At some point during the week of October 19, PayPal's system experienced a glitch involving eCheck payments made to eBay sellers. PayPal has been holding the payments captive ever since - and the glitch appears to be ongoing. Sellers are concerned about not being able to access their money, and are also worried whether buyers would be able to cancel orders for items already shipped. If they don't ship items because they have not received funds, sellers are concerned buyers will ding their reputations - especially since eBay has failed to publicly report the problem.

Sellers who experienced the problem say PayPal initially sent a "claim this payment" email, which PayPal has called an error in a forum post on the eBay discussion boards (11 pages as of Monday morning). PayPal spokesperson Michael Oldenburg told AuctionBytes on Wednesday it was a "known issue" and that he would have more information about it on Thursday. PayPal has yet to respond to follow-up inquiries, and was still sending erroneous "claim this payment" emails as late as October 30, 2008, about a week after the problem first surfaced.

The letter asks recipients to complete a special form, informing them they are one of PayPal's high-volume customers. "We ask PayPal users who receive more than $10,000.00 USD per month to complete our Supplemental Merchant Information form." It directs recipients to https://www.paypal.com/us/MERCHANT.

The letter may be related to new IRS reporting requirements that was part of legislation passed into law in July. In August, PayPal had told merchants it would be required to report to the IRS the total payment volume received by PayPal customers in the U.S. who receive more than $20,000 in payment volume in a single year and receive more than 200 payments in a single year due to the Housing and Economic Recovery Act of 2008. However, many recipients of the PayPal letter say they do not fall under the requirements outlined in the letter.

Neither eBay nor PayPal posted any formal announcements about the glitch or when sellers can expect to receive their money, except for eBay Australia on October 30, which advised sellers with problems to call PayPal customer service. The communication problem is compounded since eBay recently fired all of its discussion-board moderators, called "Pinks," in the recent layoffs that affected 10 percent of its workforce.

Sellers report that even after payments show up as "cleared," the funds do not show up in their account. Instead, PayPal displays them as "unclaimed," and there is no way for the eBay sellers to claim the payments. eBay does not allow sellers to ban PayPal eCheck payments, and many buyers often don't realize when they are using eChecks to pay for goods.

eBay sellers find themselves in a bind, since they are now required to accept PayPal if they do not have their own merchant credit card account, which many do not. Since PayPal is not a bank, it appears to be unregulated, and users have no recourse when the service holds its funds without explanation.

One reader wrote a letter explaining the conundrum she faces as an eBay seller: "PayPal has a huge glitch...won't release our money. They HAVE NOT posted an announcement about this to help up explain to our buyers. IF we ship without payments cleared or claimed...the buyer can cancel payment and were without item and money. We get graded on our shipping time by buyers which reflects our discounts and search standings in ebay and they won't release the money or help explain it. BUYERs will think the SELLERS are BAD! It's not the sellers!!"

Another seller wrote describing the problem and ending the letter with, "My main issue isn't the fact that this annoying glitch is affecting my account...as much as the fact that EBAY isn't even remotely acknowledging there is a problem to the public. And if I were a new buyer that saw my e-check had cleared and the seller wasn't sending out my item yet...I would think it was the seller. And as far as I know the sender (buyer) is not receiving any notification from Paypal either."

In another communications-related problem unrelated to the eCheck glitch, PayPal sent an email to sellers on Friday correcting a previous email about its Seller Protection Policy. It stated, Unfortunately, this email incorrectly states that it's now easier than ever to be covered against items-significantly-not-as-described and items-not-received claims, chargebacks, and reversals. To clarify, the email should have said it's now easier than ever to be covered against unauthorized payments and items-not-received claims, chargebacks, and reversals. Our improved Seller Protection does not extend coverage to items-significantly-not-as-described claims, chargebacks, and reversals.

And in the glitch department, eBay has also been experiencing a problem with search affecting some users.

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Update 11/3/08: PayPal said it put in a fix on Friday morning to prevent the problem from happening to new eCheck transactions, but are still working on a technology fix to release the funds to sellers accounts for those affected by the glitch. PayPal said users may call PayPal customer support to initiate a manual release of funds on a case-by-case basis, or wait for the fix. Check the AuctionBytes Blog for additional updates.

Update 11/5/08: See this November 5th article for an update on the eCheck glitch. Also, note that PayPal said the Supplemental Merchant Information (SMI) form is not related to forthcoming IRS reporting requirements. Sellers who apply for or upgrade to a PayPal Business account are required to fill out the SMI form.