eBay's PayPal division will start holding payments for up to three weeks for certain "high-risk transactions" next month. Some sellers are pissed, but it's totally legal. PayPal is not a bank. It is not insured by the FDIC — the government program which insures deposits should a bank go under. PayPal is a "deposit broker," meaning the company pools deposits from all its users and holds them in bank accounts under PayPal's name, collecting interest on the money — and deposit brokers are not federally regulated.
PayPal "has gone to great pains to ... not be a bank" according to Christa Quarles, managing director of Thomas Weisel Partners. Some users think the company is holding the cash to make money on the interest, but it's a small enough amount — an estimated $10 million a quarter, tops — that it doesn't make a significant impact on eBay's bottom line. (If it hadn't taken a massive writeoff for its Skype purchase last year, eBay would have made more than $1 billion in net profit.) Instead, PayPal's move is likely an attempt to reduce fraudulent purchases by keeping money in de facto escrow until the purchase has been finalized. Sellers may not like it, but the alternative — PayPal letting sketchy transactions go through, and then recovering the money later — sounds worse.
(Photo by AP/Paul Sakuma)