PayPal is everywhere — and it’s getting bigger. No longer just a point-of-sale system for online merchants, PayPal has become the de facto method of payment across industries. Friends can use PayPal to swap cash, freelancers can effortlessly collect fees from clients, and charities can even host online fundraisers to rake in digital donations. Plus, PayPal has branched into the real world, offering credit and debit cards that work just as well offline. Is PayPal the way of the future?

The truth is PayPal is an innovator when it comes to mobile money, but there are many issues with its products and services that prevent the company from becoming the shining example of banking’s future. Here are the good and bad aspects of PayPal — and what you should think about them.

Credit and Debit Cards

Since PayPal is nearly everywhere on the Web and is now split off from eBay, the company is attempting to expand its reach into physical stores with special credit and debit cards. Linked to your PayPal account (which is in turn linked to your real bank account) these cards give you all-over access to your digital funds. This could be an excellent opportunity for users who make the bulk of their income through PayPal transactions; instead of hassling with money transfers between PayPal and financial institutions, merchants, freelancers, businesses, and others can make payments straight from their PayPal accounts.

Currently, PayPal credit cards are created through established credit card companies, including Capital One and MasterCard, which means cardholders’ issues will likely be resolved through older and better organized customer service lines.

Payment Collection

PayPal tries to make it as easy as possible for customers and merchants to exchange money — and on the outside, it seems that the company succeeds. Generally, online payment collection through PayPal is as simple as registering an account (with email address and card information) and clicking “checkout.” Of course, PayPal will take its share of the merchant’s earnings — at least $.30 USD plus 2.9 percent of the total transaction — but the experience is free for customers, which means the system could hardly be any simpler from the payment side.

Unfortunately, as PayPal has grown, both merchants and customers have noticed a few issues that make PayPal sometimes frustrating to work with. For one, plenty of freelancers who rely on PayPal to bill clients have noticed that PayPal often holds money “under review” without citing adequate reasons. For another, PayPal in the past sometimes commandeered a percentage of businesses’ funds and placed it in an unrequested reserve fund, in case a customer tried to do a chargeback. The stories may represent PayPal flubs, but the outstanding number of such mistakes points to a fundamental lack of organization within the company.

Security and Legal Rights

PayPal has blurred its borders with true financial institutions so that many PayPal users feel just as comfortable using the online payment service as using real banks. Unfortunately, PayPal is not regulated like a bank, which means it is not forced to uphold any of the stringent security, customer service, or dispute resolution policies imposed on banks. Though PayPal holds millions of dollars’ worth of users’ money at any given time, the government has little say over how PayPal must manage those funds. Worse, none of those funds are insured by the Federal Deposit Insurance Corporation (better known as FDIC), which means any or all of that money could simply dissolve if PayPal ever goes under. As a result, PayPal users often feel cheated out of the treatment they usually expect when they do business other financial institutions.

The reason PayPal cannot claim the status of bank is because the FDIC ruled in 2002 that the company did not offer certain hallmark banking features, including accepting deposits and holding onto physical money, like cash or gold, and thus did not fit the standard definition of a bank. However, given the ways PayPal has spread since 2002, it might be time for the FDIC to update their decision.

PayPal is not a bank — even though it looks like one. The company has become a payment behemoth online, processing millions of transactions every day, and its new reach into the real world will only increase its power and influence. Yet, PayPal seems as yet to lack the infrastructure to handle such a significant load, putting users’ money at risk. If PayPal continues to expand in popularity and use, a lack of regulation may very well be banking’s future.

 

PayPal webpage image by richiemontalbo from Flickr’s Creative Commons