PALO ALTO, Calif. - PayPal Inc. said Monday that the Federal Deposit Insurance Corp. has advised it that certain of its deposits qualify for FDIC coverage, a decision that some observers said could mean increased regulation and higher cost for the online payment leader.
PayPal said the FDIC's final advisory opinion applies when it acts as an agent for customers and puts customer funds in well-capitalized FDIC member banks, in the event of a failure of the bank.
However, the FDIC also said that PayPal does not physically handle or hold the funds transferred in its electronic payments service, the company said.
The advisory does not apply to PayPal's money market fund or to the company's liabilities, the company said in a press release. PayPal had contended that it does not take deposits that fall under the Federal Deposit Insurance Act, and the FDIC did not directly address that contention.
Jerome Walker, a Manhattan attorney who specializes in financial services law, said the FDIC advisory inevitably means big changes for the three-year-old company, which began trading as a public company on Feb. 14.
"They'll be subject to the same set of regulations as any retail bank," he said. "They will now need a stronger infrastructure and more systems, and assuming that they don't have a lot of experience complying with regulations, they may have to hire a specialist to help them comply."
Though the FDIC opinion does not directly relate to state law issues, PayPal said the analysis of its status as an agent for its customers and the treatment of customer funds could be considered relevant by state authorities in their review of whether PayPal is engaged in banking.
The company says it will continue to apply for state money services licenses where appropriate.
