Paying online with
a person-to-person service
is uncharted territory: Beware the scammer!
A popular online payment method
can leave buyers defenseless against fraud, dozens of scam victims
Person-to-person online payment services, such
have become the method of choice for paying for items bought at
Web auctions. Thieves are taking advantage of the anonymity of the
"I'm not an expert," declares Sam
Johnson, who lost more than $100 when he used PayPal to pay for
hard drives that were never delivered. "But if you ask me,
they're acting like a bank and they should be held to the same rules
as a bank."
Quick-building a fail-safe
When you use a credit card to send money through these payment services,
the company charges your card, deposits the money into a "stored
value account" and transfers the money to the recipient's stored
When you get your credit card statement, it
shows a charge by the payment service -- not by the person you sent
money to. This makes a world of difference to credit card companies
because, as far as they're concerned, their involvement ends when
they transfer money to the payment service.
These payment services work well for people
who know and trust each other. Roommates can settle phone bills;
co-workers can split restaurant tabs.
"It's not there to guarantee that the two
parties are on the up and up," says Paul Jamieson, senior analyst
for banking and payment services with e-commerce authority Gomez.
"That's fairly clear in the terms and conditions of PayPal's
Users can leave money in their stored-value
account to trade back and forth. They can transfer it to a checking
account when they wish.
Like mailing paper money
Sometimes, in cases of fraud, you can
get a credit card company to go to bat for you. Usually
the payment service washes its hands of responsibility. This is
expressed in the terms and conditions that users are expected to
PayPal has a clear user agreements, and anyone
who takes time to read it understands the risks.
Find the fine print
PayPal's user agreement emphasizes that the stored-value account
is not a bank account and does not fall under banking regulations.
PayPal stresses that users are responsible for verifying one another's
identity and that the company is not responsible for "disputes
that arise between users relating to payments made or any other
transactions between individuals."
That's quite blunt and clear. So initially PayPal
was sympathetic, but not particularly helpful, when victims of the
"harddrives4sale" scam began complaining.
In June of 2000, someone using the Yahoo identity
"harddrives4sale" began selling seven sizes of hard drives
on Yahoo's auction service (online auctioneers almost never advertise
their true names). The seller had a spotless record, according to
buyers' feedback posted on the site.
Johnson bought eight hard drives and paid with
PayPal, but nothing arrived in the mail. He checked harddrives4sale's
feedback, which had plummeted as more than 100 would-be buyers began
complaining that they had sent money via PayPal but not received
Johnson contacted Yahoo (which never responded,
he says), PayPal (which immediately assigned an investigator and
a customer-service representative to victims of the scam), the FBI,
several news organizations and fellow victims. He has become the
hub of an informal e-mail network of harddrives4sale's victims,
and estimates that about 150 people were taken for around $10,000.
What if you shout help and
no one comes
Another victim of the harddrives4sale scam, Aleksey Maksimov of
Miami, complains that no one bothered to help.
"Imagine that in real life you will be
robbed at the mall, you try to yell, but mall's security will just
ignore you (like Yahoo did) and police will tell you that you need
to contact your robber by his fake address and/or mail and try to
get your money back (like PayPal did)," he says in an e-mail.
Johnson figures that the thief known as harddrives4sale
created several user IDs, both with Yahoo and with PayPal. The thief
used fake IDs to boost his reputation on Yahoo Auctions. And it
appears that the thief used fake IDs to create at least three PayPal
accounts, collecting the money with one, transferring the money
to another, transferring the money to yet another, then canceling
the middle account.
A suspiciously similar scam happened around
the same time on Yahoo Auctions, this time with someone using the
screen name "justgreatdeals" who purported to be selling
digital cameras and flash memory cards. The victims of that scam
call the bogus seller "justgreatsteals," says Alex Leopold,
a New Yorker who lost $104 on a pair of flash memory cards that
Refunds now, guarantees
PayPal spokesman Vince Sollitto says the company is taking steps
to prevent similar scams. He points out that some would-be buyers
were able to get refunds (known as "chargebacks") from
their credit card issuers.
"We're developing a broader chargeback
system to guarantee against fraud from both ends of the transaction,
buyer and seller," Sollitto says. "In the spirit of the
fact that we're moving toward that system, we're going to refund
the money to the people who were taken in this incident."
PayPal is now "confirming" its users' accounts
by testing whether they have been linked to bank accounts, which
require Social Security numbers and signature cards to open. If
you send money to a confirmed PayPal account, "you're 100 percent
protected against fraud," says Elon Musk, head of X.com, which owns
PayPal. "If there's a clear case of fraud then we will be happy
to make a refund."
Most of PayPal's competitors don't guarantee
chargebacks in case of fraud.
Raising the comfort
ProPay allows users to pay directly with a credit card so they
can ask their card issuer for a refund in case of fraud. The credit
card statement shows the name of the seller and not ProPay.
"It's a true credit card transaction, which
is protected through Visa and MasterCard and through the federal
government's regulations," says Brad Wilkes, ProPay's president
"For e-commerce to grow, people need to
have a high level of comfort," Wilkes says. Aiming a dagger
at his biggest competitor, he adds: "What's happened with PayPal
has not been helpful at all. It's been more of a friend to scammers
than to buyers and sellers."
Musk retorts that PayPal has helped to put crooks
"in the slammer."
"I'm sure they would disagree" with Wilkes,
he says, adding that X.com's security team consists of people recruited
from the FBI and detective agencies. "If I were a fraudster, I wouldn't
touch us with a 10-foot pole."
He says PayPal's chargeback rate is among the
lowest of any online merchant and is comparable to the lower rates
typically reported by offline retailers.
Back in the USSR
Meantime, some victims of the harddrives4sale
and justgreatdeals scams will have second thoughts before paying
online again. They include Maksimov, the Miami resident who compared
the scam to a theft at the mall where no one will help. Maksimov
moved to the United States from gangster-infested Russia a year
"I thought that law enforcement agencies
and customer support services here are more responsible and helpful
than in corrupted Russia," he says. "Now I can see that
it's not exactly that way and will be very cautious, as I was in
-- Updated: Feb. 19, 2003