Warning! Don’t use PayPal to pay on a credit card

FairTrial

Pertinax wrote: »

Does being a Payment Service Provider mean you can offer escrow services ?

Other way round.

Escrow services are conditional money remitters (that's what escrow functionally is), and as such it has been confirmed in law they have to register with the FCA as Payment Service Providers (or be authorised, which is a higher level than registration), and register with HMRC as Money Service Businesses.

stork_2

There's a lot of discussion here which is interesting but misses the point.


GraceCourt (#90) points out that PayPal are based in Luxembourg and that this gets in the way of the existence or enforcement of s.75 rights. That's not true, as a s.75 claim is brought by the consumer (debtor) against the creditor (card issuer). The card issuer then have the option of bringing in the supplier as a third party. PayPal have no part in the proceedings via s.75. So jurisdiction is a non-issue. Even if the supplier is outside the jurisdiction, the consumer can still sue the card issuer in the relevant UK jurisdiction, although if the supply contract is governed by foreign law they may then have to adduce expert evidence that there is a breach of contract or misrepresentation under that law.


There is then a lot of musing about what PayPal are and what agreements exist, so we hear about things like 'commercial entity agreements', 'merchant acquirers', agency and so on. None of that is relevant.


In fact, the only real issue here is whether there are 'arrangements' in place between the creditor and supplier as defined in the Consumer Credit Act. The transaction we're interested in is the one where there is a breach of contract, so that's the transaction between the consumer and the supplier of goods (or services). Note that it also doesn't matter whether there happens to be a transaction or contract between the consumer and PayPal in the context of the main transaction.


The FOS told Martin:
"Although PayPal appears as the merchant on the cardholder's statement, it cannot be seen as the supplier in a debtor-creditor-supplier agreement under Section 75 because it merely acts as the payment intermediary by transferring the money from the buyer's account to the seller's account. Therefore it breaks that chain to be considered under Section 75."


The first part of that is correct, and PayPal is not the supplier under a d-c-s agreement. However, it does not follow that the chain is broken. In fact by acknowledging that PayPal is somehow an intermediary and that they effect the transfer of funds, the FOS are acknowledging that there is an unbroken chain of arrangements. Their logic is simply defective.

Ask yourself for a moment what it is that enables you to pay one supplier via PayPal, using your credit card, but not a different supplier. What is it that makes that 'PayPal' button appear on their auction, website and so on? The inescapable conclusion is that the supplier must have some sort of arrangement with PayPal. It has also never been in doubt that PayPal have an arrangement with their own bank, who has an arrangement with the card network, who has an arrangement with the creditor. An unbroken chain of arrangements (which will in fact be contracts although they don't have to be according to the House of Lords case).


GraceCourt (#96) says:

The appeal decision is very clear in pointing out that the cases under consideration were what they referred to as three-party and four-party relationships relating to the credit card transaction. It specifically limits the scope of the judgement - which, as you correctly point out, is indeed binding on lower Courts in England and Wales (but, of course, not to any Court in Scotland), to (1) merchant acquirers and (2) sellers/suppliers abroad.

This analysis is wrong. The appeal case did deal with 4-party relationships involving a merchant acquirer and found that these relationships amounted to relevant 'arrangements'. It did not limit its scope to such arrangements. It did not say that the only way to ensure that the arrangements remained intact would be to insert just one extra party known as a 'merchant acquirer' into the relationship. In fact it specifically and deliberately left open the scope of what counts as 'arrangements'.


Paragraph 63 of the Court of Appeal judgments says:
"The contrary argument ... was that the word "arrangements" was carefully chosen for its breadth. There is nothing, they submitted, in section 12 to indicate that it contemplates only arrangements made directly between the creditor and the supplier and it is impossible to describe the networks to which most credit card issuers now belong, and whose cards most suppliers now accept, as involving anything other than a set of arrangements which enable the cardholder to present his card as payment for goods or services and in so doing to obtain credit from the card issuer."


