From the dawn of civilization some 5,000 years ago, the way we exchange and store value has evolved, and in the digital age, continues to do so.
Around 600 B.C., as money the Lydians and Greeks started using coins instead of bartering and exchanging metal bullion or other small items of value. Around 600 A.D., the Chinese started using paper money. Checks have been around since ancient times. Plastic charge cards were first used in the 1920s in the U.S.
Credit cards today for most people are the payment method of choice for most medium-size purchases.
But accepting credit card payments for some small businesses is too expensive -- as much as 5.5 percent of sales. Individuals can transfer money to one another through Western Union, but it's also expensive, with charges of 8 percent on a $100 payment within the U.S.
As a way of facilitating transfers of money over the Internet, PayPal (www.paypal.com) was formed from a merger of two previous companies in 2000. Using PayPal, you can quickly pay for goods or services by having money transferred from your credit card account, bank account, or PayPal account. But PayPal's claim to fame is that you can sell over the Internet without a credit card merchant account.
As the most popular payment service provider or PSP today, PayPal can be a marvelously useful and convenient service. But since coming into existence its actions have caused a mountain of complaints and controversy.
At first PayPal promoted itself by promising to be "always free," using these words in its logo. The service grew quickly. Then it started charging and dropped the "always free."
PayPal first began charging if you used it to sell more than a specified amount per month. As of June 2009, it began charging everyone. For most, that fee is 2.9 percent of the transaction plus $0.30 per transaction, with large companies receiving discounts depending on sales volume.
This fee increase generated a storm of protest, primarily for the quiet way PayPal announced it. Most people didn't find out until the charges started showing up.
PayPal is still free when used to pay merchants. And it's free to receive money from a family member or friend as long as the funds come from a bank or PayPal balance, not a credit card.
PayPal has useful safeguards in place to protect buyers and sellers from fraud, but these have also led to controversy.
Buyers have 45 days after a transaction to report that an item bought through PayPal hasn't arrived or that the item is "significantly not as described" -- different, broken, or counterfeit, for instance. Anecdotal evidence indicates that this protection is effective, with buyers having little trouble getting charges reversed.
Sellers as a whole have had more problems. PayPal's policy is designed to prevent fraudulent chargebacks, but sellers have to provide a high standard of proof that the item did in fact arrive, and sellers have complained of unfair chargebacks.
PayPal has also been criticized for freezing the accounts of merchants who grew quickly and received large numbers of payments. PayPal does this as a hedge against fraud, but it penalizes legitimate businesses. As this is being written, PayPal just froze all personal transactions involving the entire country of India as it resolves an unspecified problem.
PayPal has done remarkably well financially. In the last quarter of 2009, PayPal's volume exceeded $20 billion for the first time in a single quarter, according to John J. Donahoe, president of PayPal's parent company, eBay, in a January conference call to reporters and analysts.
PayPal and other non-credit card payments represent more than 20 percent of online sales, with PayPal the largest, according to a recent report in American Banker.
Unlike most other Internet start-ups, PayPal didn't go belly-up during the dot-com bust of 2000 and 2001. In fact, the founders sold the company to Internet auction behemoth eBay in 2002 for $1.5 billion. PayPay's CEO netted $55 million from his share.
As you would expect, as a result of the controversies, complaint sites have popped up, including PayPal Sucks (www.paypalsucks.com) and PayPalWarning.com (www.paypalwarning.com).
To help prevent PayPal problems, beware of spoof sites with names such as PayPai that try to trick you into revealing your PayPal password. Log directly onto PayPal rather than clicking on possibly bogus links in email messages. Also, don't use the same password for your PayPal account as your email account. Hackers have gotten into the PayPal accounts of some users by hacking their email passwords.
Reid Goldsborough is a syndicated columnist and author of the book Straight Talk About the Information Superhighway. He can be reached at firstname.lastname@example.org or reidgold.com.