Consumer Watchdog misses the biggest threat

The Consumer Watchdog April 21 asked the US Department of Justice (DOJ) to launch an antitrust action against Google. In its request it suggested that Google might be broken up.

While there is the potential for Google to develop into something that needs to be broken up, right now there is a candidate that is way higher in priority. And that is Paypal.

In a previous post I pointed out that the attacks on bankers’ bonuses missed the point (see Bankers’ bonuses – wrong target). The Consumer Watchdog has performed a similar trick here.

So why should Paypal be at the front of the queue?

1. It has become a monopoly – it demonstrates Metcalfe’s Law beautifully – and, if the allegations repeated below are true, is now abusing its status. Without Paypal you are unable to send money to or receive money from a very large proportion of Internet users. For sure there are competitors such as Google Checkout and 2CO. But if you can use only these, whilst most people are using Paypal, you are extremely restricted in your ability to engage in web-based financial transactions.
2. Paypal provides a service for which there is no viable alternative. You can’t realistically barter online, you need to use some form of electronic payment system.
3. Alledgedly Paypal has repeatedly misunderstood how dangerous false positives are to a person’s financial position. The web is full of stories of people who claim that Paypal has frozen their account without warning, usually on the basis of “suspicious transactions,” only to discover that the transactions are valid. Now this also happens a lot offline – personally I find my erratic credit card usage results in a new card approximately once every three months. But I can own 2 or 3 credit cards, and if one is cancelled I can use another. It is not so easy to have multiple Paypal accounts, and even if you do have more than one account, switching is not as easy as taking a different credit card out of your pocket. You need to modify your email address associations, so that Paypal transactions linked to the email address associated with the frozen account do not fail. If you are using Paypal buttons to sell, you need to recreate buttons to associate to your new account and update your website. For some people who make their living selling online, a frozen Paypal account can put them out of business in days – and for those working as sole traders or with personal guarantees to a separate incorporated business, the result can be much worse when supplier contracts cannot be immediately termninated.
4. Alledgedly Paypal is also reticient to reinstate accounts, potentially leaving people permanently excluded from the growing online economy.
5. Your online Paypal activities can impact your offline financial status too. Many people almost see Paypal as “play money” – especially if they are sending friends, say, 99 cents. What they don’t realise is that Paypal is linked into many of the credit reference agencies, and your offline creditworthiness can be decreased by your online activities. So your application for a mortgage might get refused, or the interest rate increase by a couple percentage points, because Paypal has reported “suspicious transactions.” For sure this is not all Paypal’s fault, but Paypal could do a better job of teaching people that they need to be as responsible with their Paypal account as they do with their bank account.

So what should be done about the situation?

1. Fungibility is required between Paypal and other online payment providers. I can setup an automated payment from a bank account in one country to deliver funds into a bank accounts in another country (with a few exceptions) – I am not restricted to depositing into accounts in foreign branches of my own bank. I should be able to send money between online payment providers.
2. Paypal needs better regulatory oversight. In particular, the issue of alleged indiscriminate account freezing must be investigated and addressed. This will require international coordination between regulators.

And if Paypal does not agree?

It should be split into three or four separate companies, each with the same international coverage as Paypal provides now, thereby giving consumers a choice of online payments provider. And by starting from a common position, IT system interconnectivity will be simple, and therefore fungibility can be built in from the beginning.

A condition of the licence to trade should be that fungibility should be maintained, even in the event that one of the baby-Paypals is bought by, for example, a commercial bank.

My personal expectation is that, under this scenario, one of the first buyers would be Google, which would merge the baby-Paypal with Google Checkout to take advantage of the fungibility with the other baby-Paypals – this might then provide grounds to investigate Google if it were to use the inaccessiblity of Google Checkout-only functionality in an anti-competitive manner.