PayPal Demonstrates What Happens to Former Tech Unicorns Which Get Lame

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Given the still rosy and uncritical esteem in which many tech companies such as PayPal are held, you’d be forgiven for thinking that, compared with the dotcom bust of the early 2000’s, This Time Really is Different.

But if you look closely enough, there are some serious reasons to believe that the free pass given to anything emanating from Silicon Valley or similar, on the basis that it is automatically immune from the principles of supply and demand, is misplaced.

PayPal may be a canary in the coal mine. Bloomberg reported it has recently found itself , ostensibly due to PayPal’s by long-term partner eBay – a decision which is heavy on the irony because , presumably as a stock valuation play and they speculated that eBay was going to drag down PayPal. But they forgot the importance of eBay as a captive customer and brand-builder. That was a decision which is coming back to haunt them now that eBay has figured out that PayPal is not indispensable.

Increasing user fees is most certainly an issue. But it’s a little more complicated than that.

What the Bloomberg coverage missed – which we’ll fill in here – are the reasons why new so-called disruptive entrants to established markets like PayPal are having to risk alienating their customer base by increasing their charges in the first place.

A great many Internet 2.0 companies and almost all so-called disruptive Fintech have a business model which depends pretty much entirely on regulatory arbitrage or outright evasion. Plus screwing over your customers through poor service.

Taking each of these in turn, staying one step ahead of the law only works for so long. Eventually, even the slowest of regulatory enforcement catches up with you and then you don’t have a business, or at least not one which could get away with acting in quite such a cavalier fashion. When PayPal started out it got a hefty dose of largesse, but now it needs to comply with Know Your Customer/ wire transfer fraud (US) and Payment Services Directive (EU) regulation, it no longer wants many of its customers — or its customers won’t or can’t use it because it no longer offers a method of evading the kind of scrutiny on payments which traditional operators in the ’ market must adhere to.

And after a while either your customer base grows weary of cutting you some slack in terms of how poorly you serve your customers just because you’re new, novel or offer some minor incremental convenience or, when complaints reach a critical mass, regulators respond more formally and insist you shape up in terms of how you handle customer needs.

It is unlikely to be coincidental that PayPal is forcing through fee increases shortly after CFPB enforcement action in the and Financial Ombudsman investigations in . While – as Yves noted earlier this week in respect of serial customer and regulatory violator Wells Fargo – fines and customer redress for misconduct are pitifully small, where a perpetrator has to improve their business processes and allocate resources to improve customer service, these inevitably increase the cost base for PayPal.

What is easily overlooked when considering PayPal’s operating model is that payments is a commodity business. It’s not like they have discovered some magical elixir of cost avoidance.

PayPal has the same cost drivers as any payment and merchant services provider. The main variable cost when you act as a retail payment processor is handing the unavoidable customer queries and resolving disputes. These are often complex and not amenable to light touch resolution. Disputed transactions, payment routing errors, fraud, theft, counterfeiting and misrepresentation of goods or a myriad of similar reasons can generate long-running, documentation-heavy cases which must be resolved because they a mean that either the sender or recipient of a payment is out of pocket for the transaction amount. A payment processor cannot simply fob off the sender or the recipient to an FAQs page or a chatbot.

Once PayPal started having to pay the real costs of properly serving its user base, enforced by regulators who’d got wise to its previous backsliding, that eroded margins. As it couldn’t get something (skilled, experienced customer service staff who know how to investigate and resolve complex disputes) for nothing, PayPal had no choice but to increase its fees. But then users of its services will start to look around for either traditional payment processors who have enough maturity to have figured out – or been forced through previous regulatory action to charge – what they really need to charge to provide the services they are offering. Or they can turn to a new crop of Fintech start-ups ready to play a fresh game of regulatory catch-me-if-you-can.

And if only it was just your customers making demands to not be treated shabbily or regulators rousing themselves from their slumber. It is the card issuers and card schemes, such as Mastercard and Visa, that PayPal really needs to be worried about.

Within the industry, which outsiders probably won’t be aware of, attempts by the likes of PayPal to see-saw the cost base back to other participants in the payments system haven’t gone unnoticed and are now facing serious and concerted pushback. The Visa card scheme is in the vanguard of this initiative, which it refers to as Visa Claims Resolution (VCR). Originally slated for introduction in October 2017 but due to what Visa “response to client back, and to help ensure the readiness of stakeholders around the world” (translation: an almighty bun fight as industry players engage in a Godzilla-vs.-Mothra battle) it has now been postponed. But only until April this year – Visa are not going to back down on this one and other card schemes such as Mastercard are likely to follow suit.

