How Changes to PayPal User Agreement for India will affect you!

This morning like all other hundred thousand Paypal users in India, I woke with an email notice from PayPal regarding upcoming changes to User Agreement in India. Like on the previous occasion, this time as well, all inconvenience is sponsored by the Reserve Bank of India (RBI).

As expected, this announcement rose many questions and I guess I can answer some of them correctly. As I am no legal or economic expert, it will be unwise to count on my conclusions which I have drawn after reading this official announcement page from PayPal.

Things that will change:

#1. You won’t be able to accept a single transaction of more than $500

You need to ask client to break a bigger transaction into multiple transaction not exceeding $500 each. This will add communication overhead plus will cause inconvenience to your client. “inconvenience to end client” is the worst part I feel.

Another downside is, paypal payments that we receive by automated means like from ad-networks, affiliate networks, how will you ask them (machines) to break bigger payments into multiple ones? No answer yet!

If you are running an e-commerce site with PayPal payment gateway integration, then your customers won’t be able to “checkout via Paypal” if total payable amount exceeds $500. This can be solved by using alternate payment gateway like 2Checkout. 2Checkout allows end-customers to pay via Paypal. I hope this solves the problem as 2Checkout will act as (American) middleman between PayPal and You (Indian users/merchant) 😉

#2. You must withdraw Paypal balance to Indian bank account within 7-days

As changes to PayPal user agreement for India will also ban Indian users from using PayPal balance to buy goods & services online, you anyway do not have any reason to keep Paypal balance in PayPal account itself. So keep withdrawing!

Two things that are unclear about this 7-days limit are:

  1. What will happen if for some reason you cannot access your account for 7-days? Will Paypal do automatic withdrawal to Indian bank account OR return payments to original senders? Or just forfeit the pending PayPal balance!
  2. PayPal charges INR 50 if you are withdrawing less than INR 7000. This 7-days limit may force you to withdraw smaller amounts even if you don’t need them in India.

As per Vinsar’s comment, it has been confirmed by PayPal support team that if we do not  withdraw within 7 days, account balance in our PayPal account will be withdrawn automatically to our bank account. Also, if you PayPal account balance is below INR 7000, PayPal will deduct INR 50 automatically from your account at the time of this “automated” withdrawal.

#3. You cannot use Paypal “balance” to buy goods & services online

Please note the quotes word – “balance”. New changes doesn’t mean buying through PayPal option has gone forever for you. It only means, you cannot use PayPal balance.

If you have any credit card linked to your PayPal account, you will be able to buy stuff online via PayPal. Only thing, purchase amount will be deducted through your CreditCard and not PayPal balance.

This only means – you will loose money in currency-conversion twice! This also means banks will make earn more from their foreign currency conversion service.

Practically, this will affect all PayPal users without any credit card on their account. You may try using Virtual Credit Card to overcome this problem!

Why is this happening?

For point #1, RBI has instructed PayPal as well as other banks/gateways to report all transactions above USD 500 to them long time back. Rather than following RBI’s norms, PayPal choose to set transaction limit of USD 500 for Indian users. This is a bit shocking as it was never asked to Indian users weather they mind sharing their transaction information with the RBI! Seems PayPal has “more” to hide from RBI than a businessman in India! 😉

For point #2, PayPal operates as payment gateway and not as a bank. This is why PayPal never gives any bank interest on money kept in PayPal account. This is again not acceptable to RBI. Ironically, issue of “interest” was never raised by PayPal users! And given a choice, I will personally let PayPal eat interest on my account balance rather than forcing me to withdraw money within 7 days!

For point #3, PayPal allows you to use PayPal balance to buy goods & services online directly which might be affecting India’s revenue from import/export. As an example, consider following common scenario:

  1. An Indian provides goods/services to a US client worth $100 and receives payment of $100 (minus paypal fees) in PayPal account.
  2. After few days, above Indian provider spends $40 from PayPal balance to buy webhosting.
  3. Towards month end, same Indian provider withdraws amount of $60 (minus paypal fees) to Indian bank account.

In the above scenario – India as a county should do export worth of $100 and import worth of $60. But because users can pay via paypal balance, India will see only export of $40 (minus paypal fees).

While net effect remains the same (keep currency conversion charges aside), it will affect India’s turnover from import/export. This in turn might be affecting many things on which I cannot comment.

