PayPal Credit Deception Exposes a Larger Problem

PayPal may have to pay up.

 The online payment company reportedly enrolled customers in its credit service without their knowledge and even hit some with fees when a missed payment was its own website’s fault, according to government accusations that signal the Obama administration expects Web businesses to gain more user consent.

The financial flap also highlights the potential for companies to take advantage of online consumers, who often swipe through or skip over user agreements and terms and conditions in their hurry to access a game or service. 

“We are so used to clicking through a notification online that we might not notice the details,” says Gil Luria, a managing director for research with WedBush Securities.


 The Consumer Financial Protection Bureau this week requested that PayPal refund $15 million to affected customers and pay $10 million in fines – a proposal that will be decided upon by a federal judge in Maryland.

A spokesman for PayPal, whose credit product was called Bill Me Later and is now known as PayPal Credit, said in a statement that it “takes consumer protection very seriously” and focuses on “ease of use.”

“We continually improve our products and enhance our communications to ensure a superior customer experience,” the spokesman said.

But that focus on easy access – even shy of deceptively signing customers up for a service – can open the door for problems when combined with the broader attention deficit of the online public.

And while brick-and-mortar shops like furniture retailers many times offer customers a similar chance to pay later for purchases, the real-world exchange is often sealed with a signed contract that serves as a reminder a payment is due.

“PayPal is going to have to improve their disclosures so that customers are completely aware that they are signing up for this credit product,” Luria says.

The Obama administration has cracked down on other companies for inadequately informing users or unfairly charging them. Facebook, for example, settled with the Federal Trade Commission in 2012 over charges it deceived users about the privacy of their information, and Google last year agreed to pay millions of dollars to consumers whose children made unauthorized app purchases. 

The FTC and the Federal Communications Commission last year also settled with AT&T Mobility for $105 million over accusations that it billed its customers for services they did not ask for, including subscriptions for ringtones and text messages providing horoscopes, flirting tips or celebrity gossip.

Of that settlement amount, $80 million was earmarked for customer refunds, and the FTC was tasked with managing their dispersal to customers who applied for payment on the agency’s website. The Consumer Financial Protection Bureau may choose a similar path for sharing refunds if the federal judge approves its proposal for PayPal.

PayPal not only signed up customers for the credit plan without their knowledge, but also mishandled billing disputes, lost payment checks and failed to post payments properly, according to the bureau’s director, Richard Cordray.

“Online shopping has become a way of life for many Americans and it’s important that they are treated fairly,” Cordray said. “The CFPB’s action should send a signal that consumers are protected whether they are opening their wallets or clicking online to make a purchase.”

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