PayPal Pays Up: Lessons From the Company's Credit Controversy

By Casey C. Sullivan, Esq. on May 22, 2015 | Last updated on March 21, 2019

PayPal, the online payment company owned by Ebay, has agreed to pay $25 million to settle claims stemming from its "Bill Me Later" program. The Consumer Financial Protection Bureau had accused PayPal of refusing to honor the advertised terms of its online credit product, signing customers up for credit without their permission, and failing to properly manage its credit and billing system.

Thankfully, PayPal's failure can be your inspiration, as there's plenty to learn from the company's credit debacle.

Here's Some Free Credit You Don't Want

The CFPB had been investigating PayPal for two years, after it started its lending service, formerly called Bill Me Later, now called PayPal Credit. Under PayPal's "buy now, pay later" plan, customers are provided instant loans as they checkout of online marketplaces. PayPal covered your purchase of beanie babies on Ebay, for example, with a line of credit up to $250. The credit was generally interest free for a period, then jumped to an almost 20 percent interest rate and was subject to other fees.

Letting customers keep a tab wasn't what got PayPal in trouble, however. According to the CFPB, it signed customers up for the program without their knowledge or approval. Many customers only found out they were signed up after debt collectors came calling. Those that tried to cancel were sometimes prevented from doing so. That falls well under the prohibition of unfair, deceptive, or abusive trade practices, according to the CFPB.

Be Careful With Advertising and Billing

PayPal's program also made promises that it ended up not keeping, whether intentionally or because of technical errors. PayPal advertised that customers could pick how payments would be applied to their balance, but would use PayPal Credit when consumers did not want it. Customer service lines were hard to get through to, payment systems would crash, and consumers seeking additional information would be given none.

That meant that customers were hit with expensive deferred-interest fees solely because of the company's conduct. That's a big no-no.

Extra Scrutiny From Regulators

Companies that are involved in online money transfers, including PayPal, have been under increased scrutiny lately. New regulations, established under the Dodd-Frank financial regulation law, are facing companies that do more than a million dollars in money transfers a year. Under the new rules, companies have to disclose more information to customers about fees and transfer rates and are required to give users up to a 30 minutes to get a full refund.

Those who run afoul of the rules may end up with a hefty bill, as PayPal found out.

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