Paypal’s Ed Eger on Reserves (Part II of II)

February 28, 2010

ChannelAdvisor ChannelAdvisor By ChannelAdvisor

This is the second of a two-part series and is a first for eBay Strategies.  The first post, which you need to read first is HERE, is a head’s up to sellers about what we’ve noticed at ChannelAdvisor that is happening to Paypal merchants on eBay and causing a good bit of frustration.

The second part, which you are reading, is a response to the first post from Paypal’s Ed Eger.  As you can tell from the Paypal management page, Ed is an SVP and GM of the North American business, so this is pretty much straight from the horse’s mouth.  I wanted to thank Ed for taking time out of his busy schedule to address these concerns here.

From the SeekingAlpha disclosure forward are Ed’s response unaltered by me except for some layout changes caused going from a Word document to blog post format.

Seeking Alpha Disclosure -I am long Google and Amazon. eBay is a minority investor in ChannelAdvisor.

 

PayPal’s Ed Eger on Reserves  

PayPal is in business today to connect consumers and merchants all around the world, creating opportunities for people in their personal and professional lives.

It is with these values that we approach all of our customer relationships and it’s the key reason why we continue to offer an open platform, which easily onboards all types of merchants and gives near instant access to their funds – whether you’re a new entrepreneur or the largest retailer on the web.  We’re proud of this approach to payment services which is unique in the industry.

The current severe global economic recession has impacted the ability for financial service companies to offer credit all over the world – credit required to run and sustain businesses.  However, in the face of these challenging economic times, PayPal has on-boarded more than one million new merchants and increased our total credit exposure by more than a third in the last year.  To the best of my knowledge, no major financial institution expanded credit to small and medium businesses at that rate.  In fact, most headlines talk about significant tightening of credit across our industry.

In order to maintain the strength of our business and keep our costs low, we’ve had to evolve some of the ways we manage merchant risk.  This does not mean we have unilaterally tightened credit across our entire merchant base.   Instead, we are selectively addressing a small fraction of the highest risk merchants in our portfolio—merchants who we believe may struggle to meet their commitments to their customers.  These targeted actions not only protect consumers from poor experiences but ultimately benefit our merchants by allowing PayPal to continue to extend credit when our competitors will not — all while maintaining low and simple pricing.

In his blog, Scot Wingo refers to a new “reserves” policy, the holding of a minimum balance in merchants’ accounts when there is increased risk in their business.   To be clear, this requirement affects less than 1% of all of our merchants; it is truly a targeted and a rare occurrence within PayPal.  In fact, a merchant is only subject to a reserve if the business has shown strong evidence of highly risky behaviour – for example, high chargeback rates or excessive refunds.  When high chargeback and refund rates occur at a merchant, their consumers lose confidence not just in that merchant, but in the entire ecosystem of merchants supported by PayPal.  Merchants who continue to deliver good customer experiences and maintain low chargeback and refund rates are unlikely to be subject to such reserves.

Another element of our risk management policy is selectively delaying access to funds for some merchants (this practice is commonly referred to as “delayed settlements” in the industry and as “holds” in PayPal).  Because we believe that our near instant access to funds for the majority of our merchants is a key differentiator, we strive to ensure our hold rate is lower than most payment processors in the industry – only a small fraction of our merchants have holds placed on them, with an average hold time of less than 11 days.  The vast majority of our sellers get access to their funds immediately.  By comparison, other payment processors have policies such as 14 days delayed settlement on 100% of new sellers.

I’m grateful for this opportunity to communicate how and why we work with our customers to manage risk.  We continuously listen to feedback from our sellers and other stakeholders such as Scot so that we may improve our service for our merchant customers.  And based on Scot’s feedback, we know that we need to do a better job communicating with our customers about our decisions and how we’ve implemented them.  This is a journey and we are firmly committed to being the best merchant partner in the industry – helping merchants grow, manage, and run their businesses – and in many instances their livelihoods.

I would love to hear from you. You can contact me at ed@paypal.com.