Simplx Blog

Ok so fast growth on eBay isn’t all its cracked up to be.  When I got aggressive using my Simplx account to sell on eBay I had originally set the goal to grow from $250,000 in annual sales (that I was comfortably doing) to $10 million to $15 million over the course of the next year.  The Simplx model provides me with that opportunity for that type of growth, but I learned that just because you can grow fast doesn’t mean you necessarily should.  So the purpose of my blog entry today is to share my growth experience and temporary demise with my eBay account to hopefully help you still clear of the same pitfall.

In July of this year I set the goal to start growing my account and instantly grew my account from $20,000 in June sales to $300,000 in July sales.  That was where we first went wrong.  I have had a PayPal account opened for years showing good consistent clean processing volume, but the moment my account jumped that dramatically I found myself on a conference call with my personal PayPal account manager and a lady (whose name we do not speak — so I don’t throw up in my mouth).  The determined necessary action was that a reserve account should be implemented immediately to help protect PayPal in the amount of 10% of all volume for a 4 month period.  I knew immediately that on a 5% to 7% profit margin I wouldn’t be able to make the model work with a 10% reserve.  Essentially that means that I would run a negative cash flow model of 5% for 4 months.  At processing volume of $300,00 per month (with zero growth)  I would have to have $60,000 of extra available cash to just break even (not including the value of my time or the time of employees that help run the business).  I explained this to PayPal and said that they could go ahead and shut the account down because I couldn’t run a negative cash flow model.  The decision that followed (since they did want to work with me and show they were flexible) was to lower the reserve to 5%.  My response to them was, “ok let’s give it our best shot.”  Unfortunately I think I saw the writing on the wall before we ever began…..

PayPal’s Perspective

Now to be fair to PayPal and to the lady of whose name we do not speak, I think it is only fair to try and understand things from their perspective with the end of making the right decisions in your business to “stay under the radar” and know PayPal’s response (or any merchant accounts’ response for that matter) to changes they analyze in your business.  When you process a credit card a merchant account provider (such as PayPal) is extending a form of credit to your business.  They are trusting that when you take money from your customer, you are giving them what you promised and that they will be happy.  If not, the customer has the option through credit card regulations to dispute the charge based off a set of dispute reason codes.  Typically the dispute liability period is 6 months.  That means that your customer has the option for up to 6 months after you have taken and spent their money to contact their credit card company and dispute the charge.  What if you spend that money and 6 months later that customer disputes the charge with good reason.  If you don’t have the money to put back in your PayPal account then ultimately PayPal takes that loss and they will do their best to try and recover the funds from you.  Now from a credit extension perspective with the volume on my account PayPal looks at the liability period over 6 months of processing with the volume I did in July at $1,800,000.  Now we all know that it is not possible to collect $1,800,000 in sales over 6 months and have all of those customers not be happy, but it is possible that someone could push customers off for a month or so before PayPal even knew there was a problem, and PayPal is not interested in getting stuck holding a $300,000 bag of debt from doing business with one customer.  Now we both know that neither you or I would do that to our merchant account provider, but apparently there are people out there that have done that or that intend to do that which is why this industry is so highly regulated.

Visa and MasterCard Regulations

PayPal just like any merchant account provider is put under strict regulations by Visa and MasterCard to help ensure the integrity and safety of the credit card processing industry.  Consumers drive the credit card business and so naturally the rules and regulations are put in place mostly to protect consumers.  One of those regulations that will help you understand PayPal’s response to disputes and charge backs that you may receive has to do with the ratio of charge backs to total sales that your account receives.  PayPal operates a little differently than normal merchant account providers in this regard because they are listed as a master merchant with Visa/MasterCard and not separate merchant accounts, but the sum of their total sales receipts is still scrutinized and analyzed by the same ratios and so PayPal still holds merchants to the same standard to make sure their combined total complies.  What those ratios and regulations say is that if a merchant receives more than .5% in charge backs to total volume of sales or to number of sales then the merchant account provider is required to report that merchant to Visa/MasterCard as a high charge back merchant.  If that merchant remains as a high charge back merchant for several months in a row then Visa/MasterCard begin assessing fines on the merchant account provider.  If a merchant receives more than 1% in charge backs and the merchant account provider chooses to keep their account open, in addition to the increased fines, the merchant is required to report to Visa/MasterCard the merchant as an excessive charge back merchant along with their plan as they have discussed with the merchant to reduce the charge backs below the maximum allowable limit of .5%.

PayPal Dispute vs Charge back

I have been asked this question before about what the difference is between a charge back and a PayPal dispute.  In short, a PayPal dispute is PayPal’s internal method for dealing with a charge back without the customer having to involve their credit card company and subject PayPal to handling the matter according to their process and fees.  Most dispute processes can be resolved without involving PayPal at all.  When a dispute is first opened it provides a medium for you to communicate with your customer and find a resolution to the problem.  If the dispute can’t be resolved then either you or your customer may escalate the dispute to a PayPal claim at any time.  Then a PayPal representative will get involved in the process, review the current correspondence, request additional information, and make a final decision.

Finishing my story…

After PayPal implemented the 5% reserve we were able to keep up with the orders for a couple of months, but not for the full 4 months that PayPal was requiring.  I have $50,000 in a PayPal reserve account that was money needed to process orders, but we slowly started falling behind.  As we fell behind on orders the number of PayPal disputes began to rise, and PayPal’s response to the increase in disputes was to put a 100% reserve on the account until we could demonstrate that all of the orders were being fulfilled in a timely fashion.  Now I don’t know about you, but I decided that it is very difficult to fulfill orders and conduct business when I don’t have access to 100% of the funds that the business is generating.  At this point I got my personal representative and his boss from eBay involved to see if they could help talk some sense into PayPal.  eBay has been excellent to work with through this dilemma.  My manager and his boss even drove down to my office and met with us for a few hours.  However their efforts in trying to get PayPal on the same page with us were futile and ultimately PayPal’s decisions have not only caused the initial predicament, but have perpetuated the problem beyond recovery.  I did learn however that there is a point that you can become numb to the sting of waking up in the morning and finding that first negative feedback on your account.

Resolution and moving forward

At this point the restrictions put in place have rendered impossible our efforts to salvage either of the accounts that we have used in this business.  After discussing this further with eBay and PayPal we will issue refunds to the customer that haven’t yet received their products from the huge reserve account that they are holding and the remainder of the funds will be released according to the original calendar put in place.  We are starting fresh with a new eBay account and we will be using a different merchant processor for new eBay orders, which may limit our market slightly for those customers that prefer to use the “funny money” sitting in their PayPal account, but not enough that we still won’t be able to hit the new growth objectives.

Lesson Learned

Everybody wants to grow and grow fast, but just because you can does not mean that you should.  After this experience and discussing this growth with PayPal, I would say that a 20% monthly growth objective will help you reach whatever sales objectives you put in place for your business while being conservative enough for your merchant account processor to avoid a reserve.  The Simplx model is a high volume low margin model that I have proved just does not work with a reserve, unless you have the cash to fund the negative monthly cash flows and want to use it to grow quickly with the expectation that you will have a reserve.  I think the most important thing is that you communicate with your merchant account processor.  Let them know the details about how your business model works up front.  Ask them what you need to do to avoid a reserve.

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