Summary!

One thing is for sure, the way PayPal works has always been a matter of debate. I always have a hard time explaining local banks/charted accounts/legal experts about how and why we use Paypal. But none of them are ever fully convinced. I guess in India, there are different norms for Payment gateways (like CCAvenue, EBS, etc) and Banks (like HDFC, ICICI, etc).

I already sent a few queries to my experts friends from various fields. I hope they will be able to give us more insight over time. I will keep this post updated. Being an Indian I am sure PayPal will figure it out how Indian system works soon and do necessary off-the-record “magic” to save its business in India! 😉

Link: Changes to PayPal User Agreement for India – Official Announcement

45 Replies to “How Changes to PayPal User Agreement for India will affect you!”

  1. While you found #3 point to be valid, PayPal could have avoided #1 and #2. Keith Dsouza mentioned about this in his blog post:

    1. PayPal needs to report payments of amount > 500$ to the RBI & Indian govt. which it doesn’t.
    2. PayPal needs to give some interest to the users if it holds money and act like a bank, which it doesn’t. Otherwise it has to get the money out within 7 days.

    Thus PayPal is just avoiding the laws and trying to put the blame on RBI.

    * I’m not an expert in laws, the information is just based on what I have read, particularly the linked blog post.

    1. @Gautam
      Agree Gautam. I believe point #3 to be fair & valid only.
      PayPal may not be reporting payments above $500 to RBI but I don’t think its getting banned for the same reason. There must be more to it.
      For us, $500 limit will affect the most.

      1. I did a quick Google search and found this circular (rbi.org.in/commonman/English/Scripts/Notification.aspx?Id=301#form) for the year 2007-2008 which very well states the 500 USD point. The same was also present in the 2010 update – rbi.org.in/commonman/English/Scripts/Notification.aspx?Id=719#L4. This means PayPal had not been following it since then. The site doesn’t contain circulars prior to 2007.

        Please copy paste the links as RBI doesn’t allow anyone to link to them without prior permission.

  2. @ Rahul and Gautam : This limit will affect us really. Now we have to split our payments from clients to multiple paypal accounts and perhaps, our customers won’t like that. I’m thinking to move to some other paypal alternative, perhaps 2CO

    1. @Gourav
      We can once ask clients to split payments in chunks for real.
      What about payments we get from various ad-networks and affiliate programs?
      Those are automated payments and I am not sure how they will split it.
      Also, if we ask for example Kontera to split our payment, they may force us to go for payment via check. And we all know how “fast” payments via check works… 😉

  3. I am still scratching my head after paypal released this news. For me, all the 3 steps taken will be affecting a lot.

    1. My $500+ payments for paypal only comes from HG affiliate. I hope they will understand this situation and will take steps to solve this issue for Indian affiliates.

    2. The second step will be creating a big problem for me. I am just a teenager right now and I don’t think I will be allowed to use the credit card that much I will needing from my father. Even right now, I always try to keep my pp balance above $1k so that I can purchase req. things to run a business without the need of using the linked credit card.

    3. As I said, I can’t use credit card and hence this step will similarly create a big hassle for me. The only thing I think will solve this issue for me is that I will open my bank account in SBI or HDFC as their debit cards has this feature that it can also be used with paypal which I can’t do right now with my current banks debit card (or maybe paypal can think over this!).

    Huh great New Year surprise from RBI!..grrr..

    1. @Typhoon
      If you have a bank account with HDFC/ICICI or any top-bank which gives you netbanking, you can try for Virtual Credit Card.
      Virtual Credit Card can be used instead of normal credit card. It works with paypal for sure.
      Here are details.

  4. just came to knew that even UBI has got credit card facility…I will just put this thing my pops mind to have one for me for my account as he is a staff member there, so it won’t be a problem getting it. But before that I will have to force myself to be 18+ and it’s just a matter of 4 months 🙂

  5. I have been an active PayPal user since 2001. At that time, PayPal was like some rare of the rarest words for people in India just like e-Gold is for most of the people now. Though we are dependent a lot on PayPal, however there are alternate gateways too which are always there for help.

    Many of them including 2CO provides similar services, the only thing which I didn’t feel good is the reverse direction of our economy (sponsored by RBI) which is making to trade through Internet more difficult than ever.

