users said that even when they repeatedly faxed documentation, they still couldn't get their accounts unlocked to withdraw their funds.

Founded in 1999, PayPal took on a market in which others feared to tread and made it simple for small-time traders to process their transactions via e-mail. In return, PayPal scoops a fee of 1.5% to 3% for each transaction, far below the 7% that credit card companies would charge for online merchant accounts. The company has grown from 10,000 members in 2000 to 15 million members who currently use its service to perform about 200,000 transactions worth a total of more than $10 million per day.

Because PayPal has taken on this risky market, the company's "whole model is based on fraud protection," said Avivah Litan, research director for Stamford, Conn.-based Gartner Inc.'s financial services group.

PayPal's homegrown antifraud system looks for patterns of suspicious behavior. The system, which was developed after the antifraud team had caught two Russians laundering stolen credit cards through the PayPal network, has brought the fraud rate down to less than 0.5% of all transactions, according to Ken Miller, director of the company's fraud control unit.

Less fraud means fewer chargeback fees from disputed transactions, which is key to PayPal's becoming profitable.

But because of the customer backlash, analysts said, PayPal needs to also focus its energies on better customer service.

PayPal executives wouldn't respond to questions about how they intend to resolve the company's customer service problems. PayPal spokesman Vincent Sollitto instead defended the processes the company does have in place -- the hiring of 200 more customer service reps for its processing center in Omaha, e-mail notification, self-help links and its no-risk guarantee for transactions between PayPal members with addresses verified by PayPal.

Analysts and even disgruntled users said they want PayPal to get its customer service act together and succeed because they feel PayPal is the best payment choice in this nascent market.

"What's really happened with PayPal is they've grown a brand-new marketplace in which there are no rules. PayPal's had to create those rules every step along the way," said Jim Van Dyke, research director at Jupiter Media Metrix Inc. in New York.

"PayPal needs to keep their profitable customers happy, fight off fraud and serve their nonprofitable customers better so they can continue to expand their buying and selling network," Litan said. "PayPal's walking a very fine line and could fall off this tightrope if they make serious missteps."

Copyright © 2002 IDG Communications, Inc.

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