Beware of PayPal Personal Account Gift Payment Scam

7 Feb

Unnecessary Microsoft Comparison and History of PayPal Accounts

(I wrote this section, but it doesn’t necessarily have much to do with the topic at hand.  Skip down to the section titled “The Scam” if you’re in a time crunch.  I have also written a condensed version of this entire post at the end if you only want to read one paragraph about it.  It’s all “interesting” though).

PayPal has recently taken a page out of Microsoft’s marketing handbook by offering a smorgasbord of account types and varieties designed to fit the unique “needs” of various types of people.  The current trend is that one size no longer “fits all” and customers want a product designed specifically for their individual needs.  Remember when upgrading to the new Windows meant driving out to CompUSA and picking up a copy of ‘98?  Microsoft now offers an endless array of versions – Home, Premium, Business, Ultimate, Professional, Downloadable, Upgrade, Starter, N, Enterprise, 32bit, 64bit, and those are only a few.  PayPal has “progressed” in a similar vein over the years by offering a wider variety of products and options to expand their user base.

As recently as a couple of years ago, all PayPal users either had a “Personal” or “Premier” PayPal account.  The major difference between the two was that Personal account holders could not accept credit card payments.  Personal PayPal account holders did not have to pay fees on payments funded by an instant transfer between PayPal accounts or a payment funded directly from a bank account.   At one point, PayPal even allowed Personal account holders to accept a few credit card payments per year without having to “upgrade” their account.  Regular fees still had to be paid on those credit card payments, but it was still cheaper than a Premier account.   On the other hand, Premier account holders had to pay fees on every payment received, whether it was a credit card transaction or an instant transfer of funds between PayPal accounts.  This is precisely why PayPal is so wildly profitable.  The cost to transfer funds between two PayPal accounts is virtually zero, yet PayPal charges the same 2.9% + 30 cents per transaction as if every transaction is a credit card transaction.  This is also why PayPal has historically made it as difficult as possible for users to actually pay with their credit card.  Every time a user chooses to pay with a credit card it is a loss of revenue for the company.

Companies offer a range of products not because they like variety, but because it is a means to their ultimate goal – maximized profitability.  Microsoft and PayPal don’t really care if you’re happy per se.  They merely desire to extract the most money out of your wallet without offending you so much that you won’t return to spend more in the future.  By offering a medley of Windows editions with a huge pricing gap, Microsoft can charge $300 to a business that needs an expanded set of features while at the same time selling a dumbed-down version to your mom for $100.  People are more likely to spend money upgrading Windows if there is a version that they identify as both affordable and necessary.  Of course “more” is not “always better” and Microsoft ended up going a little overboard with their launch of Vista.  Instead of feeling taken care of, customers were confused by the endless array of options and editions.  PayPal hasn’t quite taken it that far, but the addition of Business and Student accounts is a sign of where the company is going in the future.

Personal Accounts Change

As first reported back in May, PayPal made significant changes to Personal PayPal accounts back in June of 2009.  A Personal account holder can no longer accept payments for “commercial transactions.”  Not even one.  Once a Personal account holder makes a sale for a good or service they must “upgrade” their account.  Personal account holders no longer enjoy the benefits of receiving unlimited payments funded by a bank account or instant funds transfer at no cost.

The Difference Between Personal and Commercial Payments

PayPal spells it out clearly in their user agreement:

4.2 Receiving Payments for Commercial Transactions and Personal Transactions. a. Fees depend on whether you are making a commercial transaction or a personal transaction. A commercial transaction involves buying and selling goods or services, and payments received when you send a “request money” using PayPal. A personal transaction involves sending money to and receiving money from friends and family without making a purchase. b. If you are selling goods or services, you may not ask the buyer to send you a personal payment for the purchase. If you do so, PayPal may remove your ability to accept personal payments.”

Difference in Fees

There is no fee for personal transactions as long as the source of funds is either the PayPal account or a bank account.  This is why personal payments have become increasingly popular as a payment method on forums and other selling platforms.  People do not like to pay money when they perceive there is no advantage.  If the funding source of a personal payment is a credit or debit card then the fee is the same as if the transaction was commercial, or 2.9% + 30 cents by default.  All commercial transactions are charged the same rate regardless of funding source.  There are additional fees for “cross-border” transactions for both personal and commercial payments as well.

The Scam

The scam is fairly simple.  The scammer convinces the victim to pay for an item via a PayPal gift or personal payment.  This can be set up in a variety of ways, many of which do not appear to be fraudulent at first glance.  For example, there are many online forums and communities where members can buy and sell items of mutual interest as well as Craigslist and others.  A scammer might list their item for sale and state that they require a gift payment so they do not have to pay the 2.9%+30 cent fee or to avoid the PayPal 21-Day Payment Hold Policy.  They might state that the price is $100 via a PayPal gift payment or $100 + 5% for a PayPal credit card payment and the buyer, wanting to save $5, may opt for the gift payment option.  The seller might say that they cannot accept credit card payments or any number of other excuses for why a gift payment is necessary.

When a buyer sends a gift payment for an item they think they are purchasing, there is no mention of any item or service being sold nor is there a shipping address attached to the transaction.  There is a space for a “personal message” of 300 characters, but even if the buyer inputs details of the transaction there is little that can be done.  This means that the “seller” is not obligated by PayPal to actually ship an item or provide the service that may or may not have been agreed upon outside of PayPal through email, text message, or whatever else.  There is nowhere for the seller to input tracking and nowhere for the buyer to dispute the transaction if a problem occurs.  As far as PayPal is concerned the transaction is exactly what it says it is – a gift.  This is stated in section 13.5 of PayPal’s User Agreement; PayPal clearly states, “You may not file a dispute for a Personal Payment.”

