Random Thoughts – Randocity!

Paypal has been in business for how many years now? Yet, they still can’t manage to find a way to verify a person without using a bank account? Since day 1 of Paypal, I’ve been sternly opposed to giving my checking account routing information to Paypal. Why? It’s very simple. I don’t trust them. I never have. I never will.

Why you should never give out bank account + routing information to anyone!

Let me first say that when I discuss ‘routing numbers’, this means a combination of both your account and your routing number. Clearly, you wouldn’t just give out only a routing number as that’s not useful. It is only useful when in combination with an account number.

When you give someone a signed check, you implicitly give them your routing information. That’s a danger when you write a check to a company. The protection, of course, is that you’ve given them a physical paper check for a specific amount and you know exactly how much that check was. So, when the check number arrives at the bank and drafts that amount of money from your account, it was expected. They can’t draw more than the amount the check was written.

Routing numbers, on the other hand, are effectively blank checks. When you give a company your routing number, you are handing them a signed blank check. That’s because you’ve agreed to allow them blanket access to your checking account. That company can then debit any amount of money from your account they see fit without so much as a thank you. Because Paypal uses EFT (electronic fund transfers) in the form of ACH (automatic clearing house), they can debit your account up to the maximum amount of funds in your account. This means, they can overdraw your account and completely drain your funds. ACH/EFT offers no liabilities to the consumer whether accidental or intentional. Because you gave that company explicit approval to debit your account at will, there are no liabilities for any inappropriate transactions. That’s left between you and Paypal to resolve. The bank will usually not become involved. When banks do become involved, the best they can do is tell you when it happened. You can try to ask your bank for additional help, but they will most likely point you to Paypal for resolution. The reason is simple, you agreed to give Paypal access to your account up front.

Worse, if the company that overdrafted your account chooses to not give you the money back, then you may be out of luck. At that point, you better seek a lawyer, assuming you have any money left to pay them.

Paypal and Checking Accounts

Paypal does not need a checking account to verify you. They just tell you they do because that’s the way they have always worked it. This verification process can easily be done with a credit card charge that you input later to validate that you receive the bill for the card. Paypal simply wants to have unfettered access to your checking account. Frankly, it’s a huge liability for you. It’s also a huge liability for Paypal to store this information. One hacker in their system and they could have a field day with your money.

Credit Cards and Fraud

Paypal is well aware of the fraud issues with credit cards. They are also well aware of chargebacks, merchant liabilities and fees associated with these processes. To avoid them, they prefer unlimited access to your checking account that hold no such penalties or liabilities. Because the consumer has no recourse over inadvertant transactions, Paypal has the upper hand. This is why Paypal will not verify you with only a credit card. Can they validate based on only a credit card, yes. They simply choose not to.

Credit cards have long established liability rules that prevent fraud occuring from both rip-off artists and from merchants alike. Unfortunately, there are no such rules for ACH.

Consumer Protection from Businesses

Whenever a company asks you to give them routing information from your checking account, tell them, “No!”. Not only should you tell them “no”, you should explain exactly why. Tell them that you don’t trust them with that level of access to your account.

Should you continue to do business with Paypal? That’s entirely up to you. But, I still do not have a verified account with Paypal because I simply will not give them the routing information from my checking or savings account. I simply do not trust ANY company enough with that information. Remember, Paypal is not a bank. Thus, it does not fall under any banking rules, liabilities or any federal insurance. In fact, who knows what insurance Paypal even carries? So, whatever Paypal does, you’re at their mercy to do it right. If they don’t, you have to fight with them to get your money back. The bank won’t help you.

But, I need to give out my routing number…

Here’s another option. It’s not optimal, but it works. Simply, open a second checking account. By setting up a checking account specifically and solely to be used with Paypal and merchants, you can limit your financial liability. You can then link another account to this new account for transferring in money only, but be sure NOT to link the new checking account to any overdraft protection on any other accounts. So, if Paypal overdraws your account inadvertantly, they won’t get any more money than what you have specifically placed in there. If you want to buy a $250 appliance, only transfer in $250 for just that appliance.