Without getting overly technical, prior to VCR, a payment processor like PayPal could, in the event of a disputed transaction try, usually successfully, to portray itself as some sort of innocent bystander unconnected with either the cardholder or the merchant. In effect, it could say that while it processed the payment from the buyer of goods or services to the seller and used the buyer’s card to take the payment, the transaction was a matter purely between the buyer and the seller – and was nothing to do with PayPal. That gave PayPal the ability to take a transaction fee for doing very little in return – the Holy Grail of Fintech everywhere.

This convenient evasion was especially useful when processing payments for eBay where some sellers and not a few buyers are, how shall we say, not exactly always paragons of virtue.

Initiatives like Visa Claims Resolution call time on that. As Forbes it:

… disputes that pass through the [Visa Claims Resolution] allocation workflow’s automated checks without incident are considered to be the merchant’s liability. Merchants and acquirers may only respond under certain conditions, including instances where compelling evidence is present, data was invalid or a credit has been issued.

It is important to note that in a PayPal transaction, PayPal becomes the merchant. This means that it is PayPal which is on the hook for any chargebacks. PayPal can try to get itself reimbursed from the eBay merchant but this is a risk as there’s no guarantee at all you can get blood out of those particular turnips. And as we’ve noted earlier, there is a cost in investigating and managing the claims process for PayPal even if it can rebuff the dispute. Of course, it can only resist the dispute if the eBay merchant provides it with the “compelling evidence” demanded by Visa.

No wonder PayPal wants higher fees.

The only mystery remaining at this point is why Adyen is willing to jump into bed with eBay after it gave PayPal the cold shoulder. Perhaps they think they can replicate PayPal’s leverage of a large user base obtained by an association with eBay and are worrying about the profitability later. Perhaps they are smart enough to tempt eBay in with an initial low fee structure then try to boil the frog once they are more firmly embedded. Another possibility is that they will be far more choosy about who they give merchant accounts on the eBay seller side to and are quicker to revoke payment facilities on the buyer side once they get the first whiff of trouble from either of these parties. That would be the sensible thing to do but would hardly please eBay who just cares about sales going through its platform and wouldn’t welcome buyers or sellers – or both – being excluded by Adyen.

As Lambert would say if he were here, pass the popcorn.

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29 comments

  1. paul

    A great many Internet 2.0 companies and almost all so-called disruptive Fintech have a business model which depends pretty much entirely on regulatory arbitrage or outright evasion. Plus screwing over your customers through poor service.

    They were quite happy to present themselves as the ‘paypal mafia’ which was refreshingly,if inadvertently, revealing.

    I’ve always found paypal charges/conversions to be pretty horrific. I’m not sure if I will tolerate a greater vigorish.

    1. Clive

      In some ways, PayPal is something of a victim of its own rapidly acquired but ultimately low quality customer base (not, of course, that description would include your good self, paul!) which generates proportionately higher servicing costs per transaction. Yves often cites the business rule that you need to churn 10% (I think that’s the figure) of your customer base each year because you inevitably end up with a group which costs you too much in serving them compared to the value their custom brings.

      PayPal needed to do that but didn’t do it at all or if it did do it, it didn’t do it enough. I’ll dish up another serving of irony, PayPal is in a low income trap — it needs to improve the quality of its user base (both senders and recipients of payments) which it can do either by price increases or higher eligibility thresholds in terms of user behaviour and merchant standards. But if it increases prices, users will look around seriously for low cost alternatives. And if it dissuades some of its users which are high maintenance, it’ll annoy channel subscribers like eBay who just want as many bums on seats as they can get.

      Going out on a limb, Apple is in a similar bind although a bit more upscale than PayPal/eBay — it needs to escape creeping commoditisation but, as it has found with the iPhone X, way too many people get serious sticker shock at the prospect of coughing up £1000 for a bloody phone.

      1. vlade

        “coughing up £1000 for a bloody phone”

        Especially when the user experience is crapified. Both against memories and objectively.

      2. paul

        PayPal is something of a victim of its own rapidly acquired but ultimately low quality customer base

        I fear you have me in a nutshell

      3. Altandmain

        In the case of Apple, their issue is that they make phones with planned obsolescence in mind.

