March 12, 2002 3:55 PM PST
Feds: PayPal not a bank
- Related Stories
La. asks PayPal to halt service in stateFebruary 11, 2002
In an advisory letter sent last month to PayPal concerning its use of customers' funds, the Federal Deposit Insurance Corporation said it does not consider the company to be a bank or savings association because it does not accept deposits as defined by federal law, which requires institutions to have a banking charter. PayPal doesn't have a charter, thus it is not a bank, the FDIC said.
"PayPal does not physically handle or hold funds placed into the PayPal service," the FDIC said in its letter.
PayPal representatives said the FDIC opinion should help the company stave off attempts by state and federal officials to regulate its business.
"As long as we continue doing what we are doing today, we won't be subject to Federal banking laws," said PayPal Chief Executive Peter Thiel.
But an FDIC official said state officials may still conclude that the company is acting as an unauthorized bank.
"It's really a state issue," said the FDIC official. "I've been on the phone with several state regulators. I've indicated that federal law is not going to help them. They are going to have to come to their own determination under state law" about whether PayPal is acting as a bank.
PayPal has come under increasing scrutiny from states such as New York and California, which have raised questions about whether the Palo Alto, Calif.-based company is operating an illegal banking service.
State regulators have also begun to question whether PayPal is operating an unauthorized money transmitting service. Last month, Louisiana asked PayPal to cease offering its service to state residents until it secured a license from the state to transmit money. PayPal is in the process of applying for such a license, Thiel said.
PayPal acknowledged that the FDIC opinion is not binding on state regulators, but argued that it could have a positive effect.
The opinion "could be considered relevant by some state authorities in their review of whether PayPal is engaged in the business of banking under state law. Notwithstanding the opinion, PayPal will continue its applications for state money services licenses where appropriate," the company said in a statement.
The FDIC's decision on PayPal's banking status came as part of an advisory opinion on balances left in PayPal customer accounts.
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.
13 commentsJoin the conversation! Add your comment