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Feds Rule PayPal Is Not A Bank
dthable writes "CNet has posted an article update describing the Feds latest ruling - PayPal is not considered a bank. The article describes the effects of not being a bank which includes the lack of government regulations."
Yes, among other things.
The little guy just ain't getting it, is he?
It doesn't matter -- because with PayPal, users are not depositing money...they're a transfer service. AFAIK, FDIC doesn't necessarily insure money transfers, only deposits.
-Turkey
Does "not a bank" mean "not insured by FDIC"?
From the article:
As of this quarter, PayPal began depositing customer balances into FDIC-insured bank accounts. The company had asked for an opinion from the FDIC on whether it could pass the insurance protection on to its customers. In its advisory letter, the FDIC said the insurance protections--up to $100,000 per customer per bank--would extend to PayPal customers, even when PayPal deposited the funds for them, PayPal said.
Tarsnap: Online backups for the truly paranoid
Wasn't a court - it was the FDIC. And all they said was, "it doesn't look like a bank to us, but the states should decide for themselves."
The little guy just ain't getting it, is he?
Correct, in order to be insured by FDIC the way a bank is insured, the company would have to classified as a bank. But, according to the article, if PayPal deposits a users money into an ACTUAL bank, then the money will be insured by FDIC.
Cnet = www.news.com not www.news.com.com
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What is the sound of this sentence?
More about this story at:
NandoTimes
Quidquid latine dictum sit altum viditur
it earns money on cash on deposit
Actually, it doesn't. I have a few bucks in my paypal account that are not earning interest - mainly because I don't want to become verified and give PP access to my bank account. You can have paypal put your money in a money market account (which may earn or lose $). From the prospectus: note - you have to login to see this page
Although the Fund seeks to preserve the value of your investment at $1 per share, it is possible to lose money by investing in the Fund.
They hold it as a physical asset. No interest, but money is insulated from inflation, but not from price fluctuations in the price of gold.
All Troll + "offtopic" mods are meta moderated as "Unfair", because you abused the system.
This is REAL news by a REAL company and NOT some crap website ran in rob maldas dirty bed room using a crap os that nobody uses! (funny too)
WARNING:
Your Paypal account can be frozen at any time, without advance notice leaving you without your money for weeks (if not forever), and there isn't much you can do about it.
Paypal Warning
Quidquid latine dictum sit altum viditur
This is true, but at the bottom of the article, it states that PayPal inquired about FDIC protection. They have recently begun depositing the money they receive for transactions into accounts in an FDIC-insured bank. The FDIC responded to their inquiry with an advisory letter indicating that the amounts deposited would indeed be insured up to the standard $100,000 per customer per bank. This would mean that as long as PayPal opens a separate account for each customer, they should be insured. Note that it would probably NOT insure money "lost-in-transit."
GreyPoopon
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Why is it I can write insightful comments but can't come up with a clever signature?
FYI:
Banks cannot and are not required to seize an account if it is just dormant for a few years. They are first required to contact you. If they successfully contact you (be it by phone, mail, whatever) they cannot do anything with your accounts. If, however, they cannot find you they are required by law to give your money and account information to the state government. The state government is then required by law to again try to find you. Sometimes you may even see classified ads put in the paper by your state government saying they have accounts/property and are looking for owners. The state will hold your money indefinitely and you are able to claim it anytime.
In my mind, this is a good regulation because without it the banks would just keep your money and not bother to try to find you. I'd rather my money go back to the state government which is a.) more accountable and b.) if the money is never claimed they can use the money for the good of the state instead of the bank.
ps. Most states have online databases with this information that you can freely search through. Just go to google and search for "unclaimed property" plus your statename.
The main point of being a bank, is that banks are allowed to invent money.
Everyone knows about bank notes and coins, they are minted by the government. However, this is only a small fraction of the money in circulation - around 4% in most big economies. Most money is in bank accounts of one sort or another and circulates through cheques, debit cards etc. Cash is a minor part of the money supply and becoming less important by the day. So, where does most money really come from ? The answer is very simple: money is invented by banks when people take out loans.