And paragraph 64 says:
"The word "arrangements" is capable of carrying a broad meaning and in a statute which elsewhere displays a high degree of precision in its choice of language must have been deliberately chosen by Parliament with a view to embracing a wide range of different commercial structures having substantially the same effect. ... Moreover, we find it difficult to accept that Parliament would have been willing to allow some consumers to be disadvantaged by the existence of indirect arrangements when other consumers were protected because the relevant arrangements were direct."


This does not explicitly say that, where a company like PayPal is part of the relationship, s.75 applies. But it does more than open that possibility, it makes it very difficult to argue that the inclusion of a company like PayPal in the relationship defeats s.75. What the Court was really saying was that, if you can pay for something by credit card, then there must be some sort of arrangements in place for that to happen, and it doesn't really matter what those arrangements are or how many people they involve.

Even if PayPal operated by accepting the money into their account and then having an employee withdraw that cash from an ATM and deliver it in person to the supplier, so long as this is done under a contract or agreement with the supplier (and no sane supplier would agree to such a daft idea without at least a contract to back it up), it would still be covered by s.75 because there would still be an arrangement in place. Only if PayPal were saying that you could pay anyone you want by this method, even if they don't have and refuse to make an agreement with PayPal, could you break the chain.


If the banks really thought that the FOS were right on this, they would by now have introduced a PayPal-type company into every set of arrangements for paying with a credit card, and s.75 would be redundant.



GraceCourt (#107) tries again to hang an argument on the same misconception. It doesn't matter whether PayPal is a merchant acquirer, an eMoney provider, a payment services provider or anything else.


Cashisking (#110) says that the MSE advice is 100% in relation to the FOS. I wouldn't go that far, as it is misleading. It says that you have no rights, yet that is a question of law (a question on which the case law indicates very strongly that you do have rights). What is right is that if you go to the FOS they will treat you as if you had no rights.


So MSE is doing consumers a disservice by swallowing the faulty logic of the FOS and not challenging it. And it will take a challenge from a true consumer champion, whether MSE, the Consumers' Association or someone else, to resolve this issue, as banks will no doubt settle individual claims in Court rather than risk setting a precedent they don't like.

cashisking1

stork wrote: »

Cashisking (#110) says that the MSE advice is 100% in relation to the FOS. I wouldn't go that far, as it is misleading. It says that you have no rights, yet that is a question of law (a question on which the case law indicates very strongly that you do have rights). What is right is that if you go to the FOS they will treat you as if you had no rights.

So MSE is doing consumers a disservice by swallowing the faulty logic of the FOS and not challenging it. And it will take a challenge from a true consumer champion, whether MSE, the Consumers' Association or someone else, to resolve this issue, as banks will no doubt settle individual claims in Court rather than risk setting a precedent they don't like.

You are right that the FOS should be challenged on behalf of all consumers.
I would thank MSE for the article though and letting us all know what the FOS thinks.
As you point out, case law has already been used to provide S75 coverage with the card companies (not paypal, ebay or amazon as the statute does not apply to them). The FOS is out of step and just plain wrong according to the courts.

My '100% correct' comment refers to the article reporting what the FOS said 100%, not to what occurs in the courts. I was not clear.

The problem here might be that it is very complex, there are way too many cooks (the FOS, case law, the card company legal teams, legal sites, journalists, etc ) with lots of advice and there is still some confusion on here over whether paypal is liable for a claim, the card companies or your mum.

The bottom line is that your first comment #10 is true.
Case law is there to prove it and if you don't like what the FOS tells you, you can make a claim from the card company under section 75 through the courts if you wish.

C'est ca

samwardill

stork wrote: »

So MSE is doing consumers a disservice by swallowing the faulty logic of the FOS and not challenging it. And it will take a challenge from a true consumer champion, whether MSE, the Consumers' Association or someone else, to resolve this issue, as banks will no doubt settle individual claims in Court rather than risk setting a precedent they don't like.

Really useful analysis @stork. Thank you! I certainly will feel more comfortable using Paypal to pay deposit for holiday lets going forward (where it is the only option). However I'll still not use Paypal where credit card is an alternative.