        The batteries are not replaceable, they slow down the phone over time, and they also have software updates that in the words of a lawsuit plaintiff turned their phone into an “iBrick”.

        1. visitor

          The batteries are not replaceable

          Actually they are replaceable — for a price, by Apple. What they are not is swappable. This has unfortunately become usual amongst smartphones of every brand.

          1. Conrad

            Apparently it’s supposed to be a function of the cult of thinness. User-swappable batteries require a housing and socket that is ever so slightly thicker than a wired in battery, so in the quest to shave another fraction of a millimeter of each generation’s thickness the swappable batteries had to go.

            The fact this made planned obsolesce that much easier to implement is just a happy side-effect for the phone manufacturers.

    2. DHG

      I refused to do business with them after they cost me thousands on bogus buyer claims so I just retired, this was 6 years ago. I will enjoy watching paypal get everything it has coming to it.

  2. The Rev Kev

    I have a question here and that is how generational turnover has an effect here. This one I will have to explain a bit using Uber as an example. In its early days Uber was quite happy to play the pirate under the leadership of Travis Kalanick and his cohorts. You could see them break law after law and being in your face about the whole thing. Basically they just ignored inconvenient laws.
    You would wonder why a bunch of cops could not just go in and frog-march the whole lot out but of course that never happened. It was like that had high-powered officials acting as enablers to them. Maybe even having their backs. Somebody had to be giving them cover.
    Well of course Travis Kalanick and his crew have been off-loaded and I would say that their enablers have also moved on. If this is so, then could this not be a partial explanation to why these tech companies have so much trouble as they try to evolve into mature businesses. Because the people that had this relationship are no longer in the picture? A bit of a stretch, maybe, but I sometimes wonder about this aspect.

    1. Clive Post author

      Oh, absolutely. A buccaneering take-no-prisoners mentality is a big asset for climbing the ladder — especially in tech startups which have a culture all of their own. Bro Finance, Frat Boy Tech and similar cliches are cliches because there is more than a grain of truth in them. Unfortunately the skills you need clawing your way up the ladder lead you to ditch, so you aren’t weighed down by inconveniences like morality and compassion, the things you require if you get to the top of it.

      I had the misfortune to attend a seminar a little while ago on Fintech where one presenter sported gelled spikey hair, several earrings and sauntered in wearing jeans and a t-shirt brandishing a skateboard. His presentation was peppered with four letter words and was full of aggressive “your customers had just better get used to this kind of abuse” rhetoric.

      He was given a presentation slot because he’s become the doyenne of the c-suite. I pondered on the reason for this and concluded it was he made them feel like they were “in touch” with “da kidz” and in no way resembled the comfy complacent middle aged credentialed classes they were. As a reminder of their young, thrusting histories of corporate film flam peddling scammers, his USP was in giving the corporate apparatchiks the illusion that, vicariously, they could recapture lost youth. As the guy was pushing back 35 so hard his hands were hurting, it was all the more incongruous because he certainly hadn’t found it.

      But yes, going back to your point, they’ve all got to pretend like they’re Travis Kalanick right now. I’m old enough to remember when they had to channel Steve Jobs to show they had their fingers on the pulse of the corporate zeitgeist. Sigh. I knew I never should have listened to my parents and gone to work for a bank and had become a train driver like I always wanted to be.

      1. IsotopeC14

        I have a friend who is a train driver.

        He says it is the worst thing you could ever do with your life. Yes it pays very well. You get stuck in hole-in-the-wall hotels in the middle of nowhere with bedbugs. He carries around disposable pillowcases and clothing just in case.

        He says there is no safety, no way to access the internet sometimes, at least with a proper laptop, and the hours are soul-crushing. Many are long shifts and weird hours. You exist “on call” on far too many days that prevent you from enjoying any potential off-time.

        Now if you are talking about driving Lionel trains, that’s a different story.

        1. Norb

          The path to a well lived life, according to Joseph Campbell, was to “follow your bliss”. That seems like common sense advice in any properly functioning society. To find and follow your hearts desire. That is what opportunity is, should, be about.

          The soul crushing system that is our modern economy leads to what you are talking about. It defines crapification. Working for the love and skill of doing something takes second place to amassing vast monetary fortunes.

