Here's an assignment I did for a Website Development class I took a couple of years ago on (FRAUD ALERT):
March 3, 2004
Using (FRAUD ALERT)® An Online Payment System
This paper was originally going to cover different aspects of using (FRAUD ALERT) as an online
payment system. This topic had been suggested to me by **** ***** as a way of
researching a popular payment method for online transactions for my possible future
online business endeavors. Upon starting research for this paper, I found many websites
that document problems with using (FRAUD ALERT). In this paper, I will also be covering some of
the advantages and disadvantages of using (FRAUD ALERT) as a form of online payment as well.
(FRAUD ALERT)® (www.(FRAUD ALERT).com) was started in 1998 and is located in San Jose,
California. It soon became a popular form of payment over the internet because of it
offers free accounts and is easy to use. According to (FRAUD ALERT)’s website
(http://www.(FRAUD ALERT).com/cgi-bin/webscr?cmd=p/gen/about-outside), it is currently
available in over 38 countries and has 40 million account members. It was purchased by
eBay Inc. (
http://pages.ebay.com/community/aboutebay/overview/index.html) in
October, 2002.
According to www.(FRAUD ALERT).com/cgi-bin/webscr?cmd=p/ir/licenses-outside, (FRAUD ALERT),
Inc. is licensed in 24 States. There seems to be no other information about licensing
outside of the US on the website.
Information about non-US accounts from the page
www.(FRAUD ALERT).com/uk/cgi-bin/webscr?cmd=p/gen/approved_countries-outside
states that some countries can only make payments, but not receive them. There does not
seem to be any information about legalities of operating in non-US countries on this site
either.
Buyer and seller protection is based on the User Agreement. Any disputes between
the User and (FRAUD ALERT) are to be under the jurisdiction of the courts located within the
county of Santa Clara, California according to Policy 15.2 on page
www.(FRAUD ALERT).com/cgi-bin/webscr?cmd=p/gen/ua/ua-outside from User Agreement for
(FRAUD ALERT)™ Service.
According to an article on the website
www.Salon.com by Damien Cave
(
http://dir.salon.com/tech/feature/2001/02/23/pay_pal/index.html):
“(FRAUD ALERT) thrives in what many consider a dangerous form of legal limbo. Though it looks
more and more like a bank with each passing week -- offering money market accounts
and as of this month, credit cards -- (FRAUD ALERT) remains outside the strictures of banking
laws. Consumer accounts have neither the protection of federal insurance systems like
FDIC nor the assurance of regulatory oversight. Even agencies such as the Federal Trade
Commission and Better Business Bureau, which have recently started familiarizing
themselves with several e-payment providers, appear to have limited power. Since (FRAUD ALERT)
is privately held, they don't even have the outright authority to scrutinize the company's
finances. As one FTC lawyer put it, "if they filed for bankruptcy tomorrow, no one
knows what would happen to their accounts."
Ultimately, no company that processes $7 million in transactions every day, as (FRAUD ALERT)
claims to do, deserves a free ride, says Ken Thomas, a finance professor at the Wharton
School of Business. Because (FRAUD ALERT) essentially works like a bank -- thriving in an
industry where "any type of activity involving payments is heavily regulated simply
because issues of public confidence are involved," he says -- they should be treated as a
bank. Changing the laws, or persuading (FRAUD ALERT) to buy a bank charter may be difficult,
slow and expensive but until then, Thiel and his 575 employees aren't just asking that
users endure a few technical difficulties. They're asking for nothing less than blind, pre-
Depression trust.
"This is banking circa 1928," says Tom McGrath, managing partner of Bank Earnings
International (BEI), a banking consulting company. "It's backwards. They could take all
these customers' dollars and misapply them, so the money isn't available when the person
wants it. They could be insolvent and no one would ever know."