Another problem with using a gift payment to pay for an item is that the seller may not intend to scam at all, even though that may be what ends up happening.  All shipping services lose and damage parcels.  Many transactions also run into problems due to some kind of miscommunication or dispute over the quality of an item.  “Excellent” condition to me may be “below average” condition to you, for example.  Sellers often over exaggerate the condition of their item in order to sell it for more money, while at the same time minimizing the appearance of flaws.  PayPal does not cover “Item Not As Described” disputes for most transactions outside of eBay, even for commercial payments.  For commercial transactions, it is at least possible to dispute an item that is not received.

PayPal and eBay go out of their way to make PayPal feel safe for buyers, but the truth is that there is startlingly little protection for transactions outside of eBay.  Even though dispute resolution on both PayPal and eBay is skewed in buyers’ favor, it is still possible for sellers to manipulate the system and “win” disputes on items that were either not delivered or not as described.  PayPal offers no protection for buyers when there is a problem with the quality or condition of an item when the transaction occurs outside of eBay.  This is due to the fact that it would be impossible for PayPal to try to figure out the terms and details of any particular sale.  On eBay, there is just one page to take into consideration – the eBay listing.  Outside of eBay there could be any number of emails or details to try to sift through in order to make a “fair decision.”  If a buyer disputes the quality or condition of an item on a transaction outside of eBay it is almost guaranteed that they will soon receive an email from PayPal that their dispute has been decided in the seller’s favor, because PayPal dispute resolution does not consider the quality of an item, only whether or not something was received.  A gift payment multiplies this risk, because it will not be possible to dispute the delivery of the item with PayPal or file a credit card chargeback.

How to Protect Yourself

Never pay for an item or service online with a PayPal personal payment.  There is no way to dispute the payment directly with PayPal and it against the PayPal User Agreement.  PayPal states:

4.1 Receiving Personal Payments.


If you are selling goods or services, you may not ask the buyer to send you a Personal Payment for the purchase. If you do so, PayPal may remove your ability to accept Personal Payments.

If you are on a website or forum where items are being bought and sold with PayPal personal payments, you may want to advise the moderators and/or the community about the risks of using personal payments for purchases.  Respectable websites should not allow its users to ignore and break the User Agreement of a payment service such as PayPal and at the very least should include a disclaimer about the risks involved.

When using PayPal it is always best to pay with a credit card.  A credit card payment allows buyers to file a credit card chargeback directly with their credit card company or bank.  A buyer may file a credit card chargeback on a PayPal payment even when PayPal denies a buyer’s claim or on a commercial payment where it is not possible to dispute the payment directly with PayPal.  Almost all credit card chargebacks are decided in the buyer’s favor and the credit card company may even let you have access to the disputed funds before the chargeback is resolved.  Some debit cards also allow buyers to file chargebacks, but it is rarer.  Also, I am not aware of any credit card “gift card” that allows buyers to file chargebacks, so it is unlikely that you will be able to file a chargeback with a Simon Gift Card or an American Express gift card purchased from a grocery store or similar outlet.  When choosing a credit card, you may want to research which one has the best chargeback and fraud protection and use that card online.

What To Do If You Already Think You Have Been Scammed

If you think you have been scammed by a seller, it is usually beneficial to call PayPal at 1-888-221-1161.  PayPal’s dispute resolution services are generally automated online, but there are employees at PayPal customer service who can override the computer’s decisions and possibly do something for you.  You may also have luck contacting PayPal’s Executive Escalations Department.  Emailing won’t get you anywhere.  More and more, it seems like whoever calls PayPal and whines and complains with more vigor will win the dispute and it’s possible you will reach someone with a sympathetic ear.  Keep trying if you aren’t successful.  Make sure you make it clear that you have been a loyal PayPal customer, but your current situation makes you question whether you will use the service in the future.  This is the key point to make in most merchant disputes.  Keeping you as a customer is likely to be cheaper in the long run than obtaining a new one.   At the very least, you can let PayPal know that the seller is accepting personal payments for merchandise and they are more likely to shut the seller down.  If the item was purchased on a forum, make sure you let the community and/or forum administrators what happened.  It’s usually better to state facts rather than go into hysterics.  If you paid with a credit card then you should contact your bank and inquire about the chargeback process.  Most credit card chargebacks are successful.

Condensed

Never pay for an item with a PayPal personal/gift payment.  Sellers may use various tactics to convince you that paying with a gift payment is necessary or encouraged, including adding fees for credit card payments or claiming that they can only accept personal gift payments.  Not only is it against PayPal’s user agreement, but you will also not be able to dispute the payment with PayPal should you not receive the item.  For off-eBay transactions, PayPal will not allow you to escalate a claim for an item that is not as described.  For this reason, it is imperative that you pay with a credit card whenever possible.  Even if PayPal dispute resolution does not refund your payment, you may still file a credit card chargeback with your bank and you should be able to recover your payment using that method.  If you think you have already been scammed, make sure you call PayPal to explain your situation and ask to speak to as many people/supervisors as possible until you receive a satisfactory resolution.  The bottom line is that using PayPal online is always risky, but using a PayPal personal payment to purchase an item is by far the riskiest method.  Although the transaction may go as planned, it is not worth the risk of paying for an item that you will never receive to save a few dollars.

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