This is not a secret, it's just not widely known. Most people think that banks lend you other people's money and charge more interest to borrowers than the lenders receive, but this picture is fundamentally wrong. If you borrow £5000 from the bank, nobody is sent a letter saying that their money is temporarily unavailable because they have lent it to someone else. A more accurate picture is that this £5000 didn't exist until the bank lent it to you.
This is hard to believe, so let me show you how it works. It simplifies matters to imagine that there is only 1 bank, or if that strains your imagination, just imagine that A,B and C all bank with Wells Fargo.
Let us start with people A,B,C and a bank and keep track of how much money they have. The bank keeps separate accounts for A,B,C and itself
1. We'll start everybody off with no money, and nothing in their bank account
except for C who has $5000
External funds A: 0, B: 0, C 5000
Bank a:0 b:0 c:0 bank:0
2. C pays his money into his bank account
External A: 0 B: 0 C: 0
Bank a:0 b:0 c:5000 bank:0
3. A asks to borrow from bank so it breaks A's account of 0
into $5000 of money for his current account and a debt of -$5000
External A: 0, B: 0, C: 0
Bank a:(5000,-5000) b:0 c:5000 bank:0
4. The bank transfers the money to A
External: A: 5000, B: 0, C: 0
Bank a:-5000 b:0 c:5000 bank:0
5. A pays this money to B
Exernal A: 0, B: 5000, C: 0
Bank a:-5000 b:0 c:5000 bank:0
6. B pays the money into his account
External A: 0, B: 0, C: 0
Bank a:-5000 b:5000 c:5000 bank:0
7. A obtains money from elsewhere (easier said than done)
External A: 5500, B: 0, C: 0
Bank a:-5000 b:5000 c:5000 bank:0
8. A repays 5000 to bank, plus interest of 500
External A 0, B 0, C 0
Bank a:0 b:5000 c:5000 bank:500
9. The bank pays some interest to C
External A: 0, B: 0, C: 0
Bank a:0 b:5000 c:5300 bank:200
So far, the bank has done nothing strange, and this actually corresponds to the understanding that most people have about the way banks work. One thing to notice is that when A received $5000, nothing happened to C's account. Theoretically C could withdraw his money at any time.
The clever bit is that step 4 never needs to actually happen. A doesn't remove $5000 in cash from his bank - he just writes a check out to B, who never takes out the money either - he just pays it into his account. So in order to "lend money" to A, all that the bank needs to do is change it's accounts from saying:
Bank a:0 b:0 c:5000 bank:0
to saying:
Bank a:5000,-5000 b:0 c:5000 bank:0
Which means: A has $5000 in his current account and also has a debt of $5000 in a separate account.
and as far as A is concerned he has borrowed $5000 from the bank.
But there is nothing to stop the bank from "lending" lots of people money in this way. Why not lend D $5000 too, just change the accounts to say:
Bank a:5000,-5000 b:0 c:5000 d:5000,-5000 bank:0
The money that it lends out does not have to exist before it lends it out - the bank invents the money. In fact, almost all the money in circulation has been invented in this way.
Are banks allowed to do this - isn't there a law against this ? No, not at all, banks are expected to do this - in fact without the banks providing credit, the money supply drys up and the economy goes into recession. There used to be laws specifying a limit - banks could only lend out X times as much money as they received, but these laws have been scrapped in most modern economies. The only constraint is market confidence. If people start to lose confidence in the bank, too many people demand to physically get their hands on their money at the same time, then the whole facade comes tumbling down.
The central misunderstanding is that banks charge interest because they themselves are borrowing money from somewhere, as in fact they are if the money actually leaves their control. Banks compete with one another to lend you money because it is their principle source of revenue. They compete by charging less interest. If they charge too little, lend too much to people who have trouble paying it back then people lose confidence, and move their funds to another bank, the bank goes bust. They lend as much as they dare though, because it's immensly profitable: they are inventing the money they lend you.
