PayPal Explains Holds on eBay Sellers' Accounts

[eBayNews]

PayPal posted information about its rolling reserve policy on its blog today. Bill Clark, an analyst on PayPal's risk team, wrote, "We've heard a lot of questions from sellers about reserves, so I wanted to explain what these reserves are and why PayPal requires them on some accounts."

PayPal began instituting two types of holds on eBay sellers' accounts to mitigate risk. One is called a "rolling reserve," the other is a 21-day hold. In the blog post, Clark said it instituted rolling reserves "for a very small percentage of our sellers - currently less than 1%."

Why does PayPal institute rolling reserves? "This reserve helps to ensure that money is available in sellers' accounts to cover potential payment reversals or chargebacks if they do not have enough funds in their PayPal balance to do so. When sellers don't have the funds to cover their transaction liabilities, PayPal is responsible for reimbursing buyers which represents a significant cost in our system. We've been using reserves for some time in other parts of the business, and what we've found is that reserves help PayPal control costs so we can provide competitive pricing for all of our sellers, and continue to invest in improving our service."

How does PayPal determine when to institute a rolling reserve on a seller's account? "To determine when to place a reserve, we look at a number of factors that may increase the risk of chargebacks or reversals - things like industry categories that have higher-than-average chargebacks, or sellers who are new to PayPal (where we've historically seen a higher instance of chargebacks or reversals). We reassess risk factors periodically, and if we determine that the risk has gone down in certain seller segments, we will release the reserve."

Clark did not address the 21-day holds for eBay sellers introduced in January 2008 (link), but PayPal had explained the holds last year in an interview on the eBay Ink blog.

Sellers use payments from orders sold to pay suppliers, employees and overhead, and like other individuals and small businesses, often have cash flow issues, so any hold on payments from customers or account balances is of concern to them.

A common concern from eBay sellers is that PayPal is earning interest on the held funds. Clark wrote, "If the seller is enrolled in the PayPal Money Market Fund, then this money will continue to earn interest while it's in reserve."