    1. Eventhough PayPal in this case is not cooperating with government, my talks with many Indian entrepreneurs revealed that, laws & regulations in India are too strict to create a successful alternative to PayPal in India. 😐

  6. People at many places are blaming RBI, whereas it is Paypal who is screwing us. People are thinking and looking for alternatives, which is wrong approach, as in the current scenario there is no such thing as alternative, as the rules that apply on Paypal also apply on every other similar service provider. Also Paypal is preferred because it is Paypal, if we start using some other provider, clients may not be using it as most of them prefer to pay through Paypal.

    So the question remains how to survive this change? There are many different situations, like earning from freelancing, earning from commissions, earning directly from clients, having paypal business account, personal account, under age issue and so on. Each user has different setup.

    Most of the problem is because not many users are educated enough or have adequate knowledge of our countries laws, we are not an organised and united sector, and everyone has his/her self interests.

    So lets talk what best we can do in such a scenario, first step in right direction is to work as a company, I will start from teenagers or people underage as I think they are the one who are in large majority and will suffer most:

    Teenagers/Underage Users: See if you can start a company in your father/mother’s name. If your father is a business man you won’t have any difficulty, if he is in service and your mother is a housewife do it in her name, if both are in service see who else is there in the family in who’s name you can start the same, get consultation from a legal expert on how to protect your interest and for future transfer of the company in your name once you have achieved the age to operate on your own. As a company you will be able to open a current account with any nationalised bank and can also have a credit card in the name of your father/mother, moreover CC is not a problem now days as you can have virtual credit card from many banks.

    Adult Freelancers providing services as an individual: Same stands for you start a company, its not difficult or costly to do so, you can very easily open a proprietorship company in any nationalised bank, for credit card etc you all know the solution.
    Affiliates: Again open a company and work as a company.
    USD 500 Limit: If you bill your clients, use an invoicing system or through whatever way, bill them under USD 500 using multiple invoices. For affiliates and commission earners, talk to your provider if they can split payments, I think many already have the feature, if they don’t have but if request is made by enough users they will listen, volume of users and communication is the key.
    7 day withdrawal period: There are different solution to different situations, like for recurring billing, do a prorate billing, fix 1st or 15th of the month or depending on the volume you can do it every 7 days, so you will have enough funds for withdrawal without attracting Rs. 50 charge. For freelancers earning from freelancer job sites, withdraw from them to your paypal account when you have enough funds and then once funds have arrived in your account withdraw them to your bank. For direct one time billing fix due dates so you have enough funds on that date.

    Above is a rough draft and may need additions, fine tuning and customisation as per individuals needs.

    Most important is to do things in legal framework, work as a company, get PAN, get current account, file returns and pay tax. And don’t worry about tax, since as a company you can show expenses and can show no profits in the end.

    Get united, make this an organised sector, create a big force and bring Paypal and similar, our banks and RBI/Government to table and lay your terms. If Paypal can work as a bank in EU since 2007, if Paypal strictly follows guidelines of China, why can they have a proper and legal solution for India, who is stopping them to work as a bank here. Note that it is not just these clause, paypal is screwing you all over, if you calculate thoroughly you pay them around 8% from receiving funds to withdrawal, they are not a bank but use their own conversion rates which is illegal here, since they are not a bank here and not governed by our laws, they do not pay any interest and seize your account and funds at the drop of a hat. So once again, I will say do things in a legal way, support your country and government and make companies like Paypal to do things properly.

    Otherwise just suffer.

      1. Can I use VCC to send payments directly to foreign paypal accounts? If yes what is the limit of VCC is it the amount of balance that I have in my account?

  7. Just to update the 7 day limit issue, people are asking what if they missed the date, will paypal refund the money to buyer, will they forfeit it. I got the reply for the same, the amount will get transferred to you automatically if you missed the date, hence that way your money is secure.

    Now you just have to make sure that money comes in on fix dates, so that you have enough funds not to attract the Rs. 50 charge.

    Another issue is about credit card for underage people, Rahul had made a wonderful post about B2 account from ICICI the other option now days is you can have a CC from most of the banks against a fix deposit. Since most of you guys are earning enough so I think you won’t face much financial crunch on that front, you can have a CC from SBI against a FD of Rs. 10000.