This seems to be confirmed on (FRAUD ALERT)’s site at the page about FDIC (Federal Deposit
Insurance Corporation website:
www.fdic.gov/) Pass-Through Insurance
(http://www.(FRAUD ALERT).com/cgi-bin/webscr?cmd=p/gen/fdic-outside):
“You do not need to keep funds with (FRAUD ALERT) in order to use our service. If you do hold a
balance, you can do so in two ways: (1) (FRAUD ALERT), as your agent, will place your funds in a
pooled account at an unaffiliated FDIC-insured bank or savings institution, which is
eligible for pass-through FDIC insurance coverage; or (2) you can elect to earn a return
on your funds by enrolling to invest all funds that you receive into the (FRAUD ALERT) Money
Market Fund. The (FRAUD ALERT) Money Market Fund is not FDIC insured, not guaranteed by
any bank and may lose value. (FRAUD ALERT) keeps a record of the amount of your balances,
which you can check by logging in to your account through the (FRAUD ALERT) Web site at any
time. Balances held in currencies other than U.S. Dollars are not FDIC-insured.
If you do not enroll in the Money Market Fund, then in the unlikely event that an FDIC-
insured bank in which we place your money fails, your balance placed at the bank would
be subject to FDIC pass-through deposit insurance coverage, along with any other
deposits you hold at that bank, up to a total of $100,000. Pass-through deposit coverage is
contingent upon (FRAUD ALERT) maintaining accurate records and on determinations of the FDIC
as receiver at the time of a future receivership of any bank at which we place your funds.
FDIC pass-through deposit insurance protects you only against the failure of the bank at
which (FRAUD ALERT) places your funds, and does NOT protect you against (FRAUD ALERT)'s insolvency.
Through the terms of our User Agreement, we believe that your funds will also be
protected from any claims of (FRAUD ALERT)'s creditors and will be returned to you even in the
unlikely event of a (FRAUD ALERT) insolvency.
You can access a list of the banks where we place your money here.
Please see the User Agreement for more details on how we handle your money.”
This is one of many problems resulting in complaints against (FRAUD ALERT). The most
common complaint is the freezing of accounts, in which the user cannot access their
funds. The fact that (FRAUD ALERT) isn’t a bank, it doesn’t have to follow the laws of banking.
Many of the sites documenting complaints and problems with (FRAUD ALERT) point this out with
links and/or quotes from (FRAUD ALERT)’s User Agreements and other Terms of Use. By
agreeing to use (FRAUD ALERT), you are agreeing to do transactions under their rules. Your rights
to banking protection laws are waived. Some of these sites claim that there are also terms
and conditions not disclosed when signing up for accounts, which leaves the user’s
money in (FRAUD ALERT) accounts totally at risk and can and have been seized by (FRAUD ALERT).
(http://www.(FRAUD ALERT)sucks.com/ and http://www.(FRAUD ALERT)warning.com/)
Another common complaint is the customer service and response time to inquiries.
Phone numbers to contact (FRAUD ALERT) are intentionally made hard to find said Vince Sollitto,
a (FRAUD ALERT) spokesman in an MSNBC article (
www.msnbc.com/news/511209.asp).
“This is to save costs.” Sollitto said. He also said in the same article on the subject of
customer complaints that “They are read, but taken with a grain of salt.”
The emails are also met with the same enthusiastic type of response. If an email is
responded to, it usually of the form letter type.
As a result of these practices, some (FRAUD ALERT) complaint sites have listed phone numbers
and addresses both physical and electronic to contact (FRAUD ALERT) offices.
(http://www.(FRAUD ALERT)sucks.com/faqs.shtml, http://www.(FRAUD ALERT)warning.com/, and
http://www.(FRAUD ALERT)suit.com/Phone.htm)
Many of these pages also list phone numbers and websites for law firms involved in
class action lawsuits against (FRAUD ALERT). Two of these law firms are Jacoby and Meyers
(http://www.jacoby-and-meyers.com/(FRAUD ALERT)Questionnaire/default.asp) and Gerrard,
Gibbs and De Bartolemeo (http://www.girardgibbs.com/(FRAUD ALERT).html).
