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:

  1. Safety. This is cash savings, so the top priority is that you don’t want any risk or chance of loss.
  2. Liquidity. This is not a certificate of deposit; You want to be able to access the money at any time.
  3. 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?

Comments

  1. 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.

  2. Good catch on the fee waiver!

  3. MONEY BLUE BOOk says:

    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

  4. 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.

  5. 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.

  6. 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.

  7. 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.

  8. Thank you for the information.

  9. 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.

  10. but is paypal supposed to be safe since it’s backed by ebay?

  11. 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

  12. 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.

  13. 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!

  14. 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

  15. Thanks for the information. I was actually considering investing in the money bank, but after reading what you said, the best way is to just transfer it to my bank account and keep it SAFE there. Paypal can definitely be risky.

  16. i was just checking up on this because it did seem liek a good idea, i often have 500 to 2500 dollars in pay pal and i thought maybe that it would be cool to try this.

    I have just had a second thought however, LOL. i think i will just keep transfering to my bank and then going in person to do my busness.

    That way I have some one to yell at when the Doo Doo hit’s the fan.

    Pay pal has never frozen my account, BUT, if you are not careful you can get scammed by a buyer.
    NEVER SHIP ANYTHING without a confirmation number or tracking number. if it’s over 250.00 ( including shipping) <– they dont tell you that. You will need SIGNATURE CONFIRMATION. under 250 and a regular confirmation or tracking number will sufice.

    there are more rules that you could read up on but follow the ones I just told you and you will not get burnt.

    P.S media mail has NO way to track. sell a book? charge the buyer regular shipping plus confirmation. do not ship media mail. 100% guarantee. Thats why he was able to scam you book guy.

  17. I’ve never had a problem with PayPal or eBay, or any buyer/seller I dealt with (knock on wood of course), however, I don’t like many of PayPal’s or eBay’s policies–especially some of their fees–and they definitely seem to be more pro-buyer than pro-seller. Sure they’ve ‘frozen’ some of my money temporarily per their policy (https://www.paypal.com/cgi-bin/webscr?cmd=xpt/Marketing/securitycenter/sell/SaferPayments-outside) but I’ve read their policies so I know what’s going on.

    The Money Market feature is great in my opinion. You’d be crazy to try to use it as a serious investment vehicle with ‘real’ sums of money (like $1000+ which is probably better off someplace else) but for the transient and ever-changing PayPal balance I think it’s a nice way for you to earn a little interest without thinking about it–no minimum, no maximum, no fees, no penalties…

    @Mike: You CAN get signature/delivery confirmation and insurance on Media Mail (http://www.usps.com/send/wayst.....iamail.htm), and if you print your label with PayPal it automatically includes Delivery Confirmation. I find you get more sales and higher bids by offering the lowest reasonable shipping costs.

  18. Pay Pal is crooked and soon as your business starts taking off and gain larger amounts of sales and cash they find an excuse to do a 30 percent rolling reserve holding this amount from every sale freezing 30 percent for six whole months. If you object and call and complain they then freeze the whole account and tell you they are closing it and will return your money in six months that is in the account. I read all the horror stories and was wondering when my time was coming. I had scammers paying for the information email I was selling to do technical internet set up on their cell phones. Some people were honest and some people would get the instructions use them and then file a dispute. I even had a couple that said unauthrized charge on their credit card which they were lying of course I got my money back for one because Pay Pal says they have proof it was charged from their computer and the other one is still frozen because he filed the dispute through his credit card company saying he didnt make the charge which there is proof that only he and he alone charged it from his computer. I also conversed with this gentleman over the phone and throught email. Just because his credit card company of course is deciding to reverse the charge when they know it was him with no doubt. Pay pal send me this wimpy email saying we are trying everything we can but, his credit card company reversed the charge. Okay? Wait a minute Pay Pal you said you have the proof the charge was done throuhg his IP Address. Then where is the foundation for this fraudulent dispute. This means Pay Pal can do nothing just so, the customer calls their own credit company and lies and say they didn’t make that charge. I also think people should bring lawsuits against credit card companies who decide in their client’s favor even when they know the proof shows their client is being untruthful, To make a long story short Pay Pal has absolutely no pull or power over the actual credit card company and you will see that alot of these credit card companies sanction theft by their own clients who steal from merchants everyday. It is obvious that Pay Pal is freezing accounts when they get to a certain monetary level so, they can gain interest from their millions of customers. Has anyone noticed this practice has become prevalant and is now rampant since ebay has purchase Pay Pal. It looks like EBAY is getting away with one of the biggest frauds of our time which is on a billion dollar level yet the Attorney general’s office fails to investigate this obvious and outrageous injustice. Ebay and Pay Pal are gaining exhorbitant amounts of interest from so called frozen accounts and claim they are not holding this money in a bank. This is an outright lie and whoever is running ebay is not satisfied with the tremendous fees they charge you on ebay and then stick you in the back from the additional fees on Pay Pal. If you look at this the right way they are one of the biggest causes of our economy going to pot because they are systematically destroying small businesses at an alarming and overwhelming rate for their selfish personal fraudulent financial gain. The are crushing the entrepeneurial spirit of the small business man or woman who is trying to pull themselves up by their own boot straps. If Obama is so concerned about small businesses and saying they are the backbone of America how are all lawmakers and law enforcement turning a blind eye to Ebay and Pay Pal and their unethical business practices that have to be highly illegal. These two corparate entities make Bernie Madoff look like Romper Room.

