PAYPAL, the eBay-owned company that facilitates electronic money transfers to pay for goods and services online, has earned the nickname “Payfraud” from some disenchanted customers for its approach to fighting fraud.

The company, which has 63.8 million registered accounts in 45 countries, is promoted by eBay as “safe, fast and easy”. One online shopper in three uses PayPal in the UK, but a growing number are closing accounts over security fears.

Concern is growing mainly as a result of fraudulent “chargebacks”. A chargeback is a legitimate mechanism which allows a buyer to retract a payment made by credit card if he does not receive an item or if it is not as it was described.

But some buyers are issuing chargebacks after they have received the item in good order. A payment is made, the seller is informed by PayPal that it has received the money and the seller sends the item to the buyer.

The buyer then requests a chargeback, which PayPal debits from the seller’s account. The seller may dispute the chargeback, but unless he can prove that the item was delivered to the buyer in good order, he may lose both the money and the item.

Geoff Iddison, chief executive of PayPal (Europe), says that PayPal does everything in its power to prevent this kind of fraud and is working to improve users’ understanding of it. “It is important for users to understand that PayPal is an e-money transfer service, not a credit facility,” he says. “We have a protection scheme for buyers and sellers and back-end systems that enable PayPal to detect fraud risk before it occurs.”

PayPal advises sellers who are worried about becoming a victim of a fraudulent chargeback not to accept credit card payments and to arrange another method of payment.

An operator of the US website PayPalSucks.com says: “Overall, PayPal is great, until you have a problem. Then it is a total nightmare.”

The website says that the problem most users are likely to face is a frozen account. PayPal will freeze an account, pending further investigation, if it suspects there is a risk of fraud. This could be if a user has more than one account, or if a seller has sold an item that is commonly sold fraudulently. Consequently, many innocent users could have accounts frozen.

REBECCA O’CONNOR