Don’t Use PayPal if You Can Use a Credit Card

I'd like to dissent from the view expressed at Concurring Opinions's A PayPal Christmas. Prof. Waldeck suggests that we'd all be better off if we used PayPal because “PayPal and other payment providers are intermediaries that can make both consumers and merchants better off” — primarily because “PayPal and similar services charge merchants lower processing fees and offer other advantages, such as not requiring retailers to reimburse them for fraudulent purchases.”

But in fact most consumers won't see the advantages — quite the contrary.

First, consider how Paypal gets its money from you. Unless you are a seller who puts money into Paypal from other consumers, odds are that you fund your Paypal account the way I do: with a linked credit card. It may be that Paypal gets charged a lower fee than a merchant account, but it can't be that much lower because it is still a “card not present” transaction, and those tend to be on the high end.

No, the real 'savings' to merchants is that by inserting Paypal into the payment chain, consumers waive their rights to cancel transactions if the good is not delivered or the service is performed improperly. That's because the credit card payment agreement is with Paypal, and it's not Paypal that has failed to perform. It's done exactly like you asked it, by sending money on to the merchant. And now the merchant is just a third party from the point of view of the credit card.

So, my advice is that if you are buying anything at all expensive, use your credit card. (Unless you are carrying a balance – in which case you want to pay that off first before you buy anything, even with Paypal!) Don't use your debit card, and certainly not a payment intermediary unless you trust that intermediary to have as generous chargeback terms as the credit cards.

It's certainly true that credit cards take a big bite out of merchants and that ultimately these charges are passed on to consumers. But unlike debit cards, credit cards give you a small float, even if you pay your bill in full every month (which you absolutely should). More importantly, they are in effect insuring the transaction. That's valuable now and especially valuable if you are buying something online, sight unseen, and trusting in delivery.

It may be that pressure from the paypals of the world will in time — lots of time — get credit card companies to cut their fees. But at best this is an N-person prisoner dilemma game; at worst it's a category mis-match because the service you are switching to is one that is significantly inferior to the one you are switching from. Paypal does have a “buyer protection policy” but this isn't mandated by law, and it is very significantly more limited than what your credit card will give you.

But don't take my word for it. Visit some of the Paypal fan sites, like PayPalsucks.com.

(Note: There are also “warning” sites aimed at merchants, e.g. About Paypal.org and Paypalwarning.com, but it's hard to tell if these are for real or just astroturf for a would-be competitor.)

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15 Responses to Don’t Use PayPal if You Can Use a Credit Card

  1. Sigmund Freud says:

    I think its hilarious you needed more than three sentences to debunk someone whose other notable works include:
    Using Male Circumcision to Understand How Social Norms Work as Multipliers, 72 U. Cin. L. Rev. 455 (2003).
    Social Norm Theory and Male Circumcision: Why Parents Circumcise, 3 Am. J. Bioethics, Issue 2 (2003).
    Encouraging a Market in Human Milk, 11 Colum. J. Gender & L. 361 (2002).

    Is peer review dead in legal circles?

  2. Ron Low says:

    ^^ by inserting Paypal into the payment chain, consumers waive their rights to cancel transactions if the good is not delivered or the service is performed improperly. That’s because the credit card payment agreement is with Paypal, and it’s not Paypal that has failed to perform. ^^

    – – – – –

    You’re mistaken.

    I’m a merchant who accepts PayPal and the balance is tipped WAY in favor of the buyer. One buyer claimed he was a victim of ID theft, so PayPal took his money from me and gave it back to him through his credit card account. They refused to provide me any contact info for the buyer (I had mailed to his PayPal registered address, but he said that wasn’t his address) or his history of changing his PayPal personal data, or anyone to talk to at his credit card company.

    If there are PayPalSucks web sites, I’m sure they’re not all buyers complaining. That said, I couldn’t collect $150k/year from strangers on several continents without them.

  3. Hugh7 says:

    What’s so hilarious about those papers, or so self-evidently non-peer-reviewed about them? Cutting healthy erogenous tissue off normal babies is an extraordinary practice, well worthy of anthropological, legal and ethical study (and legal and ethical condemnation). Its exactly analogous counterpart in the other sex is universally condemned and outlawed in the developed world. It has been tried and abandoned in the English-speaking world (except the US) without any outbreaks of the complaints it was claimed to cure or prevent. Clearly, something very different from the dispassionate practice of medicine is going on. And Sigmund, your more famous namesake had a lot to say about its murky underpinnings, that is at least worth considering.

  4. wcw says:

    Visa charges merchants ~3% on average.

    A debit to your checking account is much, much cheaper. Basically free, compared to 250+ bps.

