PayPal Money Market Account Review: Is It Safe?
For a while now, online payment service PayPal.com has offered an extra reason to keep money in their accounts - a money market fund paying around 5% interest annually. I get asked about it regularly, and here I will explain in detail why I do not recommend keeping any significant amount of money in this account.
Now, when you think about a money market account, what are the top three things you look for? Here are mine, from most important down to least important:
- Safety. This is cash savings, so the top priority is that you don’t want any risk or chance of loss.
- Liquidity. This is not a certificate of deposit; You want to be able to access the money at any time.
- Yield. You want to earn a competitive rate of interest.
I’ll address them in reverse order:
Yield
Its 7-day average yield as of 8/16/07 was 5.04%. This isn’t bad, and historically the fund has offered competitive rates, although they are not necessarily the highest. In looking at the prospectus [pdf], these higher yields appear to be the result of temporary fee waivers. Without the ongoing fee waivers, the yield would be about 0.70% lower. Whether or not they will keep the yield competitive with these waivers in the future is unknown.
Safety Concerns
As with all money market mutual funds, they are not FDIC insured. PayPal is not a bank. However, the money market fund is still subject to the same restrictions as any other retail money market fund, and must invest in the highest rated securities out there. In addition, PayPal is a subsidiary of eBay, and the fund is run by Barclays Global Investors, a big name that manages trillions of dollars of assets. A retail money market mutual fund has never gone below the standard $1 per share for an individual investor, and I don’t expect it to here.
However, there is also the different safety concern of what happens if someone fraudulently gains access to your account. If someone hijacks your bank account, what can they really do? They can’t just go out and buy something. In order to set up an online transfer, they still need to provide account and routing numbers to a bank account with the same name on the account. Even if you do lose money, you are protected by Federal Reserve Board?s Regulation E and have your personal liability capped.
On the other hand, PayPal is inherently risky because it allows the instant ability to spend your money! In fact, they can send money to anyone with an e-mail address. If someone steals your password, they can start sending money right away to various vendors and other users. Such fraud can be very hard to track. And then who decides if you get your money back? PayPal.
There are countless complaints of people who’ve been on the bad end of a PayPal dispute. I’d be very careful. Worst case - you lose money!
Liquidity
Again, here PayPal gets to write it’s own rules. It is not a bank, and is not subject to the many regulations that a bank has to follow. They can freeze your account at any time. PayPal froze my account once for no good reason. (Unless you count a complaint of one nervous buyer who mistyped his tracking number and thought I was scamming him.) This can lead to weeks if not months of faxing them different documents in order to prove you’re you, or you didn’t scam someone else, or whatever. Meanwhile, you can’t withdraw any of your money, and they may even take some of it away from you.
The point here is that you are not guaranteed access to your money. Again, PayPal is sole judge and jury.
Conclusions
The PayPal Money Market Fund account, while offering a decent interest rate and a little bit of added convenience, fails to satisfy the two most critical requirements of a cash savings vehicle - to maintain the highest levels of both safety and liquidity. Sure, if you use PayPal a lot, you might sign up for it to earn a bit of interest on your in-transit money, but I wouldn’t keep large sums of money in such an account.
There are so many other FDIC-insured, highly-regulated banks that offer similar levels of interest and easy online access, why would you want to?
Find more in Banking, Insurance | 9/2/07, 4:26am | Trackback
September 2nd, 2007 at 5:01 am
Yes, I must agree. PayPal is not to be trusted. My account was also frozen at one time, for making the mistake of logging in while in an “unsupported country”. Eventually I got it unfrozen. I still use it to receive payments but withdraw them right away.
I read your other post that you linked to about when they froze your account. Some good comments over there. A couple people mention you need to have an empty bank account linked to PayPal so if they try to do an ACH transfer without your approval they won’t get any money. Maybe I better set that up.
September 2nd, 2007 at 7:10 am
Good catch on the fee waiver!
September 2nd, 2007 at 8:37 am
I think this statement can be applied to many online only internet companies that don’t have an associated brick and mortar store location. I feel this way about internet banks as well. I want to be able to see and speak to a manager if need be.
However I think just the shear size of Paypal and their owner eBay ensures that your PayPal money is safe. I’ve never had a problem with PayPal before…
-Raymond
September 2nd, 2007 at 12:27 pm
Yeah, I have to agree. Paypal is kinda risky. But I got tempted by their mobile service, so maybe I’ll link an account with low money in it to try it out.
September 2nd, 2007 at 2:29 pm
I would never use them as a bank, but there’s no reason not to activate the money market feature so you can earn interest on money as it passes through your account.
September 2nd, 2007 at 3:24 pm
I’m keeping my account at ING Direct. Good service and interest rate for over two years.
Looking for drop in interest rates over the next two years. First cut could come in another 8 weeks.
September 2nd, 2007 at 6:25 pm
To me Paypal has lost its brand reliability solely on how they freeze account and handle disputes over Ebay auctions. Even if its interest rate were higher, I wouldn’t even bother to think of trusting them with my money.
September 2nd, 2007 at 7:53 pm
Thank you for the information.
September 3rd, 2007 at 3:26 pm
Thanks for this. I’ve really been curious about it.. I’ve looked other places online but I wasn’t very familiar with any of the sites I looked at. I read your blog religiously and trust your input… Thanks again.
September 4th, 2007 at 8:50 am
but is paypal supposed to be safe since it’s backed by ebay?
September 4th, 2007 at 8:55 am
PayPal now offers a SecurID like token that will only allow login to your PayPal account after you enter the token after a valid ID and Password - Definitely worth the $5 one time fee. You can set it up for use on your Ebay account as well.
Regards,
sip
September 9th, 2007 at 8:24 am
Sld a book on ebay’s Half.com and the buyer scammed me by filing a complaint against me. ebay went into my account and refunded him all his money. I was out of a book and shipping costs. Too many other safe places to put your money than Paypal.
February 4th, 2008 at 9:43 am
Interest posted at the first of Feb. 08, though advertised on the site as around 3.99% it paid approximately Less then 1/3 of 1 percent. At this rate we/I could have actually lost money I was holding in reserve to to use with my PayPal Debit Card. But more there was no explanation and no one to call or write for an explanation.
I am out of here. It makes me feel shaky about all things associated with PayPal/Ebay!
February 15th, 2008 at 12:57 pm
I’ve never had a problem with PayPal. This researcher who interviewed many of PayPal’s top execs wrote this objective story about it, concluding that PayPal was a strong stable and safe company to do business with. Check it out. It’s really good.
http://www.wilsonweb.com/wct5/paypal_assess.htm
April 11th, 2008 at 6:24 pm
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