I do think you are being a little unfair to MSE. The original article by MSE is what encouraged all this debate which allowed the true legal position to be clarified. If MSE has not published the initial article (with shocking headline that grabbed people's attention) then the FOS would probably have been allowed to persist with their incorrect interpretation of the law ad infinitum.

stork_2

samwardill wrote: »

Really useful analysis @stork. Thank you! I certainly will feel more comfortable using Paypal to pay deposit for holiday lets going forward (where it is the only option).

Yes, I'd do that too (and then wait for the arguments when they say that you've paid your deposit to an agent and not to the supplier!)

samwardill wrote: »

I do think you are being a little unfair to MSE. The original article by MSE is what encouraged all this debate which allowed the true legal position to be clarified. If MSE has not published the initial article (with shocking headline that grabbed people's attention) then the FOS would probably have been allowed to persist with their incorrect interpretation of the law ad infinitum.

Maybe. Yes, MSE has done a good job in bringing the issue to public attention and encouraging debate, but the article presents an uncritical acceptance of the FOS position. Unfortunately, this is likely to be seen by many as an endorsement of that position.

FairTrial

samwardill wrote: »

Really useful analysis @stork. Thank you! I certainly will feel more comfortable using Paypal to pay deposit for holiday lets going forward (where it is the only option)....

Samwardill,
But are you protected paying for a holiday let deposit's through Paypal ??
Isn't there a danger all your money could be at risk ?

Isn't escrow (only use an escrow service provided by an FCA authorised firm) the only way to fully protect yourself when paying for a holiday let, if the landlord will not take payment by credit card ?

GraceCourt

stork wrote: »

GraceCourt (#90) points out that PayPal are based in Luxembourg and that this gets in the way of the existence or enforcement of s.75 rights. That's not true, as a s.75 claim is brought by the consumer (debtor) against the creditor (card issuer). The card issuer then have the option of bringing in the supplier as a third party. PayPal have no part in the proceedings via s.75.

Actually, what I said was that: "Martin is correct in saying that there are NO Section 75 rights, and if you want to prove him wrong by enforcing these "rights" against Paypal, you had better download yourself a copy of Part 78 CPR 1998 because you are going to need it!" We are agreed that in fact Paypal has no liability under S.75, and the point that I was making, perhaps too obliquely, was that anyone trying to bring ANY action against PayPal (Europe) S.à r.l. & Cie, S.C.A can't simply just issue Part 27 proceedings in the way that one would normally do against an individual or corporate body based in England and Wales - a process made even more simple (and cheaper!) by using Money Claim Online.

And on that note, let's look at this from a pragmatic and practical perspective. What might really happen when someone tries to prove the point, and fill the lacuna left by what the Court of Appeal didn't rule on, and having purchased something from a seller by making a credit card payment via Paypal then tries to exercise their alleged S.75 "rights" against the card issuer using the rhetoric outlined by stork? No District Judge would allow such a matter to proceed by way of Part 27, and all the credit card company has to do is enter the defence that they are not liable because there were no relevant "arrangements". The matter would NOT be allocated to the Small Claims Track because a significant point of law is involved, and ball is back in the claimant's court... Rule 27.14 CPR 1998 would no longer apply, and both parties would be open to the entire costs of taking the case as far as their wallets - and all other personal finances! - would stretch. It's obvious that this would be a high stakes poker game, with no certainty of either side winning, and massive legal costs against the loser.

Alternatively, the buyer could pay by credit card in the normal way direct to a seller with a credit card merchant account, and that seller then uses the merchant account to process the debit the payment from the buyer's card account using the aforementioned "arrangements", with all parties well aware that if the value of the transaction meets the criteria for S.75, getting judgement in the County Court using Part 27 proceedings jointly against the seller and the card issuer is pretty much a foregone conclusion.

Remember, S.75 doesn't create a cause of action for these proceedings - all it does is make the card issuer liable as a party to the contract of sale to the same extent as the original seller. That's why I pointed out the relevance of the Paypal advertising about card details never being supplied to, or known by, the seller... this whole issue relates to S.75 of the Consumer Credit Act, so if the seller is sent a payment by Paypal, a payment services provider, and never possesses or even uses the information about the credit card ("credit token", in the language of the Act), i.e. the details on the card, which facilitates the provision of credit to the card-holder, why should the legislation seek to make the card issuer share that seller's liabilities to the buyer under contract law and/or consumer protection legislation?

stork wrote: »

In fact by acknowledging that PayPal is somehow an intermediary and that they effect the transfer of funds, the FOS are acknowledging that there is an unbroken chain of arrangements. Their logic is simply defective.

