Chargeback agreements between two card companies and New York State have put PayPal in the position of mediating some disputes when eBay auction purchases go awry.
Discover Financial Services Inc. and American Express Co. have agreed with New York Attorney General Eliot Spitzer's office to change the way they treat customers who use their cards to fund PayPal accounts.
In the past both companies denied customers' chargeback requests when purchases they made using eBay Inc.'s PayPal unit did not work out. This left consumers either out their money or forced to rely on the San Jose, Calif., company's restrictive buyer protection program.
In September the New York attorney general's office announced an agreement with American Express to change this practice; a similar agreement with the Discover division of Morgan Stanley & Co. followed in December. The Amex agreement applies to all its customers, while the one with Discover applies only to New York residents.
Under the agreements, when a cardholder disputes a PayPal purchase, Amex and Discover must contact both PayPal and the end seller to settle the dispute.
An American Express spokeswoman said that this change was already in progress by the time Mr. Spitzer's office began investigating. "We were hearing from cardmembers that they had a need for us to look into purchases of goods and services from the end seller," said the spokeswoman, Judy Tenzer. "We started to look into that and change some policies."
Neither Amex nor Discover admitted wrongdoing, but each paid a fine ($85,000 for Amex and $20,000 for Discover) and agreed to reimburse cardholders who had been denied chargeback protection.
A PayPal spokeswoman said the changes that came from these settlements would not affect PayPal's acceptance of credit cards to fund customer accounts - even though PayPal is now more likely to wind up on the hook for bad purchases. "One of our best value propositions is that we accept credit cards," said Amanda Pires of PayPal. "For micromerchants it is a great alternative to a merchant account. It is not anything we would ever change."
A spokesman for the attorney general's office would not comment on whether similar investigations were being conducted for MasterCard International or Visa U.S.A.
A Visa spokesman said that it treats PayPal as the merchant, and refunds PayPal purchases funded with a Visa card. A MasterCard spokeswoman said that it leaves chargeback issues up to its bank members. "PayPal has to work through an acquirer, and our acquirer is required to make sure the people they do business with follow the rules," she said.
