PayPal Foots The Bill For Fraud

For years, eBay executives have touted the trust worthiness of the sellers and buyers on their site. Now they’re backing up that claim with cash.

On June 20, eBay announced that it will fully reimburse buyers and sellers when transaction problems arise, providing they use eBay’s PayPal payment service. That means eBay will foot the bill when, say, a buyer purchases an item that was misrepresented on the site or not sent. So, if that too-good-to-be-true bargain Gucci bag turns out to be a cheap knockoff, eBay will give the buyer a refund. The additional protections will go into effect this fall.

“We’re combining the power of eBay and PayPal to give all buyers and sellers more confidence and trust,” said Lorrie Norrington, eBay’s president of Marketplace Operations in a statement. “Buyers who pay with PayPal on eBay will be covered, with no limits, on most transactions.”

EBay will also refund sellers’ money in many cases when buyers stop payment on an item. The practice, known as “chargebacks,” costs many sellers hundreds to thousands in losses each year. EBay sellers even have a forum where they vocally complain about the practice. . “I had a buyer commit fraud once. They filed a complaint saying item not as described, eBay told them to mail the product back… they did. It was a box full of rocks,” wrote one forum member under the handle Althema . “They got a refund and my product (a digital camera).”

The protections for sellers, however, are not as comprehensive as those for buyers. The company will dole out refunds to sellers that have proof of shipment when a buyer stops payment, claiming the item was not received. EBay will also reimburse sellers when items are purchased with stolen accounts or credit cards. It will not, however, give refunds when a buyer claims that the item was substantially different than advertised. So, sellers like Althema would be out of luck.

The program could significantly improve shopping on eBay’s site going into the holiday season. Safety concerns are often cited by shoppers and analysts as preventing more sales from taking place on the site, particularly for higher priced items. The move is also central to eBay’s goal of fostering the sale of more new, in-season, higher-priced retail-type inventory. EBay struck a deal in May with to sell the big box online retailer’s brand new consumer electronic devices, luggage, and other items on the site.

The reimbursement plan isn’t all upside for eBay, however. Should the incidence of fraud on the site turn out to be higher than the fractions of a percent that the company claims, eBay could end up footing a high bill for problem transactions. That could take a toll on profits.

EBay’s announcement, made at the annual eBay Live conference, held this year in Chicago, was a clear vote of confidence in the security of their site and the honesty of its community. It’s a message that eBay users, many of whom have been vocally upset by some of eBay’s recent changes, particularly those to eBay’s system of rating other members, needed to hear. EBay stopped allowing sellers to leave negative reviews for buyers earlier this year, causing many sellers to complain that they had little recourse against buyers who unfairly refused to pay for goods or left unduly harsh criticisms of products. Now, at least, some sellers will get their money back. Plus, with eBay footing the bill, it gives the company added incentive to remove bad buyers from the site.

EBay also announced additional incentives for sellers to ensure buyers are 100% satisfied with their purchases. The best “Powersellers” will receive 20% off the fees that eBay charges on a completed transaction. According to eBay, 16% of all Powersellers have ratings that are high enough to immediately qualify for the discount.

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