No. This claim is well below the standard of your preceding arguments, because for whatever reason you are ignoring the significant difference between how the two types of transfer take place, and that is what is fatal to your basic premise. As already outlined, if a buyer provides the details from the "credit token" directly to the seller, who then instantiates the debit of the buyer's car account using the "arrangements" referred to via the merchant account, it's hard to make any argument that the card issuer is not linked to the seller via the d-c-s agreement.

It's specious to say that the FOS logic is defective if it concludes that there is no unbroken chain where the supplier does nothing other than receive a payment from a third party (Paypal), and that third party - not the seller - has instantiated the debit using exactly the same process and then forwarded on the proceeds to the seller. The most obvious evidence that the chain of the arrangements is broken is the presence of Paypal's name on the transaction - if it was indeed nothing but an intermediary, why is it shown in every case as being the originator of the debit? Paypal might add on the name of the seller but that doesn't link the seller to the card transaction, it just makes it even more obvious that there are two chains... one between the card-holder and Paypal, and another between Paypal and the seller.

Finally:

stork wrote: »

What is it that makes that 'PayPal' button appear on their auction, website and so on? The inescapable conclusion is that the supplier must have some sort of arrangement with PayPal.

Answer: Because the seller has chosen not to associate itself directly with any credit agreements regulated by the Consumer Credit Act, preferring instead to let Paypal adopt that role so that it will - by whatever means - secure the funds from the buyer without said seller ever having to even know any details about the credit card used - if any - to facilitate the purchase. Why do you think it's so relatively difficult and expensive to enrol for a merchant services account? And referring to "some sort of arrangement with Paypal" hardly supports your claim that this therefore equates to what the Court of Appeal was referring to as an "arrangement" in its judgement.

Yes, there's a theoretical argument that the Court of Appeal might agree with you. Unless someone wins millions on the Lotto and decides to finance a test case, it will remain theoretical. Until then, sensible people will avoid making credit card payments via Paypal if they want to be sure of having S.75 protection.

stork_2

GraceCourt wrote: »

That's why I pointed out the relevance of the Paypal advertising about card details never being supplied to, or known by, the seller...
...
No. This claim is well below the standard of your preceding arguments, because for whatever reason you are ignoring the significant difference between how the two types of transfer take place, and that is what is fatal to your basic premise.

To be clear, I'm not ignoring the difference, I just don't believe that it's significant. For one thing, even if you use your credit card in a chip and pin or contactless machine in a retail shop, you are not necessarily sharing any of your card details with the supplier, you're sharing them with the company they have an arrangement with to process payments by card. The same is common for online card payments. Secondly, if you can use your card to pay at retailer A but not retailer B, then there must be arrangements there -- it does not matter what the arrangements are and therefore it doesn't matter who is or is not party to the card details or in possession of the credit token. (In the OFT case, it looks like they didn't even get to the bottom of what the arrangements are; it was assumed, rather than known, that those arrangements were even contractual).

GraceCourt wrote: »

why should the legislation seek to make the card issuer share that seller's liabilities to the buyer under contract law and/or consumer protection legislation?

The underlying rationale is that the card issuer, via the chain of arrangements, has some leverage over the seller. The nature of PayPal's business, and the fact that they are not the supplier of the goods or services which consumers are buying, is no great secret, and the networks could have sought to exclude PayPal if they thought it in their interests. In fact, PayPal has obvious leverage over the suppliers it serves and probably serves as a useful punchbag for the banks somewhere in the middle of any argument! With more certainty, I think we can say that PayPal is likely to bring so much revenue to the banks via the card networks that, so long as the networks are satisfied that PayPal has appropriate leverage, they are happy to support the situation.