So, money is created by banks in the form of debt. Now, lets think about this a moment. What would happen if everybody tried to pay off their debts to the banks, and nobody took out new loans. Well, the money supply would dry up, there would be far less money in circulation. Money's primary function is a to facilitate trade, if nobody has any money then nobody would be able to trade, the economy would grind to a halt.
More fundamentally, it is absolutely impossible that all debt could be paid off. THERE IS MORE DEBT THAN MONEY. It's easy to understand this when you think about where money comes from. Every time a bank lends people money it increases the gap between the amount of money in the world and the amount of debt. The bank lends you $5000, and demands you repay $5500. $5000 is temporarily added to the amount of money in circulation, but it must eventually return to the bank - plus an additional $500 that must go back to the bank too. When the debt is finally paid off, $500 more must have been extracted from the system than went into it. The only way to keep the system going is with increasing debt. Of course, banks spends money too - they have employees and shareholders who buy cars and houses, yachts etc, this pumps money back into the system, which slows down the debt spiral. (A very fat, and almost entirely parasitical segment of the economy that creates nothing real, but that's not my point). Even if the bank spends all the money it receives in interest, there is still a discrepency, because the money must be returned to the bank before it can spend it - at any one time there has to be more debt than money.
The value of our assets (in money terms) is proportional to the amount of money existing. Our debts to the banks are in terms of money. As credit collapses, the amount of money goes down, the "value" that people put on real items goes down (nobody can pay much if they don't have much money). If banks suddenely refused any further loans the banks would end up owning everything. (In fact - I strongly suspect that one or two of the biggest banks would end up owning everything, including all smaller banks). Nobody would have money to pay off their debts and the money they could obtain from selling their assets wouldn't cover it - not enough money would exist. The banks would own all the money AND all the property. This is not just a theoretical problem, it's an exaggeration of what happens during recession. Extending it to the logical conclusion highlights how much power lies with banks in the current system.
When banks lend people money, they increase the amount of money in circulation. This changes the balance between the amount of money in the world and the amount of stuff in the world. This slightly decreases the value of all money - it is the root cause of inflation. Effectively banks steal money off everybody else by lending out more money than they have. It's just a form of legalized forgery. A private individual would have exactly the same effect on the economy if he produced perfectly forged money that he was allowed to add to the system on the condition that he removed and destroyed the same amount at a later date.
An expanding economy needs an ever increasing amount of money. The more stuff in the world, the more money is needed. This money is invented by private banks in the form of debt. Even governments borrow their money from private banks. So we have this paradoxical situation where the most successful countries have the largest amounts of debt. Amazingly the USA has recently been able to start decreasing it's national debt, but this has been achieved by a massively expanded amount of private sector debt. People are more confident, they believe their shares are worth more, they borrow more money and invest more. More is collected in taxes due to increased wages, and for a short time the government debt can decrease, but overall debt always increases.
During boom times - the credit supply increases. The system keeps afloat by ever increasing amounts of debt. In order to service this debt, the economy *must* expand - it is completely impossible for the monetary system to stay afloat with a stable economy, because the only way the debts can be serviced is by creating new debts.
Obviously this debt cycle cannot quite go on forever. At some stage people lose confidence, and it becomes harder to get credit. Then businesses go bankrupt, banks foreclose on the assets, and we go into recession or depression. Then gradually things improve and we start over again - the only difference being that now more of the actual assets in the world (rather than just the money), are then owned by the banks.
So the boom/bust cycle is inevitable when all money is created in the form of debt. The system is inherently unstable. We end up with rather large debts. For instance, the national debt of USA is $5,673,018,308,921 (last time I checked). The estimated population of the United States is 276,004,098 so each citizen's share of this debt is $20,554.11. The money to service this debt is extracted (taxed) with menaces by the government and paid to the banks. If you wanted to be alarmist about it, you could say we are selling our children into slavery (or at the very least indentured servitude) to the owners of the private institutions that invent our money.