          Maybe instead of doubling, and tripping down on their predatory and destructive practices, the elite are finally feeling the heat and will begin to back off somewhat on their parasitic behaviors.

          Infrastructure includes human capital. A dispirited, carless workforce doesn’t bode well for the heath of a nation.

          I for one would love to have Clive as an engineer running a train I was traveling on.

          1. a different chris

            > the elite are finally feeling the heat

            But they just double down every time, don’t they? They know what they know, it’s all they know.

          2. ambrit

            Much as I like Joseph Campbell, I don’t remember reading anywhere about his days of hunger and homelessness. /s
            Gautama the Buddha started out as a prince for Voids’ sake!
            To paraphrase one of your statements: “Working for the love and skill of doing something takes second place to (simple physical survival.)”
            No matter how often it is pointed out, it bears repeating; the the best way to ‘manage’ parasites is to exterminate them.
            The one unpleasant thing about the struggle for peace and justice is that it is eternal and unending. Entropy.

        2. pretzelattack

          that’s a good idea about the disposable clothing and pillowcases, i like to drive fair distances, which sometimes entalis stopping in small towns, but worry about the possibility of bedbugs in roadside hotels/motels.

          1. California Bob

            I’m not a ‘bed bug’ expert–who is?–but I’ve heard of more bug issues with big, ‘name brand’ lodging chains as with small independents in out-of-the-way places. Maybe it’s because the big names get more attention overall, but I don’t think the bugs care one way or another. I too, drive long distances and stay in small towns; so far, I’ve been lucky.

    2. PKMKII

      Time stops for no man, and no business. Which in some sectors, is not a problem, and in some is a (a restaurant going for rustic, old-school charm only gains if it’s got a decades-old year of inception). The Silicon Valley tech scene, does not. If your method of getting the regulatory authorities to look the other way is a giant appeal to novelty, that the threat to innovation is just not worth the social protection, then you need be able to bank on that start-up disruptor status. Once you’ve been around a couple decades like PayPal, if you haven’t managed to become a Goliath by that point or work yourself into a narrow but profitable niche, you can’t pull that routine anymore.

  3. Self Affine

    NIce article.

    Paypal also has some other issues with their approach. For example: they are the owners of Venmo which is mobile application that allows one to transfer money directly to someone else’s account. The problem is that it is very insecure and very scam-able due to the user agreement which states

    ““Business, commercial, or merchant transactions may not be conducted using personal accounts.” which usually isn’t read or understood. This leaves people open to all kinds of manipulation via the usual US payment methods like ACH (like reversing payments).

    I also don’t see much of a future for PayPal as the competition increases. Besides the merchant/intermediary issue, the high fees and poor customer service; they also have very spotty security approach.

    1. Scott

      I looked at using Venmo, but passed when they wanted to charge me to use a credit card instead of a debit card. Given that one of the main reason that I use a credit card is because of limits to my liability, that was a non-starter.

    2. False Solace

      Venmo? My sister urged me to sign up, so I read over the scant information on their website and found this:

      “Venmo does not offer buyer or seller protection.” (from their “” page)

      I noped on out of there. Told my sister I still accept checks.

  4. Harrold

    While banks are not the most ethical companies by a long shot, at least when I have an issue with my Visa card I can find someone on the phone to talk to.

    I stopped using my paypal account about 10 years ago after I was locked out of my account. I was unable to talk to anyone at paypal to resolve this. After 5 years they remitted my money to my state’s unclaimed funds department, which sent me a check for the amount ( sans interest of course ).

    1. Clive

      If I had a £1 for every time I’d heard that story, or a variation of it, well, I’d have several hundred pounds. Little consolation but my Dad had a similar experience. He simply could not find anyone to talk to at PayPal. Eventually he found a number in the Netherlands (PayPal’s base of operations here in the EU market region) and at least found out what had happened.

      Not that they could then actually fix it. He was about to give up (I think the sum involved was about $50 for some eBay purchase or other) but I knew who to get involved in terms of the U.K. regulatory body and what to tell them to get them to make and enforcement judgment. Many, many others simply write it off to (bad) experience.

