PayPal will be your friend when online deals go sour

THE recession has triggered a boom in online auctions on websites such as eBay, pushing up transactions at the online payment system PayPal, which has seen business climb 50% to become the UK's most visited financial website.

But fees involved in both eBay and PayPal, now the world's largest online payments service, can eat into your profits, as can postage and packing. And not all consumers have been left satisfied.

Families under financial pressure are clearing out their attics in large numbers to raise cash by selling on eBay. According to research by YouGov, the typical UK family has redundant saleable items worth 452 on average.

Popular resale items include women's clothing, with a garment selling every three seconds on eBay, for an average of 9.59. Books sell every six seconds, for an average 5.37; women's shoes every 10 seconds, for an average 13.11; and baby clothing every 14 seconds, for an average 5.79. A mobile phone is bought on eBay every 16 seconds, for an average 39.56.

But what happens if the deal goes sour? Perhaps because you buy something and it is not as described or the money doesn't come through?

That's where PayPal comes in. This is the money transfer system which provides an element of consumer protection and allows payments to be made almost instantaneously. You open a PayPal account, which can be linked to your bank account or credit card. Money is then transferred across as necessary. If anything goes wrong, PayPal is, in theory, there to sort it out.

It all started modestly about a decade ago in California when the company's founders devised a system allowing individuals to transfer money securely to friends and family using personal organisers, pocket PCs and palm pilots.

It was the start of the online revolution and eBay was getting under way. But in those days you had to either pay by cheque or cash through the post, both of which left you vulnerable to fraud or theft. Alternatively you could arrange an electronic bank transfer, but that could also involve delays. Furthermore it required disclosing your bank details to a stranger.

At the time eBay was experimenting with its own payment system. When PayPal saw the potential of a link between the two, a deal was done.

Today, if you want to sell something on eBay you must offer PayPal as a payment system. It protects the buyer by paying compensation if items are not received or on arrival turn out to be significantly different from described.

It also protects the seller, but only if there is proof of postage. For items under 150 this means a receipt for recorded delivery. Above this sum a signature confirming delivery is required for a claim to succeed.

However, some items, such as cars and MP3 music files are not covered. Furthermore, you must complain within 45 days and you may not be reimbursed if there are no funds in the seller's account. In theory, PayPal will pursue the offender for the money owed, but in practice it may not be successful.

For example, PayPal paid up when someone bought a cage on eBay for her pet rat that used to run wild in her home and kept destroying furniture. But the cage was made of nylon, and the rat bit through it in no time. In another case, garden patio slabs were described as finest Indian sandstone, but were actually concrete.

But not all customers have been so lucky. Neil Henderson, of Edinburgh, bought a signed Manchester United football shirt for 50 on eBay which never arrived.

He said: "I complained to PayPal but they never paid up. I think part of the problem was that I had left it too late to complain, but there was also an issue with fraudulent e-mails. I complained after a fortnight, but because there was fraud involved they said I should have complained immediately. The problem was the person I was buying off kept sending me e-mails assuring me it was on the way. Then they disappeared.

"All I know was I never got the money, although to be fair I buy on the internet a lot and have never experienced a similar problem. This was a one-off."

More than 22 million customers have signed up for PayPal accounts in the UK, and 175 million worldwide. However, consumer group Which? points out that customers are not protected by the consumer credit legislation which offers automatic redress to credit card customers if a company goes bust, or there is some other dispute.

On the other hand, PayPal is a voluntary member of the Financial Ombudsman's system, which could intervene in disputes.