The problem with this technique is that banks sometime require minimums to open an account and minimums to keep it open. So, you may have to leave $1000 (or some other arbitrary amount of money) to prevent accrual of monthly fees or account closure. You’ll need to contact your bank for details.

While this does work, it’s not optimal by any stretch. It requires you to be extra cautious with how you use that account. You have to be diligent to place the money in there when you need it. And, you need to remember that transfers of money into the account are not always instanteous. So, you may have to transfer your money in the day before you intend to purchase to ensure the money is there to cover the transaction.

What if I’m a Merchant?

For merchants who want to get paid for products they sell, I understand the issue here with ACH/EFT. Again, in this instance, I would set up a separate checking or savings account solely for Paypal use. Only give this account to Paypal so that when you receive payments, you can transfer them out of that account and to your ‘regular’ account immediately. This way, if Paypal decides to debit you for any reason, the money won’t be there.

Overdrawn Accounts

If Paypal overdraws your account for any reason, don’t expect them to pay you back for insufficient fund fees. You will have to deal with these fees on top of the inappropriate debiting from Paypal. You will then have to argue with Paypal to get your money back and your bank fees reimbursed. But, good luck with both of those processes.

Spending Limits

If you choose not to give your routing information to Paypal, Paypal arbitrarily limits how much money you can send to an individual when you buy merchandise. For this silly reason alone, this is enough to tell Paypal to take a hike. There are plenty of ways to buy merchandise from merchants on the Internet. In fact, when a merchant is reputable enough, they will set up their own merchant account with a bank and let you pay the merchant directly. You should also feel comforted knowing that when you send a payment to a merchant, not through Paypal, you have the full card protections behind your transaction. When you purchase through Paypal, your Paypal account agreement may prevent you from using some of your card’s built-in protections… such as a chargeback.

Credit Cards

For all of these reasons above combined with card liability limits, fraud protection and other protections that come built-in with the Visa, Mastercard and Amex logos, credit cards protect a whole lot more than ACH/EFT. Cards limit your exposure to ID theft and they also limit your liability if someone steals your card and then, for example, buys a new car with it.

For payments, Paypal could choose to issue checks instead of requiring ACH/EFT. But, they have never wanted to go this route for payments. Instead, Paypal forces you to verify your Paypal account by giving them a routing number from your checking account. As I have said, this is not necessary and is a huge liability.

If you want to protect your money in your bank account from unauthorized transactions, you should not give Paypal (or any company) access to your checking account via routing numbers. Instead you should insist on the protections that credit cards offer. Credit cards are more than sufficient for anything that Paypal would need (at least for paying for merchandise). For merchants, you will need to determine what works best for you.

[UPDATE: 6/27/2012]

Paypal now has a new wrinkle in its verification process. When attempting to verify a checking account and your bank has a web portal (i.e., Wells Fargo), they will ask for the login and password to your bank’s web portal to do an ‘immediate’ verification. Don’t do it! Don’t give it to them. Paypal says they won’t store the credentials, but with all of the stolen information from various sites, do not trust ANY site with your bank’s web portal login and password. This should really be common sense, but maybe it isn’t. With that said, if you must verify a bank account with Paypal, do it the old fashioned method by letting Paypal make two small sized deposits. First, it makes Paypal give you about 25 cents. Second, you’re not giving out your bank’s web portal password to some random third party.

As much as I rant above about giving out routing numbers and blank checks, it’s far worse to give out your bank’s web portal login and password information. Do not do either if you can help it. However, if you can manage to set up a separate one-sided transfer system into a free savings or checking account for Paypal payments and transfers, then by all means set that up. Do not give Paypal access to your primary checking account with full access your bank account. Also, make sure that you have disabled overdraft protections on any accounts you give Paypal so that if they reach in and grab money out, when the account hits $0 it doesn’t go any further. You don’t want to be mopping up a mess of bad debits and at the same time having to pay interest payments on those bad debits. Paypal is not a bank and they’re not likely to reimburse you for any bad transactions leading to overdraft fees or interest accrued. So, avoid the issue and prevent Paypal from doing this damage in the first place.