PayPal will have to pay $25 million to settle allegations it illegally signed up tens of thousands of customers for unwanted credit, U.S. regulators said. The Consumer Financial Protection Bureau said that PayPal advertised benefits of its PayPal Credit online credit product that it failed to honor, signed up customers for the credit without their permission, and mishandled billing disputes when they arose.
PayPal neither admitted nor denied the allegations in the settlement. In a statement, a PayPal spokeswoman said: “We continually improve our products and enhance our communications to ensure a superior customer experience.”
The company last month said it faced a potential lawsuit from the CFPB over the product. The agency has been looking into the popular lending service, formerly known as “Bill Me Later”, since 2013. Under the settlement, the company is expected to pay $15 million in refunds to customers and a $10 million penalty.
The settlement comes at a sensitive time for PayPal, a San Jose, Calif., company that processes billions of dollars in payments through its payment networks, including PayPal Credit and Venmo. The company is set to split from its parent, eBay, later this year and become an independent publicly traded firm. The separation will bring increased attention to both eBay and PayPal, so any complications within either company will face heightened scrutiny from investors.
According to the CFPB allegations, many PayPal customers unwittingly signed up for the credit product when enrolling in a regular PayPal account or making an online purchase. The CFPB said the company then failed to post payments properly, lost payment checks from customers, or failed to remove late fees and interest charges for customers unable to pay bills due to website problems. It also said the company failed to honor advertised promotions, such as $5 or $10 in credit toward purchases.
PayPal Credit provides instant credit checks and loans to customers as they check out at various online marketplaces. Customers generally don’t have to pay interest, provided they pay in full before the end of a promotional period, after which the annualized rate rises to 19.99% and may include other fees. PayPal’s credit unit grew 27% in the first quarter.
The payments unit faces additional scrutiny from the CFPB as part of new regulations that govern companies making at least one million international money transfers annually.
According to the settlement plan, affected customers who are eligible for these payments include certain people identified by PayPal and the CFPB who paid late fees or interest or incurred deferred-interest charges, or had a payment processed through PayPal Credit without understanding they were using PayPal Credit.
Consumers who are eligible for payments don’t need to take any action; they will be contacted by PayPal, the CFPB said.
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