Is PayPal a safe and secure way to pay online?

More and more online retailers are encouraging shoppers to pay via PayPal, which can be linked to your debit and/or credit card. But is the platform a safe way to pay and what sort of protection is there if things go wrong?

How does PayPal work?

PayPal offers an easy way for you to make and receive payments online using just an email address or mobile number.

The platform, which launched in 1998, has grown in popularity with more and more online retailers offering it as a method of payment.

It’s often the more attractive option for paying for things like holidays to avoid fees that sometimes come with using a credit or debit card.

But is it a safe way to pay and what sort of protection can you expect if something goes wrong?

What protection does PayPal offer buyers?

PayPal offers PayPal Buyer Protection to users of its platform.

This policy states if an ‘eligible’ item you’ve bought online doesn’t arrive or doesn’t match the seller’s description you will be reimbursed for the full amount along with the postage and packaging costs.

PayPal Buyer Protection covers online purchases on eBay and other websites, but you will need to open a dispute within 180 days of purchase.

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When PayPal Buyer Protection won’t pay out

PayPal won’t pay out if the seller is found to have accurately described an item but you aren’t happy with it, if you fail to open a dispute within 180 days of purchase or if your account is not ‘in good standing’.

There are also some exclusions to be aware of.

Items not covered by the PayPal Buyer Protection include real estate, motorised vehicles, custom-made items, industrial machinery, prepaid cards, any item that violates PayPal’s policies, anything you buy in person and money transfers to friends or family.

Does Section 75 protection apply to PayPal purchases?

PayPal allows you to link your bank account and credit cards to make payments online.

When you shop with your credit card you get extra protection on purchases over £100 through Section 75 of the Consumer Credit Act 1974. This states that a credit card company is jointly liable with a retailer on purchases that cost between £100 and £30,000.

This means you can go to your credit card company if the retailer goes out of business or anything else goes wrong with your purchase where you haven’t got what you paid for i.e. it’s not of satisfactory quality, as described or fit for purpose. The timescale for making claim can be as long as six years.

However, Section 75 protection doesn’t apply to indirect relationships. So when you use credit card via PayPal you lose your rights to Section 75 protection.

When you link a credit card, you are paying PayPal and PayPal pays the retailer. So even when you enter you card details into PayPal to pay it counts as paying through a third party or agency.

This rule doesn’t just apply to PayPal transactions. Goods bought on a credit card through an Amazon third-party seller uses Amazon as an agency to obtain money. The same applies to flights bought through a travel agency rather than from an airline, however the industry’s own ATOL protection is more powerful.

The Financial Ombudsmans spokesperson told loveMONEY: “In order for Section 75 of the Consumer Credit Act to apply there needs to be a debtor-creditor-supplier relationship in place, so if a consumer used their PayPal account to buy goods and services that relationship wouldn’t necessarily be in place.”

Does chargeback cover apply to PayPal transactions?

Section 75 protection doesn’t apply to debit card transactions.

However, you may be able to use a protection called chargeback, which applies to both credit and debit cards, that can reverse a payment if you receive a faulty item, a service wasn’t provided or a firm goes bust and the goods aren't delivered.

This level of protection is less powerful than Section 75. That’s because Section 75 is a legal requirement, whereas chargeback is part of Card Scheme Rules from major providers Visa , Amex, MasterCard that banks have to agree to.

Typically there is a time limit to make a claim of 120 days. However, unlike Section 75, which covers purchases worth from £100 up to £30,000 chargeback potentially covers purchases of any value.

When it comes to using your debit card on PayPal, whether you are entitled to chargeback protection depends on how you make the purchase.

If you load money using the card into your PayPal account, you won’t be covered by chargeback as it is not considered a card transaction.

But if there’s no money loaded in your PayPal account and you use your card directly to make a payment through PayPal, your purchase should apply for chargeback cover.

To avoid any grey area, you should empty your PayPal account before making a purchase to make it clear how the payment was made.

Is PayPal a safe way to pay?

If you are concerned about handing over your account details, PayPal can be a safer option for moving money between friends or getting money paid into your account, say after winning a competition. But when making purchases you should probably think twice.

Using PayPal to pay for things will invalidate your right to Section 75 protection on your credit card and in some cases chargeback cover on your debit card.

Also, PayPal Buyer Protection isn’t enshrined in law, you only have 180 days to make a claim and it only applies to things that don’t match a description or haven’t been delivered – so the scope for a claim isn’t massive compared to if you were to make a claim using Section 75 or chargeback.

What to do if you have a complaint about PayPal

If you have a complaint you should first take it up with PayPal. If it’s not resolved you can take it to the Financial Ombudsman Service (FOS).

PayPal is not regulated by the Financial Conduct Authority so it’s actually outside of the Financial Ombudsman Service’s compulsory jurisdiction.

However, the FOS told loveMONEY that PayPal has signed up to its voluntary jurisdiction, which means PayPal allows FOS to formally deal with complaints and agrees to comply with the decisions as it would do under a compulsory jurisdiction.