      1. ChrisPacific

        I had a similar experience. Someone registered a PayPal account under my e-mail address somehow, I’m not sure how (possibly my account was compromised for a while – I’m also not sure what ). I spent a while trying to get it released, and was able to do things like lock whoever it was out of their account (since all the e-mail confirmations were going to me). But it’s an anonymous e-mail account. How can I prove to PayPal that I, not their account holder, am the true owner? Or prove that I’m not a hacker who has gained control of it via illegitimate means? PayPal can’t confirm my identity because they have no idea who I am. I believe the account has now been deactivated as a result of my efforts (at least I no longer receive e-mails about it) but I still can’t add the e-mail address to my own account.

        This is a good example of why I hate PayPal. It’s absolutely a last resort for me. Security-wise it’s designed so that you can transmit funds to an e-mail address, which means that transaction as a whole is no more secure than the e-mail accounts in question. It’s the online equivalent of stuffing a bunch of money in an envelope and posting it. If there is any kind of federated payment system available, using credit cards for example, then I will always choose it in preference, even if it means higher fees.

  5. Tim D

    It is unfortunate that more consumers are not aware or don’t take advantage of their ability to dispute charges on credit cards as it is their most valuable feature. For the most part, the credit card companies are going to put the onus on the merchant to prove that the charge is valid. If you ever have a legit dispute with a merchant who won’t be fair, just tell them you are going to dispute the transaction on your credit card. (and make sure you use a credit card not cash or a debit card to pay).

    More merchants and service providers are trying to get you to use Venmo, Paypal etc. You lose significant rights and negotiation power when you do. I refuse to use any of these services for this reason because the charges flow thru to your credit card indirectly and you lose your right to dispute the charge with no counter-benefit as far as I can see.

    1. cnchal

      You are making an unwarranted assumption, that every customer is an honest customer. Disputing a transaction or claiming the charge is unknown after receiving the goods is as old as the hills.

      Many merchants are too small to take credit cards directly on their website, so that part is handed off to PayPal.

      1. Tim D

        No idea what you are talking about unless you are saying that honest consumers (the vast majority) should lose consumer rights because a few people abuse them. If so, there is a place for you in the new Trump CFPB. How many online sellers do you think are out there scamming consumers?

        1. cnchal

          How many online sellers do you think are out there scamming consumers?

          Since there are many more consumers than online sellers, and it’s trivially easy to dispute a credit card charge, the answer is lots more consumers scam online sellers than the other way around. PayPal always finds for the consumer in a dispute, unless it’s absurd like a year elapsed from delivery to “realizing” they didn’t recognize the charge.

          For a small merchant to take credit cards directly is thousands to get set up and maintain, which is another bankster scam all on it’s own, and then one has a database worth attempting to hack. Refusing to purchase from a capitalist singularity because PayPal is the payment processor is cutting off your nose to spite your face.

  6. Tyronius

    This is another data point in the rising flood of corrupt business practices and operations now pervasive in our country. When EVERYONE is a scammer the system breaks down because the basic environment of trust necessary for any transaction to happen is lost.

    When wealthy individuals publicly flout the law and don’t pay their taxes, when large and famous companies like Uber and PayPal unashamedly build their business models on the circumvention of applicable regulations and the highest echelons of law enforcement and political power are on the take, the inevitable result can’t be anything but a gigantic crash of the entire edifice.

    The only question I have left is how long it will take to happen… THIS time.

  7. Ep3

    Just quickly scanning comments, I have to bring up Elon. And what I want to bring up is whether he will treat spaceX and Tesla like PayPal. I have read a few things that some experts already see him doing this with spaceX. What I am referring to is his long term plans. And it is expected he will attempt to sell (off-load) spaceX by 2030.
    I don’t see him as this “father of new tech”. He’s a businessman (right down to his alpha male statements). I see him doing to these companies what he did to paypal. He, and his buddies, develope the company then flip it to the biggest buyer (with an inflated price based upon brand name). He’s not looking to go to Mars. I bet he doesn’t give a crap about space at all. He just sees it as a chance to build up a brand name that he can then flip for big profits and dump any problems in someone else’s lap (i.e. the US govt). And with the car company, all he’s trying to do is intimidate the major car manufacturers into having some minor fears of him threatening sales so that they buy him out at his asking price. The real tech they care about is his manufacturing process. His assembly line is supposed to be completely automated, which means fewer union auto workers building cars. That’s why he’s holding up car sales for his new car; they are trying to get that line to work.
    So yeah, build a company, flip it (and all it’s problems) to someone else, then when those problems come crashing down, his personal brand name is not ruined and he keeps his riches.

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