    The economics are left as an exercise for the reader.

  5. Siggy says:

    Oh Hugh7, Hugh7…law students are collectively hundreds of millions of dollars in debt, generally dissatisfied with the marketability of their degrees, and increasingly alienated from faculty.

    Meanwhile, they’re saddled with a female professor that writes not one, but two “articles” about the male organ. Why not ear piercings? Nose rings? Tattoos? Were those “mutilations” less worthy?

    Madness like this is usually a precursor to backlash by students who are fed up with such nonsense. It can’t come soon enough.

    Regards,
    Siggy (a circumcised male, who drinks soy rather than breast milk), Esquire

  6. Mikes says:

    wcw, debit charges still have interchange fees – and none of the rates are transparent for consumers at all. And if they are not at the same rates as credit cards yet, I’m sure they soon will be. I’ve done some work with the MPC and the credit card companies make so much with these fees I can’t see how they’re looking at the difference in fees as anything but losing money. I saw that a website called Unfaircreditcardfees has a lot of good background on interchange and how much its costing us. I also saw recently at http://supermarketnews.com/technology_logistics/payment_relief/index.html that lawmakers might be trying to do something about this before too long which would be great.

  7. Mikes says:

    wcw, debit charges still have interchange fees – and none of the rates are transparent for consumers at all. And if they are not at the same rates as credit cards yet, I’m sure they soon will be. I’ve done some work with the MPC and the credit card companies make so much with these fees I can’t see how they’re looking at the difference in fees as anything but losing money. I saw that a website called Unfaircreditcardfees has a lot of good background on interchange and how much its costing us. I also saw recently at http://supermarketnews.com/technology_logistics/payment_relief/index.html that lawmakers might be trying to do something about this before too long which would be great.

  8. SEO says:

    “I’m a merchant who accepts PayPal and the balance is tipped WAY in favor of the buyer.”

    Yes very true, it gives buyers two avenues for chargebacks and unfortunately they can chargeback on good or services and there’s very little you can do about it. As you said, a simple claim of unauthorized use of either the credit card or PayPal account sees the funds reeling back to the buyer.

    I’m a seller who been burnt many many times using PayPal despite doing everything by the letter.

    Carly,

  9. One large advantage to using PayPal over the internet is the safety of your card information.

    When you give some small website your information, you really don’t know what they are doing with it. Some possible problems:
    1) If the company stores your information. Small companies are normally not very secure, computers can be stolen, employees may have access. Paypal is huge and has a lot to lose if they mishandle your information.
    2)Maybe the company is a sham and just collecting credit card info. You don’t know.

    If you know the company, then maybe giving them your credit card info is safe. Otherwise I’d rather make my payment straight to Paypal and let them pay the company.

    Much like credit card companies, Paypal usually favors the buyer not the seller. I hear a lot of Seller complaints, and very few buyer complaints (at least as long as it is a physical product)

  10. For the internet I tend to prefer Paypal. Much for the reasons stated by the above commentor. Credit card fraud is getting more and more common. I don’t like giving it to anyone I can’t see.

  11. KissingKate says:

    I can’t remember how many times already a buyer told paypal to return his payments and my seo company suffered from this crap. bot cc and paypal are too much on the buyer side. if you want business with paypal – get ready for some hard blows.

  12. Twins Design says:

    there is a lot of truth in it. credit cards are safer and more reliable than paypal as well as those other cheap alternatives. it’s a small price to pay when one of those medium-sized companies will crash. and after enron i really believe just about everything can happen.

  13. Personally i trust paypal, they have been around forever and never made me any problems in the last 5 years. i;m working with them in high value comissions and you can take my word on it…

  14. NoLongerAPaypalUser says:

    Well I was scammed for a simple $5 by some services on the internet and when I disputed the charge with Paypal they sided with the scammer. I have to say I was more than a little surprised and was glad to have learned my lesson for only $5 to never use Paypal again. I know for sure my credit card company would never have done that so will only buy from a vendor that accepts credit cards from here on out. Any ways I wouldn’t use Paypal for any transaction over a few bucks since there is decent chance you’ll get burned.

  15. indu_erandaka says:

    Dear readers,
    I did a AUS550.00 worth transaction through the ebay-paypal combination. But I didn’t receive my item. I opened a case at PayPal. After about 1 month period they said, the seller has proved the accuracy of the transaction and they can do nothing about that. Further they have asked me to take security precautions before buy an item. That was their answer. Finally I lost my money. Eventhough they are shouting about the “buyer’s protection policy”, they do nothing when something happend. Always they take the seller’s side because of their income. So you better do not risk your money by doing transactions through the PayPal.
    indu_erandaka

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