I don't see how he got burnt. He decided he wanted to accept credit cards directly, instead of having customers use their PayPal accounts to pay him, and so started using a PayPal service he had not been using before.
That means he's going to be subject to the same kind of things other merchants who accept credit cards have to put up with (everywhere, not just at PayPal), including acquiring banks deciding to hold a reserve to offset their risk.
The acquiring bank is on the hook to the credit card associations and issuing banks for any chargebacks that he can not cover. Worst case would be if he goes out of business leaving no money, and a year's worth of his customers chargeback. The acquiring bank is on the hook for all of that.
From a risk point of view, an acquiring bank is in about the same position as a bank that is giving you a loan, collateralized by your business, in the amount of a year's worth of your credit card sales.
I think there are a few key points that highlight why offsetting risk is not a valid justification for this behavior:
-A 30% default rate is absurdly high. There is no way 30% of the cards being used over the phone are stolen.
-Even if usage of the service stops, the Rolling Reserves are a permanent change to they way PayPal handles his account. He cannot turn this off, even if his risk profile goes to 0.
-PayPal is not even authorized to act as a bank in the state he lives and operates in.
PayPal will re-evaluate your rolling reserve periodically. Assuming steady volume and low charge backs they will lower it.
Rolling reserves are not uncommon for merchant accounts. PayPal didn't event them. 30% is on the high side but if PayPal feels the merchant is risky they should have the right to ask for it. There are other merchant accounts out there this guy can use.
The reserve isn't to offset the risk of stolen cards. It's to offset the risk that the merchant will not remain solvent over time, leaving the acquiring bank responsible for the merchant's debts to the credit card associations and issuing banks.
It's not at all clear that merchant account providers are banks as far as state banking law goes.
I don't think it matters. Some don't seem to realize that when you sign up for any of the PayPal Pro features you're getting a real merchant account underwritten by a real bank. PayPal isn't underwriting it, it's usually JP Morgan Chase or Wells Fargo. You are asked to accept a separate agreement specific to that bank your account is assigned to when you apply for the upgrade.
No, most businesses that use PayPal are using it as a credit card processor. Either by using a form hosted on the merchants website itself (via PayPal IPN) or a cheaper version where the user is redirected to a form on PayPal's site.
This is what the author was using before. His change was to enable a feature that gave him access to a "terminal" wherein he could type credit card numbers himself.
In high-risk markets, and new merchants, it's not uncommon for funds to be held. But apparently this was neither. This is just paypal doing what it's always been known to do -- Assault the merchant while whispering in his ear "this is for your own good."
In high-risk markets, and new merchants, it's not uncommon for funds to be held. But apparently this was neither.
We really can't tell from the OP what market this guy is in, and what he is really selling. He is deliberately vague..
"I run a few online stores which sell various products (non-Ebay, just regular old stores that sell stuff I make or provide)"
If he's going to attempt to draw such a large amount of attention, it might be helpful to know what specifically he is selling from all of his "regular old stores."
When he upgraded to PayPal Pro to get the Virtual Terminal, he separately applied for and received a real merchant account underwritten by a real bank (usually Chase or Wells Fargo). He accepted a separate agreement with that bank including the boilerplate Visa/MC agreements and the stuff about risk reserves. It's not the same as just turning on a feature.
I'm saying the underlying behavior of holding a reserve is reasonable. I can't comment on whether or not HOW they did it is appropriate--I don't know if they did a poor job of documenting how it works (most payment processing companies have crappy documentation), or if he did a poor job of researching before deciding to use their virtual terminal service.
Other services suggested as alternatives in the Reddit thread, such as Google Checkout, also can hold reserves. This is not a PayPal thing--it is a credit card system thing. The system is designed so that if you end up owing money to the credit card association and member banks (say, for chargebacks), it is the responsibility of your merchant account provider to collect that money from you, and if they can't for some reason (e.g., you are involvement) then THEY have to pay it themselves. Essentially, your merchant account provider is guaranteeing to the credit card associations and the issuing banks that your debts to them will be covered.
That means he's going to be subject to the same kind of things other merchants who accept credit cards have to put up with (everywhere, not just at PayPal), including acquiring banks deciding to hold a reserve to offset their risk.
The acquiring bank is on the hook to the credit card associations and issuing banks for any chargebacks that he can not cover. Worst case would be if he goes out of business leaving no money, and a year's worth of his customers chargeback. The acquiring bank is on the hook for all of that.
From a risk point of view, an acquiring bank is in about the same position as a bank that is giving you a loan, collateralized by your business, in the amount of a year's worth of your credit card sales.