What Can You Do If PayPal Holds Your Funds For 21 Days? Gamble With It In Their Money Market Fund

EBay’s highly criticized fee changes—lower listing prices but a 67% increase in seller fees—kicked in last week, and next month eBay’s payment service PayPal will start holding certain deposits for up to 21 days if PayPal considers the transaction “high risk.” PayPal earns interest on any money it holds—and it’s perfectly legal because PayPal is a deposit broker and not a bank. If you do find your money stuck in “high risk” detention, there’s only one way you can attempt to earn money from the delay, and that’s by sticking it in PayPal’s Money Market Fund.

Although PayPal earns interest on the money it holds, it’s not very much when compared to the rest of the company’s revenue streams. PayPal doesn’t release data on how much it earns in interest, but outside analysts estimate it’s less than $10 million per quarter—”a drop in the bucket” compared to the $1.8 billion PayPal earned in 2007.

None of that matters for sellers, though, who will now run the risk of losing access to funds for up to three weeks, even though they still must ship the sold item.

What is sparking reactions ranging from annoyance to panic among some of eBay’s sellers is the company’s criteria for determining what transactions fall into the “high-risk” category. Factors beyond sellers’ control, including the number of “feedback” comments they have from previous buyers and how many of those comments are positive, can trigger the freeze.

“It’s like a bad dream, really,” said Dana White, an eBay seller who lives outside Ocean City, Md., and deals in used clothing, shoes and accessories. “I’m a small seller. All I need is two negatives in a 30-day period, and they will hold funds.”

If you started selling within the past six months, have a low number of feedbacks, have had too many instances of negative feedback in the recent past, or are selling a high-priced item or charging a high shipping & handling fee, you could earn the high risk designation.

PayPal’s representative tells CNN Money that the one way you can put that held money to use for yourself is to enroll in PayPal’s Money Market Fund (download a PDF of the prospectus here):

PayPal’s Pires said accountholders should be aware that they have the power to collect interest for their own use on delayed funds. It’s as simple as enrolling in the company’s PayPal Money Market Fund, Pires said.

For enrolled accountholders, any funds earmarked for a hold are diverted into the Money Market Fund rather than PayPal’s corporate bank account, Pires said. The dividends earned are credited to user accounts on a monthly basis.

“Every U.S. accountholder has the ability to invest in the Money Market Fund,” Pires said.

PayPal’s Money Market Fund is run by Barclay (BCS)’s Global Investments. No minimum balance is required, and the fund’s current interest rate is 3.46%.

The other solution, CNN Money notes, is to abandon PayPal (and eBay along with it) and go with an alternative e-commerce solution—they list five potential candidates on their website.

“What PayPal does with your money” [CNN Money]
“EBay’s PayPal funds freeze plan draws fire” [CNN Money]

Basic Fee Changes [eBay]
“eBay raises seller fees 67% on the cheapest items < $25.00" [eBay Forums]
“PayPal’s 21-Day Hold Policy for eBay Sellers” [Auctionbytes]
“Putting The PayPal 21 day Hold Into Perspective” [Skip McGrath]
“5 PayPal alternatives” [CNN Money]
PayPal Money Market Fund [PayPal]
(Photo: St0rmz)