PayPal: Caught in a Dilemma

There've been a number of angry articles recently about PayPal censoring bloggers who use its donation system. In a nutshell, a handful of bloggers have received notices that they would be cut off from PayPal. PayPal has clearly gone too far down the road of trying to control who uses its service and for what purposes, but I do have some sympathy for them, since the first few steps on this path were not of their choosing.

First a little history: PayPal legally can't offer its payment services for certain types of businesses, particularly online gambling. Gambling used to be a significant business for PayPal (about 6% of revenue), but then they were forced to cut off all gambling customers. Congress, in its infinite wisdom, decided that if interstate gambling was to be illegal in the U.S., then banking services which support gambling would also be illegal. For better or for worse, this effectively makes every bank an extension of law enforcement when it comes to illegal gambling.

As a result, any bank which knowingly offers a credit card merchant account to a gambling organization can get in big trouble. PayPal, as a "payment service," ran afoul of this law, and was forced to start policing its customers to make sure they weren't running online casinos.

There are other services which financial institutions are prohibited from offering (for example, money laundering, sending money to terrorists, and large untraceable fund transfers), and as long as PayPal had to start policing their customers for gambling, they probably figured it was a good idea to make sure they weren't being used as a vehicle for other illegal transactions.

This is about where they probably should have stopped. Nobody suggests that PayPal should be breaking the law, though I suspect few understand just how restricted banks are in who they can deal with.

From Following the Law to Censorship

PayPal has a right to decide who they will and won't do business with (within limits--for example, they probably would not be permitted to discriminate on the basis of race or gender). As long as they were forced to purge their customers of gamblers, terrorists, and money launderers, they probably made the decision to avoid doing business with any person or company which might bring a taint of scandal. I'm sure there are PayPal executives whose nightmare is seeing a front-page "expose" about how PayPal is a major funding channel for some scandalous-but-not-illegal venture, such as online pornography or hosting beheading videos.

In other words, better to play it safe. This decision was probably made easier now that PayPal is owned by eBay, which has never been shy about enforcing its version of community values on its member base (and to be fair, eBay also has to be careful to avoid becoming a marketplace for illegal or morally distasteful products).

Gone Too Far

I can entirely understand PayPal's point of view (by the way, my company is a heavy user of PayPal's payment services, since they're far and away the most efficient way to make thousands of small online payments). There's a lot more business to be done in the "squeaky-clean" arena than in the shady backwaters, and very little upside to exposing oneself to potential scandal.

The problem is that PayPal is a de-facto monopoly. There are other payment services out there, but none with the size and reach of PayPal. Critically for my company, there are also no other services which offer the ability to crank out thousands of tiny payments to individuals for pennies each.

In other words, if you don't like PayPal's policies, you might not have the option of taking your business elsewhere.

Monopolies have, in my opinion, a special ethical responsibility to not abuse that position. That means they have to deal with everyone fairly, not leverage their monopoly into other monopolies, and not arbitrarily refuse to do business with certain customers. In this respect, PayPal is failing to live up to its ethical responsibility as a de-facto monopoly.

More Competition, Please

For this article, I've ignored many of the other problems at PayPal, particular their customer service (which sets new heights for the term "sucks"), and their very un-bank-like attitude towards their customers' money (such as their practice of completely freezing accounts when there's a dispute, cutting the customer off from his/her money). I would like nothing more than to see a credible competitor to PayPal, especially one with better service and more of an attitude of fiduciary responsibility. That might actually force PayPal to consider some of its business practices in terms of customer's ability to take their money elsewhere. Until then, we're stuck with what we've got.