  8. I understand that one have to follow government rules and here is what paypal doing to stay in India but i am still not understand why the limit is only $500 ( i did research on that and found that as per RBI norms, Indian merchant have 25k INR limit !! buy why only 25k?).

    will really appreciate your feedback,

  9. I have one question will I be able to transfer my paypal balance say 100$ to another paypal account like that of a company. Both are in India. Is that possible can anybody help?

  10. @Vinsar.Net – the amount will get transferred to you automatically if you missed the date. This means that the paypal balance will be transferred to your primary indian bank account automatically if we miss the date?

    1. Exactly Kishor… it will be transferred to your Indian Bank account, however I do have a question what if the PayPal balance is only $1, then what?

  11. Thanks Ankit, looks like we should not have $1 balance!! These restrictions are not ok, Paypal should solve this issue at the earliest.

  12. Here is a question. The minimum withdrawal amt is #10. What if I receive less than that in affiliate commission. I can’t keep the money in Paypal nor can I withdraw. What happens in such a case.

    Hope somebody would help out with this

    Thanks in advance

  13. Guys lots of useful discussions are going on, I have few questions which I a looking for answers. (I am located in India too)

    1. We usually pay outside India to freelancers working on our several projects. We configured Credit card to our paypal account and using it to send money. Can we continue doing so?

    2. We receive lot of payments and most of them are low amount e.g. $10, 15 or so. We usually wait to reach balance till $500 and then withdraw so that it saves transaction charges. But with new rules, any amount will be transferred to our account and in this case if account balance is below $50 a week, what will be the Paypal charges?

    Looking forward to get a good opinion on how we should operate now.

    Regards

    Maria.

  14. Please note that they are waiving the INR 50 withdrawal fee since March 2 2011. I raised a request regarding this and Paypal reversed the fee and it’s credited back to my Paypal account.

    So DO raise a request with Paypal if they are charging INR 50 withdrawal fees. Please note this in the main topic.

  15. Hi Rahul,

    First of all I’ll like to thank you for such a informative post. Paypal has also learned the tricks of finding loopholes in Indian laws and then applying the same to improve there business. They are already here (ebay.in).

    Most Indian do not make even $500, they only make few dollars (most of them are beginners) and when they have to withdraw (or are forced to withdraw) how much will they actually get in hand. (after deducting there huge commission and poor conversion rates).

    Even businesses cannot afford this frequent withdrawals and then paying them again in USD.

    Paypal should reduce there commission structure (which is already too much for Indians who accept payments globally).

    They should also keep there conversion rates close to market rates.

    In this scenario anyone who is in online business will now incurr a loss of approximately 20% as commission+conversion losses.

    I think in the present circumstances it is better to switch to CCAVENUE (for those who own a website or blog), for others there aren’t much feasible alternatives.

    Today more Indians are active online then there were few years ago, even reputation of India has changed (some years back many sites didn’t even considered anyone from India) and this can be used as pressure group/lobbying in various communities online.

  16. Thanks for a such a useful article and I thank each and every one who are very active to discuss on this via comments. And I have one more solution if you have friends, relatives who are staying abroad to hold your paypal balance in their paypal account. I mean to say, linking paypal account of some one whom you know and living abroad so that you can use the balance to buy things online and get the required amount transferred to your paypal account when your amount reaches a resonable amount in their paypal account. GuyS how would it be ?

  17. Hello Friends,
    Thanks for your comments and valuable information sharing.First of all i am the new user for pay pal so want to know some important things.
    1)How i get transferred my amount from pay pal to indian bank… 2)Should i need to transfer the whole amount or should i kept minimum $1 in pay pal is this make sense?

    Please suggest me the exact way for this transaction..Thanks..

  18. Hello Sir, i an from india.and i want to open paypal account.so i want to know more about paypal india.and how can i transfer my paypal amount to my indian bank account.and how much can dollar can be tranrferable.kindly help me.

  19. What if fund remains more than 7 days with pal and i try to withdraw it to bank account…
    I have this situation now… Shear ignoratnt struck me,

  20. Is there any update for paypal that it would be again allowing us to use its Balance to buy good and services ? As with this credit card terms running an business is going to be an pain . We have to wait for the money for atleast 5 days to start appearing in bank .

  21. i have linked my credit card with paypal and used it for sending some payments(below 500 usd) now i am unable to send payments…..i have raised all my limits…..what can be wrong????ive cleared my credits also

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