Whose idea was this wonderful mechanism for inventing money ? Amazingly enough, it was the bankers. In 1694, Britain's King William was having trouble with money and probably did not understand it too well. At the time governments were scratching their heads over how to pitch the speed of money supply to the economy so as to avoid periods of inflation and at the same time finance their wars, build their palaces and even, from time to time, make life bearable for their people. The bankers convinced King William that the bankers were the "experts" who understood money and that the job of issuing currency should be handed to them.
As the amount of stuff in the world increases, the amount of money needs to increase. An artist paints a picture and wants to sell it - the amount of stuff in the world has just increased. Either: more money has to be created everything; the price of everything needs to reduce slightly; or we have a world where their is plenty of stuff, but nobody can buy it. In fact, this is pretty much the situation we live in: there is plenty of stuff, but everyone is short of money.
Letting the banks invent all money in the form of debt is not the only possible system. For instance, the government could invent money and give everybody a certain amount each year. This scheme was advocated by Douglas in the 30s and was making progress before war broke out. The introduction of more debt free money into the economy would reduce the need for loans and gradually eliminate the boom and bust cycle. Of course if the government invents too much we end up with inflation. But we have inflation already because the banks are inventing money all the time. If people were given money, they would borrow less from the banks so we wouldn't need inflation. A lot of inflationary pressure comes from the need to make interest payments. This scheme is far less inflationary than you might think.
The reason that the current system (where money is invented by banks) has become dominant is that the current monetary system is pretty good at creating a vibrant thriving economy where enterprise is encouraged and financed - it undeniably encourages growth, in fact, it can't live without it. A stable economy is absolutely impossible in the current system, people must be perpetually taking out loans and investing. Without constant investment and new loans the money dissappears and we sink into recession. That's why the idea has spread so wide - it's the most competitive model so far seen.
It's not exactly perfect though. The tendancy to enslave populations into the service of bank owners is one flaw. An insatiable need to expand economies until the whole planet is covered in concrete is another. The necessity for people to work like mules their whole lives, scraping a living amongst plenty when automation should provide us with leisure is another. The maintenance of a huge parasitical segment of the economy that creates virtually nothing of value is another... I could go on, but I think you see my point - the current system is not ideal.
One good thing about the current system is that the wastefulness of private institutions is bounded by the fact that if they become too bloated, corrupt and stupid then they go bankrupt. Governments don't have the same market-place correction. Elections change the spokesmen, but the permanent institution that grows up behind our "elected representitives" is much harder to displace. It can reach far greater levels of stupidity and incompetence than is possible for private organisations. But the market place competition between banks doesn't help us much. When banks fold they get taken over by other banks. Banks have an even greater motivation to merge than other businesses - the larger they are, the less likely that money ever leaves their control, so the larger their possible debt/credit ratio. What this means is that larger banks can invent more money than smaller banks, thus stealing more from the rest of the world. The fact that stupid banks get taken over by clever banks doesn't help. It just makes the resulting mega banks more powerful than ever.
You can't really blame banks - they are just making the most of a preposterous situation. It should be the responsibility of government to create the money we need and distribute it amongst us. Counter-intuitively this would make governments less powerful. The present system gives them the power to do whatever they like, or more accurately the power to not do whatever they like. They control the
rate of the economy by controlling interest rates. They can obtain as much money as they want by increasing the national debt, and they can avoid doing things that people want by just saying they can't afford it.
An intelligent and informative book that explains this stuff and related ideas quite thoroughly is "Grip of Death" by Mike Rowbotham, Jon Carpenter Publishing; ISBN: 1897766408
http://rareformnewmedia.com/
As well as many others... regardless if they are a bank or not they should still be held accountable.
(My story is posted at www.paypalwarning.com)
You're correct--perhaps a bit too precisely correct--when you write that you're not insured by the FDIC. That's because credit unions are not insured by the Federal Deposit Insurance Corporation--credit union deposits are insured by the National Credit Union Administration (NCUA). I don't know which three "seperate" [sic] insurance companies you're referring to, but deposits in any federally-insured CU in the U.S. are insured to $100,000. That insurance is backed by the NCUA Insurance Fund, which in turn is backed by the full faith and credit of the United States.
