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PayPal claims to have more than 16 million members worldwide, and promotes itself as "The way to send and receive money online." PayPal, Inc. completed an IPO in February 2002 and trades over-the-counter NASDAQ symbol PYPL. (By the way, the founders of PayPal have registered to sell 6 million of their shares -10% of the company - at the earliest legally allowable date: perhaps they know their Enron-like house-of-cards is about to fall?)
When I started offering Modemsite Premium Access subscriptions in February, 2002, I used PayPal as a payment processor. Some friends suggested that PayPal was an unethical shady concern that I should avoid. They pointed me to various websites detailing problems with PayPal like Paypalsucks.com, Paypalwarning.com, AboutPaypal.org, etc.
Despite the warnings and horror stories, I decided to use PayPal because it is one of few processors that facilitate small subscription payments of $1. I realized that I might have a problem with PayPal and access to money in my PayPal account, so at least once a week, I transferred any funds in my PayPal account to my real bank account.
Then, around June 8, 2002 it happened to me: I was on vacation out of the US, had accessed my e-mail and PayPal account in order to provide customer service, and found my PayPal account was "restricted" - I could no longer refund money to subscribers per my money-back guarantee, nor could I access the funds in my PayPal account.
On June 19, PayPal lifted the restriction, and I'm again accepting PayPal payments, although I'm in the process of implementing a replacement for PayPal that will provide a lower price option than iBill's $2.95 minimum.
While my first PayPal problem has been resolved, PayPal's policies and communications are poor. They regularly restrict accounts without notice. If your account is restricted, you will not be able to access any of your funds unless you successfully appeal the restriction. If the restriction is not lifted, you might get your money back after 6 months. But, while your account is restricted, people can still send money to your account. This money is in limbo - the person that sent it to you will expect their goods or services even though you can't access that money! You can't even refund it!
Normally, if you use a credit card to make a purchase, you have added protection against shady businesses through your credit card company's dispute process. However, with PayPal, credit card payments may not provide normal protection: PayPal is the "merchant" you are paying; they transfer the money to the person or business you specify, and PayPal will argue that they performed as promised even if you didn't receive the goods or services your payment was intended to purchase. If you continue to use PayPal, I recommend you keep your balance as close to zero as possible by regularly transferring funds received out of your PayPal account.