Criminals target online payment services

Paypal, the e-money service, has opened 6.3 million accounts in the UK on the back of the protection it offers to people making transactions online. One in every 10 people has a Paypal account and a third of people shopping online use Paypal, but increasing numbers of users are finding the protection has serious limitations.

E-money schemes enable individuals and small traders to pay and receive money over the internet without disclosing their bank account or credit card details. The systems work in this respect, but a lot of people have still been losing money through fraud. Problems concerning those who have bought big-ticket items have been extensively reported (Paypal cover is limited to items costing less than £500). But Cash readers are also experiencing problems with selling too.

Brian Webb sold tickets to the Champions League final through online auction site Ebay for £360 last May. He accepted payment by Paypal from an account funded by a credit card. The buyer, in America, said the tickets were a birthday present for a friend in Holland so, when the money arrived in his Paypal account, Webb posted the tickets to Amsterdam as requested. Several weeks later the buyer told his credit card company to stop the payment, known as a chargeback, as he denied making the purchase. Paypal took the money back from Webb's account. He does not qualify for Paypal's seller protection as he posted the item to Amsterdam rather than an address registered with Paypal.

Sophie Wright sold a mobile phone for £360 on Ebay and posted it by special delivery to the address on the buyer's Paypal account. She transferred payment from Paypal to her bank savings account. Four days after the sale, on the day the phone was delivered and signed for, Paypal told her it was investigating because the buyer claimed the payment Sophie had received was unauthorised. The £360 was erased from her Paypal account. Paypal has told Cash it will reopen her case when Wright sends in hard copy proof of the address she used - but failed to tell her that, although she has the receipts available.

Much of Paypal's business is through Ebay, which bought Paypal in 2003. But some Ebay sellers now refuse to accept Paypal because they have repeatedly lost money to crooks and have been ineligible for Paypal's protection scheme.

Typically fraudsters pay from a Paypal account backed by stolen credit cards. When the genuine cardholders complain about being charged for items they have not bought, the card company instructs Paypal to retrieve the money from the seller. Some fraudsters receive the goods but claim they did not arrive and instruct their credit card company to claim back the money from the seller. Paypal investigates each case, meanwhile freezing the seller's account, but invariably agrees with the card companies' decisions.

Geoff Iddison, chief executive of Paypal, says: 'If we feel the buyer has a case, we will chargeback and pull the money back from the seller's Paypal account. If the credit card is identified by the credit card company as stolen and the seller has shipped the item, that is an unfortunate example where a chargeback could happen and the seller would be charged back after the items had been sent.'

Sellers cannot refuse to accept payment from Paypal accounts backed by credit cards, rather than bank accounts. Sellers suffer a £7 chargeback fee - even if the chargeback is incorrect - if they inadvertently fail to meet Paypal's strict qualifying conditions (see below).

Other e-money services give greater protection. Nochex never charges back fraudulent deals to sellers. Marketing manager Stephen Potts explains: 'We get chargebacks coming in all the time, a steady flow. Quite often people will freeze an account on a whim. But with Nochex you are protected from chargebacks if you are a genuine seller.' But Nochex only accepts sterling transfers up to £300 a day. 'That is no good for someone selling computers at £600 but we made a conscious decision because there is a lot more risk associated with that type of business.'

Fastpay, owned by NatWest, also deals only in sterling, accepts a maximum of £250 a day, and decides whether to carry the cost of chargebacks case by case.

Since buying Paypal, Ebay has dropped any mention of other e-money schemes on its website.

Potts says: 'Paypal is highly integrated into the listing process. It is pretty much there by default. Ebay won't let us advertise, so someone new to Ebay is unlikely to know about Nochex.'

The small print

Sellers with a premier or business account who have verified their address and who suffer a chargeback can claim up to £3,250 on any transaction, but only if the card company and Paypal agree it is fraudulent. Other protection of £3,250 a year is available for sellers when buyers say the goods did not arrive.

But there are strict conditions and failing to meet even one negates the protection. They include checking on the transaction details that the address you are posting to makes you eligible for seller protection (only in a few countries, and not all then), keeping proof that you delivered to this address (not just proof that you posted the item) and requiring a signature on delivery for items costing more than £150. UK sellers have Paypal protection only when they deal with UK or US buyers. Items posted to any other country have no seller protection. When posting to the US, they must send to a confirmed address. Sellers can check a buyer's confirmed address from the Paypal email notifying them that payment has arrived or the history page of their Paypal account. Within the UK, provided they use an address shown on the transaction details in Paypal's email, they have protection even if this is not a confirmed address.

Some fraudsters use the genuine address of a stolen card and then ask sellers to deliver elsewhere. Sellers can do this and still have seller protection provided they post to the address shown on Paypal's email confirming payment has arrived.

Protection money

All schemes are free to senders.

Paypal Recipients pay 3.4 per cent plus 20p. Withdrawing money from Paypal account to your own bank account costs 25p if under £50, otherwise it is free.

Nochex Recipients pay 2.6 per cent plus 20p. Withdrawing money from Nochex account to your own bank account costs 25p if under £50, otherwise it is free.

Fastpay Recipients pay 9p. Withdrawing money from Fast- pay account to your own bank account costs 2.9 per cent.