Tilson: PayPal's 'Highly Deceptive Practices' Could Be Grounds For Class Action Lawsuit

Former Kase Capital Management hedge fund manager Whitney Tilson called out Paypal Holdings Inc PYPL this week for practices that he said could leave the company vulnerable to a class action lawsuit.

When recently using the payment app to send funds to a friend, Tilson said he came across “highly deceptive practices” that are a “total scam.”

Tilson’s Allegations On PayPal

Tilson’s beef has to do with PayPal attempting to charge him its 2.9% fee for buying goods from a merchant even though he was merely sending cash to a friend, a service PayPal offers free of charge.

After entering his friend’s information, a screen popped up that offered purchase protection and gave two clickable options: “Send to someone you trust” or “Continue,” with “Continue” seemingly the default option. Tilson said he didn't want purchase protection, so he clicked continue, and his friend was charged a 2.9% fee for the transfer. Given the transfer was a large one, Tilson said this fee amounted to hundreds of dollars.

Tilson realized he apparently should have chosen “Send to someone you trust,” but PayPal didn’t make clear what was happening or that he would be charged the fee.

“I have three problems with this: a) It wasn't visible on my screen when I went to click the ‘Send Payment Now’ button – I had to scroll up to the top to see it... b) Only in the fine print does it say ‘Paying for an item or service’... and c) There is no disclosure anywhere on the page that PayPal is going to charge a fee on this transaction,” Tilson said.

In addition, the confirmation email Tilson received from PayPal claimed his friend would receive the full amount, which wasn’t the case.

“Every sophisticated company carefully designs and tests every element of their website and purchase/payment process, so I'm certain that this is a carefully orchestrated plan – what I call a scam – to increase the number of people paying fees unnecessarily,” he said.

Legal Fallout?

Tilson suggested lawyers looking for a potentially huge class action case against a big company could have a major opportunity in PayPal.

He said he called PayPal to complain and they advised him to tell his friend to cancel the transaction, which allowed Tilson to re-send the money free of charge.

“I don't think that this, by itself, is sufficient grounds to short the stock of this rapidly growing company... but I'd want to look into it if I were a shareholder, especially given the stock's nosebleed valuation (7.2 times revenue, 37.7 times EBITDA, and 50.7 times trailing earnings),” Tilson wrote.

Benzinga reached out to PayPal for comment on Tilson's comments.

Benzinga’s Take

There’s a thin line between steering customers in the right direction and deceiving them into paying for services they don’t want. If PayPal has crossed that line, it could ultimately be a costly mistake for the company and its investors.

Do you agree with this take? Email feedback@benzinga.com with your thoughts.

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