The Better Business Bureau’s report on (FRAUD ALERT)
(
www.bbbsilicon.org/common.html?loca...bindr/report.php&bureau=sanjose&compid=210387) had this to say (dated 03/02/2004):
“The following data concerns complaints processed by the BBB since the firm's file was
opened or over the last 36 months, whichever is less. (FRAUD ALERT), Inc. has had 2830
complaints. 666 were closed as Resolved. 1986 were closed as Assumed Resolved. 178
were closed as Adminstratively Judged Responsible. Of these complaints: 45 were
concerning Selling Practices. 26 were concerning Advertising Issues. 1465 were
concerning Service Issues. 62 were concerning Delivery Issues. 421 were concerning
Refund Practices. 10 were concerning Product Quality. 13 were concerning Contract
Disputes. 12 were concerning Guarantee or Warranty. 1 was concerning Repair Issues.”
(FRAUD ALERT) says that the reason for freezing accounts is that this is their policy while
investigating what they consider a possible fraud or security threat. This may happen to
both the seller and the buyer. (FRAUD ALERT) has listed restricted items and activities throughout
it’s User Agreement and Terms of Services (http://www.(FRAUD ALERT).com/cgi-bin/webscr?cmd=p/gen/ua/ua-outside). Violation of these rules, even if unknown by one
of the parties involved in the transaction, can result in the freezing of both accounts, often
without returning of the funds.
The website Sue(FRAUD ALERT).org (http://sue(FRAUD ALERT).org) has many links and information
documenting the violations by clients of (FRAUD ALERT) and eBay policies, which allows them to
then seize the funds in the accounts of their clients.
Security problems also seem to be a common complaint. (FRAUD ALERT)’s security page
(http://www.(FRAUD ALERT).com/cgi-bin/webscr?cmd=_security-center-outside) says that they use
Military Grade Encryption.
On page www.(FRAUD ALERT).com/cgi-bin/webscr?cmd=p/gen/security-outside of (FRAUD ALERT)’s
site about security it says:
“(FRAUD ALERT) automatically encrypts your confidential information in transit from your
computer to ours using the Secure Sockets Layer protocol (SSL) with an encryption key
length of 128-bits (the highest level commercially available). Before you even register or
log in to our site, our server checks that you're using an approved browser - one that uses
SSL 3.0 or higher.
Once your information reaches us, it resides on a server that is heavily guarded both
physically and electronically. Our servers sit behind an electronic firewall and are not
directly connected to the Internet, so your private information is available only to
authorized computers.”
(FRAUD ALERT) also has an Identity Verification system (http://www.(FRAUD ALERT).com/cgi-bin/webscr?cmd=p/gen/verification-faq-outside) which allows clients to improve trust in
their transactions, although it is not required to do transactions.
The (FRAUD ALERT) Security page (http://www.(FRAUD ALERT).com/cgi-bin/webscr?cmd=_security-center-outside) also has information, tips and advice on security and privacy issues.
There are reported incidents of (FRAUD ALERT) accounts and software being hacked. The most
mentioned was from an article in Wired.com
(
http://www.wired.com/news/business/0,1367,51977,00.html) in which a way was found
to change the price of items on a website. This would allow the purchase of items worth
hundreds or thousands of dollars for a dollar as an example.
The main security concern was about “spoofing” or when websites and emails claim
to be (FRAUD ALERT) in order to get account information and/or access. Clients may be emailed
and told there is a problem with their account and they are to give account information to
help fix the problem. There are also websites that trick users into thinking that they are
using (FRAUD ALERT) when they aren’t.
(FRAUD ALERT)’s free accounts offer three options: Personal, Premier, and Business. (FRAUD ALERT)
charges Premier and Business accounts to receive payments. Personal accounts are free,
but may not receive credit card payments. Transactions fees are also applicable if
withdrawing from outside of the US (http://www.(FRAUD ALERT).com/cgi-bin/webscr?cmd=_display-fees-outside).
