By Leslie Josephs
Entrepreneur Catalina Girald credits her use of PayPal, eBay
Inc.'s online-payments service, with helping fuel a surge in
lingerie and swimwear orders earlier this year.
At Naja, her young San Francisco-based company, sales have
increased nearly 20-fold since she began selling its products on
her own website in November.
In January, Ms. Girald began using PayPal to process customers'
payments for goods ordered on the site. "Our sales increased even
more," she said.
But then, she said, "PayPal freaked out."
An account representative from the company emailed her May 7,
informing her that PayPal was "going to apply a reserve" to her
account, and temporarily withhold part of the payments from Naja's
customers. It effectively halved her access to her daily
revenue.
Her situation highlights the risks that heavy reliance on PayPal
can pose for small merchants. Many businesses depend on PayPal--and
other online payment platforms--because the services offer
consumers and businesses a level of confidence and security. It is
up to PayPal, however, to size up the risk of fraud. And some
entrepreneurs say its precautions are too heavy-handed.
In Naja's case, it can take 45 days to make and ship some
products, such as embroidered bustiers, to San Francisco, and then
on to customers, from a factory Ms. Girald owns in her native
Medellín, Colombia. The transactions were considered a "presale"
because the items hadn't been produced yet.
Her company ships about 50 orders of lingerie and swimwear a
day, and she uses that revenue to pay the factory's 16
seamstresses. In addition, she recently hired 10 contractors to
handle her new order volume.
In its emailed notice, which was reviewed by The Wall Street
Journal, PayPal told Ms. Girald that, "During a recent review, we
determined that there may be a high level of risk associated with
your PayPal account, and are going to apply a reserve to your
account." It told her the first of the withheld funds would be
available to her in August.
PayPal, citing its privacy policy, said it can't comment on
specific cases.
But a company spokesman said presale orders, long delivery times
or disputes with customers can trigger a reserve on a merchant's
account. To tide them over, he said, the company offers loans that
could be used to cover production costs.
"We want to avoid the situation where people buy something and
don't get it," because PayPal would be on the hook for refunding
that money, said Tomer Barel, PayPal's chief risk officer.
Mr. Barel declined to say how many sellers using the platform
sell their products before they are made.
"PayPal's secret sauce is their ability to keep fraud low," said
Gil Luria, a Los Angeles-based financial-technology analyst at
Wedbush Securities. He estimates that PayPal now processes between
15% and 20% of all e-commerce payments, but he expects that to grow
when the company splits off from eBay. PayPal has said it plans to
list on Nasdaq in the second half of 2015.
Some merchants relying on PayPal say they need their sales
revenue promptly so they can pay workers and cover other production
costs, even if the products ordered haven't been produced yet.
Ms. Girald said she tried to appeal PayPal's hold on her
account, but that it told her on May 16 that she had to wait 180
days before it would consider her appeal.
The question, she said, "is do you lose those sales" by not
using PayPal? "Or have them on hold for three months?"
Mr. Barel said PayPal is considering other payment-processing
methods, such as charging customers after their orders have
shipped.
Last year, PayPal established a "crowdfunding" policy, aimed at
avoiding complications when entrepreneurs raised money online to
manufacture a product. The policy allows entrepreneurs to have
access to the funds immediately, as long as buyers are informed
that there isn't a guarantee that they will receive the product, or
about other risks associated with the project.
For many small specialty merchants such as Phoenix-based Bison
Made, which makes wallets and leather goods for men, PayPal is
critical in making shoppers confident enough to buy online.
"Whether they trust me or not, I have no ability to steal their
information" when customers pay for items via PayPal, said
Sebastian Sandersius, Bison Made's founder.
Jamie Siminoff of Santa Monica, Calif., said his business, Ring,
which makes camera-embedded, smartphone-connected doorbells, was an
"all-PayPal shop" when he started selling his doorbells online in
December 2012. At the time, he was selling the doorbells before
manufacturing them.
But PayPal froze a portion of his revenues. In an August 2013
email to his company, PayPal said it set aside $25,000 as a reserve
on his account and would take 10% of daily sales, releasing the
money six months later.
Ring began shipping its doorbells to customers in November 2013,
he said.
"They just didn't understand our business, Mr. Siminoff said of
PayPal, "and, as a small business, you want to work with someone
who understands your business." He now uses payments startup Stripe
Inc. to process online credit-card transaction.
Ryan Fant, co-founder of New York-based Keen Home, which sells
smartphone-linked heating and cooling vents, said he was buying a
book of color swatches for his office when he tried to check out
with his PayPal account. Mr. Fant said he thought the account was
flush from preorder sales of the vents, following his appearance on
the television show "Shark Tank."
He said PayPal sent him an email that it was placing a reserve
on some of his revenue because of the surge in preorders after his
appearance on the show.
"I was like, oh, I only have $40 [available]," he said of his
account, adding that he is considering dropping PayPal.
Greg Bensinger contributed to this article.
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