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Sample Deal Review

I did a cursory (2 1/2 hours, only the 44 relevant pages of 61 total) deal review of the Paypal Merchant Agreement as of 2/20/2003, as it would effect Gropen Associates, Inc.

This is not a legal opinion, but my opinion of the agreement's impact on our business, with some remarks about its suitability for small publishers. Your requirements may be different than mine, leading to a different assessment of the agreement.

This document assumes that you have a copy of the proposed contract. It is intended to draw your attention to points that may make a difference to the client. Conclusions are signaled by bullets. And, now, without any further ado, . . .

Note that section 2.1 states that Paypal is allowed to invest your funds on deposit, if you do not do so through their Money Market fund, and that Paypal will keep that interest. Now your funds are going through some broker's account, too, and that's extra risk, even if the brokerage is Paypal's in-house one (which is not specified).

  • In general, bankruptcy of a financial agent leaves your funds on deposit with that agent at risk.

It continues to say that Paypal won't voluntarily make those funds available to its creditors in such a case. I doubt that any company would. But I also suspect that it may have no choice.

Lastly, it notes that you remain the owner of funds sent in payment, until the recipient accepts them.

  • This could mean tax complications, if the payment crosses a period end. Nothing to do about this, and it shouldn't have much impact.

Sections 2.3,2.4, and 5.1 make it clear that you have all the risk of accepting payments from credit cards - chargebacks, fraud, etc.

  • This is no great loss if you want to accept credit cards anyway, and if you follow basic anti-fraud precautions.

They will insulate themselves from this risk by seizing the money for the chargeback from your accounts (Paypal first, then your bank account). But so would your merchant account clearinghouse.

  • Net effect: nil, if you want to accept credit cards anyway.

Section 5.3 limits the size of your withdrawals. This could be an issue, especially if you can't get your limit set higher than the largest of your normal daily receipts.

  • If you are going to receive significant payments this way, and cannot withdraw them all immediately, you will need to set up the sweep arrangement discussed above.

Section 6.2 mentions a possible deal killer, if this will be your only avenue to accept credit card charges: no AmEx Corporate cards may be accepted through Paypal.

Also,Paypal has the option to charge $1.95 for membership, which is later refunded.

  • Depending on your customer base, I would think long and hard before making this your primary payment vehicle.
  • If you offer several alternatives, the lack of ability to accept American Express Corporate cards, and the possible fee charged to your customers, would not be problems. On the other hand, you have to consider your record-keeping burden in offering several payment alternatives.

Paypal's return reserves (section 10) are no worse than those of larger publishers, and with much the same sort of justification.

Section 16.4 asserts that the first filer gets to chose the method of dispute resolution, which could land you in court in Paypal's home county.

  • I'm not sure that this will likely work out any worse in the end, as disputants usually do file in their home counties, but it definitely gives all parties an incentive to be quick on the draw.

Paypal's privacy policy has one clause I dislike: they are allowed to send you emails marketing their own products.

  • When your customer signs up for Paypal to send you money, they will also receive a certain amount of what may feel like spam.

Section 2: The policy on closing accounts does some good things for you. It says that if buyers are chargeback maniacs, or if they constant circumvent Paypal's dispute resolution process, or try to get a bank generated chargeback and a refund from you, then their accounts will be closed.

It also says that an account logging in from a banned country will be closed.

  • Good for preventing the international scamsters we all know and love from robbing you blind, but bad if you're doing some exotic travel.

Paypal can now handle international members.

Paypal's Business account has a very good feature: it allows the primary user to set up secondary users with (potentially) limited access. It also hangs all the risk of embezzlement on the account owner.

  • I think this is very nice, and the additional risk is minimal. Anyone who has a bookkeeper or accountant needs to have control systems set up to catch such activity already.

Paypal Shops requires you to have a Business or Premier account, and a Money Market fund account.

  • Having more exposure for your site can't actually hurt.

I did not review the Seller Protection Policy, Buyer Complaint Policy, or the Money Back Guarantee, as they apply only to tangible goods, which I neither buy nor sell through Paypal. A cursory glance seemed to show that they were not unreasonable. For example: they need proof of delivery if the customer claims non-delivery, etc. I also ignored the Bill Pay Policy, as I prefer to manage my Accounts Payable differently. As for the ATM/Debit card policy, I decided that the limits were so small as to be of no interest to me, and read no further.

Altogether, I believe that the new User Agreement is acceptable for Gropen Associates, although we have chosen to process credit cards in a different way. The risks and problems inherent in the system are manageable, and the limitations can be sidestepped if you have alternate ways of accepting payments. This may not be true for all.

Please also note that this analysis is not assessing the charge structure, or comparing it to other alternatives.


Gropen Associates provides solutions to financial, accounting and management problems to publishers. Our services include inexpensive software packages and reasonably priced, individualized consulting.

The information above is presented to complement our services. If you have further questions or need more detail, please contact us.


  • Re-use of any material on this site requires written permission.
  • Opinions presented are based upon our assessment of best practices for the mythical "average publisher." Please use your own business judgment in applying this information.
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