Problems increase as electronic payments grow in popularity

More people are getting fed up with their e-money supplier. Are PayPal and other firms playing fair with users?

complaints about electronic payments are soaring, according to the Financial Services Ombudsman. Some users report having their e-money account closed or restricted, while others complain that disputes with buyers or sellers are not being resolved satisfactorily.

With more people than ever using e-money – of which PayPal is by far the biggest issuer – for buying and selling through such sites as eBay, the number of mistakes is bound to grow. But there does seem to be a growing trend for errors not to be sorted out properly, if the Ombudsman's latest report is anything to go by.

In a typical case, Mr J (not his real name) lost out on £300 after someone who sold him a faulty car stereo refused to give the money back, even after the stereo had been returned to him. After several fruitless attempts at getting his cash, Mr J turned to the e-money issuer, expecting it to refund his money.

He got short shrift. The e-money issuer refused to arrange a refund because, it said, the seller claimed that Mr J never returned the stereo. Additionally, the company noted that Mr J had "failed to follow the correct procedure" for returning faulty goods.

It pointed to its small print which stated that any faulty goods must be returned to the address registered on its system for the seller. It said it had no record of the seller at the address Mr J claimed to have used when returning the stereo.

But he had used registered post when returning the stereo so could prove that the package had been delivered there. He also had copies of his email exchange with the seller, including the address details the seller had sent to him.

When he turned to the Ombudsman, it looked at the terms and conditions of the e-money account. Contrary to what the e-money issuer had told Mr J, the small print did not say that items had to be returned to the address the e-money issuer held for the seller. They simply said that items had to be returned to the seller.

So, since Mr J could prove he had followed the seller's instructions, the Ombudsman told the e-money issuer to refund the £300 and pay Mr J £50 for the inconvenience it had caused.

The company had clearly fobbed Mr J off with nonsense to avoid paying his claim. Searching on the internet reveals lots of fed-up eBayers reporting similar stories, with Paypal the company mostly mentioned. There also seems to be growing numbers of people who claim to have had their accounts closed and cash held – for up to six months – if PayPal notices unusual activity, such as sudden large sums, on their account. The Financial Ombudsman's report also covers other e-money problems, with pre-paid cards, gift cards and similar payment disputes, when it has in fact sided with the e-money issuer. In many cases it's clear people may not have read closely enough the terms and conditions of using the service. That sends out a warning to all those who do buy and sell over the internet to ensure they are not in danger of breaking the rules and losing out.

There are certain procedures you should follow and, for instance, if you get suckered into a scam which costs you money, you are unlikely to get much of a hearing at whichever company handled your cash. But the number of complaints to the Ombudsman is growing, with about 1,600 received in the last 12 months. Not so long ago the number was nearer 400.

That may still be small beer compared to, for instance, the tens of thousands of complaints received about mis-sold payment protection insurance, but the increase is notable.

PayPal has the lion's share of the growing e-money market and consequently it is the e-money provider with the highest proportion of complaints according to the Ombudsman's published data. However it's worth pointing out that complaints about PayPal were pretty small, especially taking into account the millions of transactions it processes.

PayPal says it has 14 million active accounts in the UK, yet there were just 106 complaints about the firm to the Financial Ombudsman Service in the six months to July 2011, and 122 between July and December 2010. This year, the Ombudsman found in favour of the customer in just 34 per cent of cases involving PayPal, the company says.

So does the firm have a case to answer? I put some of the criticisms about PayPal to the company. Rob Skinner, head of PR, says: "PayPal is unusual in that many of our payments are between individuals. When issues arise, it's often because of a dispute between buyer and seller about a transaction – for example, about a product that one PayPal customer has sold to another.

"We have extensive buyer and seller programmes that can help when things go wrong – including in many cases refunding the cost of the payment. Terms apply," he says. For example, buyer protection covers only physical goods, and seller protection covers only items that have been posted to the buyer through an online trackable delivery service such as Royal Mail's recorded delivery.

"We always try to strike a balance between protecting buyers and sellers," says Mr Skinner. "And our systems are designed to spot activity that may cause problems for customers – for example, if we see a seller is suddenly receiving a lot of money through the sale of expensive electronic goods we may put restrictions on the account, to make sure everything's legitimate and buyers are getting the goods."

Such protective measures are good news for consumers, but does PayPal always measure up in terms of customer service? As more and more people use e-money, firms must ensure they treat users fairly.

The Independent wants to hear the experiences of other users of e-money services such as PayPal. Email s.read@independent.co.uk

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