For Canadian accounts, there is a $0.50 CAD withdrawal fee and a $30.00 CAD return
fee. Receiving fees are 3.4% of the amount + $0.55 CAD at the Standard Rate and 2.7%
of the amount + $0.55 CAD at the Merchant Rate. The Merchant Rate is available to
clients who meet the criteria (http://www.(FRAUD ALERT).com/cgi-bin/webscr?cmd=_fees-rate-about-outside).
There is an additional cross border fee if you receive a payment from a user in another
country. The cross border fee is an additional 1% for U.S. Dollar payments and 0.5% for
Canadian Dollar, Euro, Pound Sterling, and Yen payments. This cross border fee is
currently waived for Canadian sellers receiving payments from U.S. buyers.
(FRAUD ALERT) Preferred Sellers (www.(FRAUD ALERT).com/cgi-bin/webscr?cmd=_display-fees-ppp-outside) can earn 1.5% cashback on debit card purchases made with the free (FRAUD ALERT)
ATM/Debit Card (www.(FRAUD ALERT).com/cgi-bin/webscr?cmd=p/acc/dc_intro-outside). This
card allows clients to withdraw cash from their (FRAUD ALERT) accounts at ATMs, pay for
purchases wherever MasterCard is accepted, and allow clients instant access to the
money received in their (FRAUD ALERT) accounts.
(FRAUD ALERT)’s Shopping Cart (http://www.(FRAUD ALERT).com/cgi-bin/webscr?cmd=p/xcl/rec/sc-intro-outside) is free to use on client’s websites. It follows the fee schedule used for
other transactions. There are other business and management software available on the
(FRAUD ALERT)’s Merchant Tools page (http://www.(FRAUD ALERT).com/cgi-bin/webscr?cmd=_merchant-outside) such as Buy Now Buttons, Shipping Center and Instant Payment Notification.
In conclusion, (FRAUD ALERT) may be a good way to get a payment system when starting an
online business. Starting an account with a shopping cart is free and small fees are
charged on transactions. Due to (FRAUD ALERT)’s popularity, customers are more likely to feel
safe using it.
Caution should be used if (FRAUD ALERT) is still an option, regardless of the type of account.
Recommendations for clients from websites warning about (FRAUD ALERT) are all basically the
same. The following advice is from the website (FRAUD ALERT)Suit.com
(www.(FRAUD ALERT)suit.com/Phone.htm under the heading “What should I do?):
“We strongly recommend that people keep their (FRAUD ALERT) balance as low as possible.
Remove funds immediately. Also, use a second banking account for (FRAUD ALERT) and as soon
as those funds are in there, move it to your main account. Be prepared to stop using
(FRAUD ALERT) at any time.”
These websites also suggest alternatives to using (FRAUD ALERT). Getting a merchant account
with a popular credit card such as MasterCard or Visa is the safest. This option may cost
more to set-up, but is probably the best way to go. There are also other e-currency
payment companies that are recommended by these sites, which may be another option to
investigate.
Sources Cited:
www.(FRAUD ALERT).com
http://www.(FRAUD ALERT)sucks.com/
http://www.(FRAUD ALERT)suit.com/
http://www.(FRAUD ALERT)warning.com/
www.bbbsilicon.org/common.html?loca...bindr/report.php&bureau=sanjose&compid=210387
www.msnbc.com/news/511209.asp
http://dir.salon.com/tech/feature/2001/02/23/pay_pal/index.html
http://sue(FRAUD ALERT).org
http://www.wilsonweb.com/wct5/(FRAUD ALERT)_assess.htm
http://www.wired.com/news/business/0,1367,51977,00.html
Here are two other threads on CGN discussing gun related (FRAUD ALERT) problems:
http://www.canadiangunnutz.com/forum/showthread.php?t=92591&highlight=(FRAUD ALERT)
http://www.canadiangunnutz.com/forum/showthread.php?t=117643&highlight=(FRAUD ALERT)