  19. Kaitlyn says:

    Wow Andy. Looks like someone has a grudge. You are totally and completely off topic of the article. It’s about the Money Market Fund on Paypal, not how Paypal and Ebay are ripping off everyone.

    As an Ebay buyer and seller myself, I have not been ripped off by any buyers or sellers (knock on wood). I know that some people have been and this unfortunate. But from my dealings with Ebay, there is only a listing fee and a percentage fee. That percentage fee actually pays the Paypal fee, which means that there is not an additional Paypal fee when selling. It is only OUTSIDE of Ebay sales that there is a Paypal fee (which you can easily get around by having people send it to you as a gift).

    Anyways, thank you MyMoney Blog for a great article that helped me get a good look at the Paypal Money Market Fund. I don’t keep much money in my Paypal account, so I think I will go for it and see if I can get interest on what little I have :)

  20. Not a Retard says:

    Are you kidding? What are you smoking? There is NO Ebay fee that pays any Paypal fee. And you can’t “get around” any Paypal fee for sending or receiving money using the types of transfers they have a fee for. If someone buys something from you and pays with Paypal and selects ‘gift’ they’re an idiot because they’ll have no buyer protection. And if you ask people to do it that way you’re a scammer.

  21. Paypal/Ebay User says:

    I have to agree “Not a Retard” if you use the send as gift option you are definatley a retard. If the person is a scammer you have no seller or buyer protection and if you are the seller telling customers to do this then you should be arrested for theft. As this is theft you are committing.

    I am a active ebay and paypal user, knock on wood I have never had my entire account frozen. I have had funds frozen because of a dispute. I simply send paypal the tracking info for the shipment and the funds get put back in my account.

    Paypal has no way of knowing who the scammer in a situation is. They only have the facts at hand to go off of. If the buyer files a dispute for not recieving a item and the seller didn’t buy tracking info then the seller is stupid.

    “Andy” what you wrote makes no sense, you are charged by paypal for them allowing you to accept credit and debit cards. FYI every store with one of those cool little credit card swipers get charged a fee everytime you swipe that plastic. As for the ebay fees, If you don’t like paying the fees then don’t use the services. Try opening your own website and see how far you get. I bet it won’t be long until you are coming back to ebay. You are paying to use a website that have millions of viewers a day. You won’t get that on your own website. I can promise that, I own my own and do a lot of advertisment I get 1/6 the sales on my website as I do only ebay.

  22. betterinformed says:

    Thank you for all of the above. I am interested in starting an e-bay business, and have only had bad experiences with Paypal. I feel better informed by reading all of these posts.

    Thanks!!

  23. Tell you the truth as much as i hate 12% and the 2% ebay and paypal tax me for every sale/money transaction i have to admit they are very legit. Like any other business their motto is “customers always right”, so even though i am a seller and a customer, obviously the one buying from me is ultimately what makes the business work. So if a buyer opens a dispute for an order not received and i dont prove it was delivered then the customer gets his money back. Obviously they want people to feel safe shopping online and thats how they do that. But let me add that first class mail has delivery confirmation so it’s not like the customer can lie about not getting. You dont have to ship overseas either. I do and though it doesn’t happen often but when orders are claimed not to be received i chock it up as a loss. No sweat, 1 or 2 every 3 months is no big deal.

    So my point is most people who have had bad experiences with paypal / ebay , even i have, weren’t taking precautionary measures before doing that transaction. In other words they didn’t read the advice both paypal and ebay give you when selling through them. I did the same thing but finally got it down and now i’m a Top Rated, Gold Power Seller with 100% feedback shipping about 350-400 orders a month. You cant compete when it comes to having the ability to sell to anywhere in the world. The marketing they provide is top notch.

    Anyways i read this cause obviously i have a paypal account and was curious. thanks for your input.

Trackbacks

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