PayPal and the Battle for Control of E-Commerce

April 30, 2012

dollar computerThe dramatic growth of electronic commerce sometimes makes us feel that continued e-commerce expansion is inevitable. 

The e-commerce system today seems to be robust enough for us to consider it virtually invincible.

In reality however, electronic commerce is not invincible.

It is vulnerable, and one of its key vulnerabilities is the electronic payment processing structure which is at its heart. 

Reliable processing of electronic payments is essential to e-commerce.  Without a reliable system for online payments, there is no electronic commerce.

For this reason, the parties who process e-payments, such as EBay’s PayPal, have the power to shape and direct all electronic commerce. 

They must exercise caution and good judgment as they apply that power.

The significant impact of e-payment processors was recently illustrated by PayPal’s refusal to process payments associated with the distribution of e-books and other electronic publications that appear to be obscene. 

PayPal is implementing a system which will enable it to work with publishers and review electronic publications which may be obscene.

PayPal will refuse to process electronic payments associated with the distribution of materials it considers to be obscene. 

The PayPal review system will apparently put the company in the business of making the legal determination of exactly which digital content qualifies as obscene, and should therefore not be accessible for online purchase.

Government authorities have long recognized that payment processors are at the core of electronic commerce. 

When those authorities wanted to move against online gambling operations, for example, one of their first initiatives was to take legal action against e-payment processors, disrupting their ability to handle the electronic payments which enabled online gambling.  Governments know that one of the most effective methods to control e-commerce is to control the payment processors.

If there is an individual, a company, an industry, or a class of transactions that governments are concerned about, one of the most effective ways to act against that target is by limiting the target’s access to electronic payments.

Private parties also understand the vital role played by payment processors. 

After WikiLeaks generated global controversy as a result of the confidential material it disclosed, its opponents encouraged e-payment systems to refuse to process payments made to WikiLeaks.  This action seriously impaired the ability of the organization to raise funds.

There is significant attention directed toward ensuring that electronic payment systems are secure against criminal activity and technical failures.

That attention is important and justified, yet it is incomplete.

We must also be concerned about the unilateral decisions made by electronic payment processors regarding the payments they will and will not process. 

Payment processors are rightly concerned that they may face legal liability for transactions they support which may be associated with illegal activities.

They must remain mindful, however, that they can also face legal liability in some circumstances, under antitrust and competition laws for example, if they unreasonably refuse to handle transactions.

As a result of their critical role in e-commerce, payment processors face potential liability when they provide services and when they refuse to provide those services.