PayPal's File-Sharing Restrictions Drive Merchants to Rivals

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PayPal's strict requirements for merchants that sell file-storage services have created an opportunity for competitors including BitPay, which processes payments in the digital currency Bitcoin.

Last week, four vendors that market the cloud-storage services of Mega — the new venture from controversial Internet entrepreneur Kim Dotcom — stopped accepting payments through PayPal. It is unclear whether PayPal dropped them or vice versa.

PayPal, a unit of eBay (NASDAQ: EBAY), allows such merchants to sell only file-sharing services it has approved. PayPal also makes these merchants monitor uploads to prevent copyright infringement — somewhat akin to banks monitoring transactions under anti-money laundering regulations.

Stop File Lockers and other antipiracy groups have accused Mega of facilitating illegal downloads. Its founder, Dotcom, faces extradition to the United States from New Zealand for his previous venture, Megaupload, a file-sharing site the U.S. government shut down last year for alleged copyright violations.

Hosting.co.uk, one of the Mega vendors that stopped using PayPal, turned to BitPay, whose service lets merchants accept bitcoins and converts them into dollars.

"Now that PayPal is trying to clamp down on file-storing sites, these vendors who've made investments in their servers and their infrastructure are saying … 'how are we going to accept payments?'" says BitPay founder Anthony Gallippi. "Some of them are looking at either accepting Bitcoin directly or using BitPay or another payment processor."

The other three Mega vendors that stopped using PayPal accept encrypted credit-card payments through other payment processors — two of them use Wirecard, the third uses Systempay.

A PayPal spokeswoman would not discuss the Mega vendors, but she said that as a general matter, its policy is to part ways with firms offering file-sharing services the company has not approved. She would not say whether PayPal approved Mega.  

Unlike PayPal, which requires both the consumer and the merchant to have accounts (unles the retailer offers "quest checkout"), only a merchant needs to have an account with BitPay to accept bitcoins, Gallippi says.

"PayPal is like a walled garden. It's more like the early days of the Internet, when somebody on AOL could talk to somebody on AOL but not somebody on Prodigy," he says. "BitPay is different, because there's no company behind Bitcoin."

Mega, meanwhile, remains under scrutiny for its potential to allow illegal file-sharing. Despite Dotcom's claim that the site is "the most legally scrutinized Internet site in the history of the Internet," the company has fielded 150 copyright-infringement warnings since its launch on Jan. 20, PCWorld reported.

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Comments (4)
Whether PayPal dropped them or vice versa, is not important. This is good news for PayPal as it demonstrates that PayPal is aggressively monitoring how its service is used and is on top of potential fraudsters. As PayPal emerges as a global network for consumers and merchants (online and brick and mortar) maintaining the integrity of their system is paramount. www.philliou.com
Posted by philipp | Saturday, February 02 2013 at 2:25PM ET
Thank you for your comment Phil. I'm afraid I don't follow how this story demonstrates PayPal is "on top of potential fraudsters." The issue here seems to be the potential for these merchants' customers to use Mega for unauthorized sharing of copyrighted material. That may arguably be a form of stealing (from the copyright holder, which is not a party to the payment transaction in this case). But is it fraud in the commonly understood sense of "obtaining money from someone by means of deception"? Are PayPal's other customers somehow at risk of being defrauded by the file-sharers who use Mega?
Posted by Marc Hochstein, Executive Editor, American Banker | Monday, February 04 2013 at 10:05AM ET
It is not good news for PayPal, as they are acting against the interests of the merchants and customers who use their service. PayPal will lose market share to more accommodating payment services because they are not being responsive to market demand.
Posted by jranvier | Monday, February 11 2013 at 2:04PM ET
How utterly amusing. What we are witnessing is the first example of a large corporation deciding "for the good of the consumer" how they can spend their money - and how there's a way to route around such tyranny.

Keep it up PayPal, you're really providing impetus to ditch your excessive fees and arbitrary account lockouts.
Posted by TraderTimm | Monday, February 11 2013 at 7:26PM ET
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