Paying through Paypal could break the link - Gareth Shaw

Dear Gareth,

It has come to my attention lately that when paying for an item using my credit card it is being processed via PayPal. I have also read that this loses me my rights under Section 75. It seems to be becoming more and more prevalent.

You have no option but to pay this way or simply to abandon your purchase. Why has this happened? Who benefits? Can you explain what is going on here?

Neil Hodgson, via email

Gareth says…

PayPal is one of the largest payments platforms in the world. It boasts 295 million customers globally and touts a host of benefits to retailers to integrate its payment processing services – allowing retailers large and small to accept payments, manage their supply chain and pay suppliers, currency conversion services and access to insight on customer behaviour.

PayPal also claims that its systems can help detect fraud, offers protection for sellers and can help manage disputes between buyers and businesses.

So, given the scale and access that PayPal can offer businesses, it has become an incredibly common form of payment. But you’re absolutely right, there are some differences in your consumer protections when you pay in this way.

Let’s start with Section 75. What you’re referring to is Section 75 of the Consumer Credit Act 1974, the legislation that governs how the credit market works. It is one of the most powerful weapons in a shopper’s arsenal to deploy when things go wrong with a purchase.

It makes your credit card company jointly liable with the retailer for a breach of contract, making it just as responsible for the goods or service supplied as the retailer. So, if something goes wrong – you can put a claim into your credit card company to get your money back.

The goods or service you bought must have cost over £100 and not more than £30,000 for it to apply, though you don’t actually need to spend that much on your credit card – a £1 deposit for goods costing between £100 and £30,000 would still entitle you to protection.

However, there are some instances where Section 75 may not apply, although you start entering some grey areas here. For Section 75 to be applicable, there needs to be three parties – the buyer, the seller and the credit card firm. But sometimes the link between the retailer and buyer is broken – for example if there is a business taking payment that is acting as an agent for the seller.

For example, you might want to buy theatre tickets. If you buy them from the venue, Section 75 is likely to apply. If you buy them through an agency, it might not as the credit card company may argue the purchase was not made to the supplier of the goods.

It is a similar issue with PayPal and other third-party payment processors. Essentially, by using PayPal, you are breaking the chain between your credit card provider and the retailer.

PayPal does have its own buyer protection scheme, which is designed to reimburse you if you have problems with your order. But this protection is not enshrined in law – making it less powerful than Section 75. However, there are some arguments that state that Section 75 can be applied to some PayPal payments.

If you use your credit card to pay for something through PayPal and the funds go direct to the seller, then as long as the company you’re buying from has a ‘Commercial Entity Agreement’ with PayPal you may still be able to claim against your credit card company under Section 75 for any misrepresentation or breach of contract by the seller.

PayPal does have a banking license in the UK, which means it is regulated and that gives you access to the Financial Ombudsman Service.

So, if you were unhappy with PayPal when something went wrong with a purchase, you do have the ability to escalate your complaint.

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Thank you

James Mitchinson