The risks of using Paypal

How does Paypal work?

Instead of sharing your payment details with an unknown retailer, if the website allows Paypal payments, you can effectively use Paypal as a middleman. So Paypal - which prides itself on being a brand you know and can trust - takes your payment and passes it on to the retailer without sharing any of your sensitive financial information.

Does Paypal actually offer extra protection?

If you pay for an item costing £100 or more using your credit card, you are protected under Section 75 of the Consumer Credit Act. So if the retailer goes bust, fails to deliver the goods or the goods it supplies are not up to scratch, you have the statutory right to compensation from your credit card provider.

But this statutory right does NOT apply if you pay for something on your credit card via Paypal. In this case, the very safeguard you sought - having a middleman - means you no longer have a direct, legal contract with your credit card provider.

Instead, you will have to make a claim for compensation with Paypal. And that means Paypal gets to decide whether your dispute is valid. You no longer have the protection of the law.

Having said that, Paypal does offer some protection under its 'Buyer Protection' scheme. It states that it will 'help you' if you didn't receive the item you paid for with Paypal or you received an item that is 'significantly not as described'. However, there are eligibility requirements you must meet:
You must have paid the full amount in a single payment, not multiple payments, like a deposit followed by a final payment. (Under Section 75, you can put down a £1 deposit on your credit card and pay the remaining balance by another means, and still make a claim.)
You must open a dispute within 45 days of the date you sent the payment, and follow the online dispute resolution process on the Paypal website. (You get up to six years under Section 75.)

Both of these restrictions make using Paypal worse than buying direct from the online merchant with your credit card - if the item costs more than £100. This distinction is important. If the item costs less than £100, you don't get any special statutory protection from your credit card provider.

However, even then, you'd have more protection if you paid with a Visa or MasterCard debit card, rather than with Paypal. This is because your bank will allow you 120 days to make a claim after realising there's a problem with your purchase under its debit card Chargeback scheme. You can also make a claim for fraud and unauthorised use of your card under the Chargeback scheme.

Unlike Section 75, there's nothing to stop you making a claim under the Chargeback scheme if you've paid with your debit card via Paypal, but it might make the process more difficult. And as some banks are notoriously rubbish at dealing with Chargeback claims, personally, I would be wary of adding a layer of complexity to the transaction.

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