10 May 2001: PayPal responded and we present excerpts of their comments at the end of the article.

As any regular online player knows, moving money freely in and out of online casinos is getting tougher all the time. As of March 13th this year, the major credit card companies are requiring that transactions involving Internet-based businesses be identified and gaming transactions must be flagged with a specific transaction code. The major banks in turn are restricting or refusing those transactions and that could effectively remove the major credit cards from the online gaming business cycle. Enter the "e-cash" solution from services like PayPal, NetTeller, and others.

In a nutshell, an e-cash provider is a third-party that handles your money. You register with the service and supply a credit card and/or banking account. Once approved, you can deposit money into your e-cash account via a credit card charge or bank account withdrawal. The other option is to give someone (such as a casino) your e-cash account number and approval to withdraw funds. They request the money from the e-cash people, who in turn withdraw the funds from your credit card or bank account.

In any case, the bottom line is that the casino is dealing with the e-cash provider and not with the credit card companies. That keeps everyone happy because the e-cash providers have more-or-less been accepted by the credit card companies, and thus far, moving money from credit card to e-cash system comes off without a hitch. So from the player's point of view, everything gets simple again by using the e-cash provider as a new middleman between them and the casinos.

The most successful e-cash provider to date has been PayPal. The company claims to do $7 million a day in transactions for more than 8000 merchants, including biggies such as eBay.

PayPal can be ideal for the online player, largely because it's easy to use. Assuming the player is using one of the casinos that accept PayPal, including Aces Palace, Gambler's Palace, Mayan Casino, and Royale Casino to name a few, the player can move their funds back and forth via e-mail. Most participating casinos seem happy with the arrangement and reports are that they typically respond quickly enough to withdrawal requests. But the player still doesn't have the money in their hands. For that they have to request a withdrawal from PayPal. And that should be easy, right? Maybe not.

Officially, a player can get withdrawals from PayPal via a check sent through the regular mail, a deposit back to a credit card, or a transfer to the user's bank account. In practice, any one of these methods can take a week or more to process. The fact that PayPal makes it's money from interest collected on the funds that sit in user accounts is probably something to keep in mind.

Given the extreme ease of sending money, PayPal's security measures have to kick in somewhere along the line. They are currently designed to do that when person who has received money via PayPal tries to withdraw. Small amounts seem to move fairly smoothly but larger amounts --typically anything over $200-- start to trip PayPal's alarms and the process slows down.

Pre-approval for larger transfers is required, and aggregate withdrawals in excess of $1000 over 6 months are not typically allowed. At worst, assets have been frozen and user accounts suspended while PayPal's fraud detection and security people investigate.

More than a few PayPal members have experienced the displeasure of locked assets. In fact, PayPal has reported that their backlog of user complaints topped 100,000 at one point. In response, PayPal has tightened user limits and transaction allowances. Prospective members are strongly advised to read PayPal's terms and conditions before signing up in order to avoid unpleasant surprises later.

In the end, it's just as important to see what PayPal is not as it is to recognize its success and the opportunity it represents for online gamblers. PayPal is not a bank, it does not insure the depositor's funds, and is in no way accountable for its financial policies or procedures.

One final thought - the U.S. Federal Trade Commission (FTC) is the de facto regulator for financial institutions that fall outside specific corporate law, including Western Union, American Express and the e-cash services. And while the FTC does not have specific regulations for e-cash services like PayPal, they have advised users to "keep their PayPal balances low."

Update: 10 May 2001
Ryan Knight from Customer Relations at PayPal responded to our article at length. Here are some excerpts:

It's important that we correct a few inaccuracies in Max Drayman's recent review of PayPal:

Since PayPal is not a bank but a payment service (like Western Union on the Web), we don't pay interest on our accounts. However, we don't make our money by holding onto this so-called "float." We charge businesses, such as online casinos, a transaction fee for using our service to accept payments easily and securely on their own websites. This is far and away our main source of revenue.

... Mr. Drayman is simply wrong about "tripped flags" and processes being slowed down for withdrawals over $200. Also, there is no requirement that our members ask us for permission to withdraw their funds from PayPal or that it is prohibited to withdraw more than $1000 in six months.

... the link in Mr. Drayman's article, purportedly to a collection of PayPal user complaints, is really to a website maintained by a well-known -- and largely discredited --PayPal critic, who has admitted to working with rival payment services. He also has admitted to passing judgments on services he has never used.

... Most customers have noticed a tremendous difference from the early days of the PayPal service, and the fact that our use continues to grow dramatically would seem to indicate that they recognize and appreciate our response. Bottom line: customer support is crucial to the success of our business -- and we aim to be successful.

... Finally, while PayPal is not a bank, we do take steps to ensure the maximum protection of members' funds. We provide $100,000 in insurance to each account (free of charge) in the event of unauthorized use. We also keep members' funds separate from PayPal's operating funds, so that they can easily be claimed in the unlikely event that PayPal were to cease operations. And, finally, far from unaccountable, PayPal is subject to regulation by the Federal Trade Commission, the Securities and Exchange Commission, all applicable state laws, and finally, to our customers themselves.