Founded in 1998, PayPal offers a straightforward service for making and receiving payments over the internet. Its popularity among traders on internet auctions – both individuals and small businesses – persuaded eBay to pay $1.5 billion to buy the Mountain View, California-based company in July 2002. At the time, PayPal reaped 60% of its business from eBay users alone.
The system works by establishing PayPal as a trusted intermediary with which both payer and payee have an account. This ensures that sensitive information, such as credit card or bank account numbers, are not disclosed to anyone other than PayPal.
However, despite reassurances to individuals in PayPal's terms and conditions that they would enjoy. "the rights and privileges expected of a credit card transaction," in practice they did not, according to New York State Attorney General Eliot Spitzer.
Following an investigation into alleged misrepresentations in PayPal's User Agreement, Spitzer announced on Monday that he had arranged an agreement with the payment service requiring PayPal to better disclose the rights of account holders when an affiliated merchant fails to deliver merchandise.
"Protecting consumers' rights in on-line transactions is the best way to establish and maintain confidence in electronic commerce," Spitzer said. "As with any new industry, it is essential that consumers making e-payments receive full disclosure of their rights and liabilities."
Under the agreement, PayPal must clearly describe account holder rights in its User Agreement, including any conditions or limitations to those rights, and reversal or refund policies. The company will also pay New York State $150,000 in penalties and costs of investigation.