Anyone ever managed to claim on PayPal's Money Back Guarantee?

Thought not

The perfect insurance company would have thousands of customers paying for its services but never claiming. But then that's a fantasy scenario. Or it was anyway before PayPal managed to fit for a second time into a legal grey area with its Money Back Guarantee service.

In March this year, the US Federal Deposit Insurance Corporation decided PayPal was not a bank or savings association since it does not accept deposits as defined by federal law. The decision angered thousands of customers who had seen their money fall into PayPal's coffers without an adequate explanation or appeal process.

Now it seems that the same question will be posed over whether PayPal is an insurance company and so forced to comply with all the laws that are placed upon them. At least one US State is concerned over PayPal's Money Back Guarantee that it introduced in September 2002.

There is good reason to be. Because, while PayPal is charging people on average six per cent of the cost of the transaction for its "guarantee", we find it extremely hard to imagine a scenario in which it would ever be required to pay out. There are plenty of opportunities for a claim to be filed but thanks to an over-complex process and restrictive time element in the "guarantee", it would seem that PayPal has simply built its own press to print its own online money.

If you live in the US and choose to buy a good online using PayPal, you may well be offered the choice of its Money Back Guarantee. This states that for around six per cent the cost of the transaction, you will get your money back through PayPal if you are unhappy with the goods you get or if they don't arrive.

For people nervous of buying online this may seem like a logical step to take. However, a closer inspection of the terms and conditions attached show that the chances of you ever managing to claim back on this service are tiny.

First the restrictions: The good must be under $1,000. Fair enough. It must be a physical good that you have bought and not hired/leased etc. Okay. It can't have been damaged or worn by you. It can't weigh more than 70lbs. It cannot be more than 130 inches in overall size, which in reality means a rectangle about twice your desk length, so pretty big.

No DVDs, CDs, videos, games, software, value cards, hazardous materials, ammunition, animals, plants, any form of motorised transport or consumables.

Okay, you must make your claim within 30 days of paying for the good or within seven days of receiving it - whichever is earlier. So, if you ordered something and were given a 21-day delivery time, you have nine days from the day they are late to when you have to claim. More likely though you will be given a 28-day delivery time, meaning you have just two days to apply once it has passed their agreed delivery date. If they deliver to you on the 27th day and you aren't happy, you still only have three days to make a claim to PayPal.

Before you make any claim to PayPal though you have to have tried to sort it out the situation with the seller personally or the PayPal "guarantee" is not valid. So - best case scenario - if you are lucky enough to be on a 14-day delivery and you call on the 15th day to complain and they promise it will be within you within three days and it doesn't turn up, you still have 11 days to claim on your PayPal guarantee. Most likely though, you'll be on 21-day and you'll have just three days. Or 28 days, in which case you can forget it.

Equally, if you get your goods and you're not happy with them, if they promise to send a replacement, they'd need to send it within six days and you to immediately go to PayPal if you're not happy.

If you have the good fortune to fit in with any of these scenarios, all you need to do is send the item to PayPal and it will give you a full refund. Of the money you paid the seller anyway. You will not get back the guarantee money back and you will have to pay the cost of sending the good to PayPal.

Presuming of course you have supplied all the paperwork. You will need to have filled in an online form. And then to send a properly completed reimbursement form with the transaction ID and a written explanation of why you are using the guarantee. Plus of course a printout of the website page where you bought it from. And the auction listing and email and invoice to prove how much you had paid. You need to supply tax and shipping terms with this as well.

You better hope you haven't thrown away any of the packaging because that also needs to be sent to PayPal. Plus copies of all correspondence you have had with the company. If you do all this within the allocated time span, PayPal will consider your request. It does reserve the right to decide how much of the fee it will refund though. If it does decide to pay only part of the reimbursement, you have no appeal, its decision is final.

So you buy a jumper for $50 and pay PayPal $3 for its guarantee scheme. It arrives bang-on 21 days later. It's not the size you ordered. You call up the company and tell them. They ask you to send it back and they will send you a new one. You aren't happy with it - oh no, hang on, the guarantee's not valid because it's a different item. Go back. They say they're sorry, they will send you another. You wait for five days. Nothing. You call again. They promise it'll be there on Monday. You've already passed the guarantee's date. But wait - you didn't believe them and you decided immediately to send your jumper to PayPal and get the money back. So you go to the PayPal website and send an online complaint. Then you print off the reimbursement claim form and fill it in. You pack the jumper up, with the original packing. You go to the company's website and go to the right page and print if off. You print off the email they sent you confirming the order. You stick all this in a bag and pay $5 to send it to PayPal.

PayPal gets it just in time and emails you back two weeks later to tell you they aren't paying anything because there's no evidence that you contacted the company in question. They keep the jumper. Okay, so you remembered to write on a piece of paper all the details in your phone conversation - when you made it, who it was to, what was discussed. PayPal tells you that you didn't try hard enough to sort out the problems. It keeps the jumper, no money. Okay, PayPal believes you that they weren't trustworthy and you get the full $50 back. And it only cost you $8 and six hours of chasing to get it.

Of course this scenario is pretty unlikely anyway because PayPal only allows its guarantee to be put on top of goods from certain sellers - namely, those sellers that has been trading through PayPal for at least five months and have a very high record of delivering the right goods on time. Those companies themselves have to opt out of the guarantee system as it is automatically added to those services that PayPal deems safe enough to offer a guarantee service on.

Now, no insurance company in the world would offer such terms as one court challenge would see them thrown out for being unreasonably restrictive. But is PayPal an insurance company? Does it again exist in legal no man's land?

Under US law it would have to be shown to be collecting a pool of money with which to pay for the losses of a few. It would also have to go through a third party that makes the guarantee. Neither of these appear to apply to PayPal yet it is clearly offering what people would consider to be an insurance service.

The problem is that PayPal really is its own separate entity. It merely appears to be a bank and an insurer but because it takes and pays out money and offers guarantees on goods purchased. In law, however, thanks to the gap opened up by the Internet, it is currently not either.

This means that there will continue to be hundreds of angry customers who feel cheated but who have no legal recourse. Only yesterday a reader complained to us that he had sold two items on eBay through PayPal for £75. He tried to transfer this into his UK bank account. PayPal sent an email a week later saying the transfer had been rejected. The PayPal account now said £61. His bank denied any such rejection of transfer. So PayPal appears to be at fault and charged £14 for the pleasure. If past experience is anything to go by, he won't get it back.

This is just one very small story of hundreds dotted all over the Internet. And these stories will continue until either a) the law changes to pull in PayPal and force it to follow the laws and regulations everyone else is subjected to or b) people learn the fine distinction between PayPal and the institutions they instinctively trust. ®