Is PayPal Really Sorry?
David is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Note: This post originally contained incorrect revenue data. It has been corrected.
eBay's (NASDAQ: EBAY) PayPal payment processing system is impossible to avoid. If you're feeling nostalgic and want to pick up a Commodore 64 to relive your gloriously misspent 8-bit youth, you'll have to go through the service in order for your hard-earned money to change hands with the seller.
It's a useful service that allows customers to buy and sell without exposing their personal information such as their credit card numbers, but a quick Google search will reveal countless horror stories of PayPal's customer service. Being able to accept payments from anyone over the Web is irresistable to scammers, but PayPal seems to take a "freeze first and ask questions later" approach to dealing with anyone who appears to be making too much money. PayPal's dragnet has swept up a lot of legitimate sellers and nonprofits, many of them conference organizers.
PayPal delivered a lump of coal to the humor site Regretsy late last year, which had $20,000 in donations for a Christmas toy drive frozen, but relented after public outcry.
The latest problem to hit the Web was Andy McMillan, a publisher based in Belfast, Northern Ireland. He had over £40,000 (or over $60,000 U.S.) frozen in his PayPal account since May. Getting no traction by going through the company's customer service channels, he was forced to tweet about his problems.
McMillan's desperation apparently worked its way up to PayPal's management. McMillan got a personal email from PayPal president David Marcus, promising to release his funds. Marcus wrote in the message:
If anything, please know that I'm now going to use your story to radically change how we deal with holds, and communicating with our customers. I'm driving a lot of changes at PayPal (I took over 5 months ago), and I hope that over time we will earn your trust again. Not with words but with delightful products, and amazing service.
Marcus seems to have his work cut out for him. PayPal has been able to get away with its heavy-handed holding behavior for so long because of its virtual monopoly on online payments. It's an update of the old Lily Tomlin sketch: "We don't care. We don't have to. We're the online payment company."
Now that PayPal is expanding into mobile and brink-and-mortar payments, it will have to care now that it's entering a space where it's no longer a monopoly. It's partnering with Discover (NYSE: DFS) to offer the ability of customers to pay with their PayPal accounts at the register, while Discover handles the actual processing.
Other established players like Visa (NYSE: V) and MasterCard (NYSE: MA) are not only getting into the mobile payment game but also benefit from developing names that customers can trust, and more importantly, not freezing their accounts at the drop of a hat. Even stodgy old American Express (NYSE: AXP) has a mobile app.
And with annual profits of $4.9 billion, $3.6 billion, $2.2 billion and $1.9 billion for American Express, Visa, and Mastercard, respectively, compared with the $4.4 billion the company took in from its payments last year, eBay has a lot to learn about treating customers. The bigger companies simply have more resources and can crush eBay and PayPal if they don't shape up, even if it does compare favorably with credit card companies. On the other hand, Paypal had second quarter sales of $1.36 billion, up 26% percent year over year, so they might not have an incentive to change."
Marcus has inertia working against him. A big company just isn't going to be able to change direction quickly in 5 months the way he plans without giving out a lot of pink slips. As IsaacL, a commenter on Hacker News put it, when eBay acquired PayPal, "all the smart people left and the bozos and middle managers remained. You know the type of place and the type of people it attracts: it's the smooth-talking-but-not-that-bright individuals who do well, and any smart employees who perceive the real problems the company is in find themselves a part of an outcast fringe."
Now that the company has some real competition, it's going to have to care, or merchants will give PayPal's rivals a ringy-dingy instead.
Fool blogger David Delony has no positions in the stocks mentioned above. The Motley Fool owns shares of MasterCard and has the following options: short OCT 2012 $55.00 puts on American Express Company, short OCT 2012 $60.00 calls on American Express Company, and long OCT 2012 $65.00 calls on American Express Company. Motley Fool newsletter services recommend American Express Company, eBay, and Visa. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. If you have questions about this post or the Fool’s blog network, click here for information.