GraceCourt wrote: »

It's specious to say that the FOS logic is defective if it concludes that there is no unbroken chain where the supplier does nothing other than receive a payment from a third party (Paypal), and that third party - not the seller - has instantiated the debit using exactly the same process and then forwarded on the proceeds to the seller. The most obvious evidence that the chain of the arrangements is broken is the presence of Paypal's name on the transaction - if it was indeed nothing but an intermediary, why is it shown in every case as being the originator of the debit? Paypal might add on the name of the seller but that doesn't link the seller to the card transaction, it just makes it even more obvious that there are two chains... one between the card-holder and Paypal, and another between Paypal and the seller.

It's all very well to say that PayPal instantiates the debit, and from the point of view of the banks and networks and their processes, this is how it looks. However, PayPal does not instantiate a debit of its own initiative, it does so in response to a transaction being made between a buyer and seller in the circumstances where (a) it has an arrangement with the seller to do so, and (b) the buyer chooses this as their channel/method of payment. The name on the transaction tells us nothing useful about what arrangements exist between whom, or about who the supplier is for the purposes of the Consumer Credit Act. All it does is require us to ask the question, when the name on the transaction and the name of the supplier are different, as to whether there are nevertheless 'arrangements' connecting the supplier and creditor.

GraceCourt wrote: »

Why do you think it's so relatively difficult and expensive to enrol for a merchant services account? And referring to "some sort of arrangement with Paypal" hardly supports your claim that this therefore equates to what the Court of Appeal was referring to as an "arrangement" in its judgement.

There are any number of reasons for the pricing of merchant services accounts and payment processing services, some of which relate to the risk which the bank takes on, and others of which might relate to the bank having significant market power and/or a captive customer base. Pricing and models have changed a lot over recent years, and models like PayPal use not only price to manage risk, but other techniques (e.g. maximum transaction volume/values). Pricing tells us nothing about whether there are arrangements -- indeed it would be possible to open a very low-priced payment processing firm and for that model to be unsustainable, yet for it still to contain the relevant arrangements. Whether the banks would allow it to enter the chain of arrangements would be a different question.

I'm not claiming that 'some sort of arrangement' equates with what the CA said, only pointing out that the Court decided that 'arrangements' must be interpreted in a wide sense and in its everyday sense rather than in some narrower, more technical sense. The Court did take the view that, without even considering the technical relationships, and from the point of view of the consumer, there had to be arrangements in place in a four-party structure, and that if this is the case it makes it pretty hard to argue that those arrangements are not 'arrangements'.

GraceCourt wrote: »

Yes, there's a theoretical argument that the Court of Appeal might agree with you. Unless someone wins millions on the Lotto and decides to finance a test case, it will remain theoretical. Until then, sensible people will avoid making credit card payments via Paypal if they want to be sure of having S.75 protection.

I agree with your practical advice. However, there are people who have had little option but to pay through PayPal and then have a potential claim. For these people, they don't have to just give up, and if they stand their ground they might well prevail. Just as a consumer doesn't want to fund a fast track or multi-track test case, so banks don't want to risk what they see as an adverse precedent. The tactical advantage is not all with the banks. Also, I take your point that a bank might attempt to steer a case out of small claims, but such an approach does carry a risk of backfiring on them nastily (impecunious Claimant supported by pro bono legal representation by someone who has an interest in consumer law and wants to make a name for themselves in the field). Even defending a small claim could cost hundreds of pounds, costs which can't be recovered from the Claimant.

ScumBag

I don't have a PayPal account and don't want one (I get enough spam as it is, telling me my account - which I've never had - has been compromised).
So how do I buy the item I want, when they only take PayPal as payment, and PayPal is asking me to sign up rather than sign in as a guest?

warty_2

Maybe things have changed, but in 2008 I made a couple of online purchases (not from Ebay , from retailers' own sites, but paid via Paypal ), but did not receive the goods. I raised disputes with/via Paypal, and they found in my favour - but told me that they could not refund my money as the retailers had zero account balances in their Payal accounts. At that time at least, Paypal would only refund by taking the money directly from the retailer.
I raised clams with my credit card co. (Barclaycard Visa) as I used that to fund my Paypal account. They refunded me without fuss and Barcaycard pursued PayPal for the amounts - £180, and £360.