PayPal Backtracks on User Policy Change After Furor

Life just got worse for PayPal Holdings Inc. (NASDAQ: PYPL). The digital payment giant, formed by the combination of two companies co-founded by Elon Musk and Peter Thiel, was apparently about to change its user policy to give the company the ability to penalize customers the company deems to have spread misinformation anywhere on social media.

On Saturday, The Street reported that a leaked Acceptable Use Policy (AUP) gave the company the authority to fine users up to $2,500 for spreading misinformation and that PayPal would take the money directly from the user’s account.

The policy apparently was set to go into effect in less than a month, on November 3. The link to the AUP at PayPal’s website now leads only to a blank page. However, the Internet Archive Wayback Machine has the full text from a snapshot of a document from PayPal’s website dated September 27. The blank page appeared first last Saturday, October 8.

PayPal called the document a mistake in an email to The Street:

An AUP [Acceptable Use Policy] notice recently went out in error that included incorrect information. PayPal is not fining people for misinformation and this language was never intended to be inserted in our policy. Our teams are working to correct our policy pages. We are sorry for the confusion this has caused.

That probably will not mollify PayPal (and Venmo, a PayPal subsidiary) users who lit up social media condemning the company and reporting that they had closed their PayPal accounts.

Why would PayPal attempt such a tone-deaf policy? Here are a couple of possibilities. Izabella Kaminska at The Blind Spot suggests that this could be PayPal’s way of trying to meet its requirements under know-your-customer (KYC) and anti-money laundering (AML) rules. In the United States, the Patriot Act, enacted following the World Trade Center bombing in 2001, is the basic legislation that makes banks and lending institutions responsible for knowing where their money is going.

Kaminska suggests that banks (and financial institutions like PayPal) facing heavy fines for running afoul of KYC/AML rules are becoming more risk-averse and would prefer to be more rather than less cautious. These institutions also are trying to do this in a way that can be automated rather than subject to human scrutiny. People cost a lot more than algorithms in the long run. Eventually, KYC/AML could become an even more expensive proposition.

Another possibility for the more conspiracy theory-oriented is that PayPal (and indeed the financial system as a whole) is making a tentative move toward a social credit system like the one being rolled out in China. Under such a scheme, individuals and companies are given a social score based on their trustworthiness. The government, of course, establishes the framework for what comprises trustworthiness.

PayPal stock dropped about 4.5% on Friday and traded down about 1.8% in Monday’s premarket session at $88.55. The stock has dropped nearly two-thirds of its value over the past 12 months.

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