There are some CUs that are not federally-insured. States vary on how they regulate financial institutions--there are very sophisticated, completely sound institutions that only have state charters. There are also "institutions" that are little more than investors clubs with extra paperwork to file at the end of the year. There isn't any annual cost of federal deposit insurance--the deposit insurance funds are based on "lifetime" deposits (as opposed to premium-paid insurance). Yes--there are costs associated with banking regulation: regulations that ensure, among other things, that the bank actually has cash necessary to fund its continuing obligations.
Since you mention that your deposits are insured by three different international investors, it might well be that you are not a depositor in a federally-insured CU. In that case, you're wasting money. Federally-insured CUs do not pay deposit insurance: CUs deposited 1% of their assets in 1970 to form the NCUA Insurance Fund, and with one exception there has never been a need to assess member institutions any fees for insurance since. If your deposits are privately insured, your institution is paying deposit insurance--which costs you money.
Should the U.S. government be building water projects in districts of politically influential congressmen? Nope. Should the government promote commerce by ensuring a sound currency? Absolutely. Deposit insurance is a big part of that--and unquestionably a very good thing.
(Disclosure: I'm the president of a small software company. We have developed software for credit unions, both federally-insured and state-chartered. If you have a car loan from your CU there's a good chance it was processed with our software. We like the CU movement a bunch.)Again, I've yet to have any problems with PayPal's service. Again, of course, I read the fine print that says I can't start transferring huge wads of cash without becoming a verified member (Unlike many dolts who don't, and wonder why PayPal won't cut them a check.).
Quite simply, their service rocks, and they're well established. I'd rather use PayPal than some up-and-coming knock off.
The programming of the transaction is not difficult. What is difficult is the fact that in order to accept a CC you have to have a Merchant Account. Merchant Accounts are not free, and you still have to use a service for CC validation.
Granted, for large businesses which take in thousands of transactions per year, this is a cost effective method. However, for the smaller businesses and "Mom and Pop" type things (even in the brick and mortar world), such accounts can be cost prohibitive.
PayPal allows anyone to be able to take CC payments for pretty much any reason. Yeah, they charge you 3% or 4%, but there's no monthly fee (Merchant Accounts can run $60 a month or more).
Regardless of the reports of fraud, etc., I still think the PayPal idea, if not the company itself, is a good one. Besides, I've had my brick and mortar bank "accidentally" charge me 6 times for the same transaction (thanks Y2K "upgrade"). Just because there's a "regulatory body" doesn't mean that there won't be any fraud or other bad behavior.
Your Friend,
D
Citibank does offer some of the services that PayPal does. Particularly, sending money via email. Check out:
https://www.c2it.com/C2IT/Login
Unfortunately (or maybe fortunately), it is not nearly as easy to setup an account. They send you information that you are required to return (with a voided check) to activate the service.
This is even true if you have a Citibank account and not a third party account.
I haven't actually returned my paperwork yet, so I don't know how easy or convenient the service is.
Snowdog
This is a false statement by comeone who did NOT comprehend the article. PayPal IS NOT insured by the FDIC. PayPal claims and the FDIC has not refuted the idea that PayPal's INDIVIDUAL CUSTOMERS are insured when AND ONLY WHEN PayPal deposits their funds into an FDIC insured account, i.e. ONE IN A REAL BANK!
Are you just one of those bitter cretins that are jealous that someone smarter than you made an observation?
CEE5210S The signal SIGHUP was received.
Banks are regulated either by the Comptroller of the Currency (that's what "National Bank" means) or by individual states. Savings and loan institutions are regulated by the Office of Thrift Supervision. Money transfer firms are regulated by states. Credit card issuers are regulated by Federal law. Broker/dealers are regulated by the Securities and Exchange Commission.
It's not clear what PayPal is, but because they appear to accept deposits, they're subject to regulation. Even if they store the money somewhere else, that doesn't help; that may make them either a broker or a mutual fund.
In the early days of money-market funds that offered check-writing privileges, there was a real question how they would be regulated. But that's been worked out. PayPal will end up being regulated as some kind of financial institution, even though it's not yet clear which kind.