Are your PayPal balances safe? Are they FDIC insured?

With all the banks that are supposed to fail I was beginning to worry that maybe I should be more careful about carrying a balance at PayPal. I know lots of sellers sometimes maintain a balance at PayPal for a number of reasons.

1. To process returns quickly
2. To pay eBay fees
3. To pay for other items they might purchase on eBay

So I did a little digging and read through the PayPal user agreement. PayPal is officially not a bank. PayPal is only a Payment Service Provider. Consequently, Paypal only acts on your behalf and deposits your money in a bank for you. So your PayPal balance is held at a bank at which PayPal deposits your money. Here is a list of the banks that PayPal currently uses.

https://www.paypal.com/cgi-bin/webscr?cmd=p/pop/fdic_banks-outside

Now there are 2 ways in which you can hold your money at PayPal. One way is to have it saved in a money market account and the other is so it is put into a bank account. The money market account, like all money market accounts, is not FDIC insured. However, when PayPal acts on your behalf and deposits the money into a bank account, not a money market account, the account qualifies for FDIC Pass-Through Insurance. So it appears that any balances you hold at PayPal, that aren't money market accounts, should be insured. However, if you read the fine print PayPal says,

"Pass-through deposit coverage is contingent upon PayPal maintaining accurate records and on determinations of the FDIC as receiver at the time of a future receivership of any bank at which we place your funds. FDIC pass-through deposit insurance protects you only against the failure of the bank at which PayPal places your funds, and does NOT protect you against PayPal's insolvency."

Here is the link to PayPal's disclaimer on FDIC Pass-Through Insurance.

https://www.paypal.com/us/cgi-bin/webscr?cmd=xpt/UserAgreement/general/FDIC-outside

So apparently you are at PayPal's mercy to keep "accurate records" and not become insolvent. I think the later part of that statement is probably the most concerning to me. Although I have little faith in eBay/PayPal to keep accurate records, I would be most worried about eBay going bankrupt. Anything can happen these days and with markets as volatile as they are it can happen in an instant. (Think Enron or IndyMac Bank)

Another issue to worry about is that with PayPal is that it takes a long time to withdraw your money. You can't line up outside a bank and wait to withdraw all of your money. At PayPal you have to put in an ACH request to withdraw your money and wait a few days. Consequently, if any of the banks where PayPal's money resides fails, it would probably put PayPal users at a significant disadvantage.

Anyway, this author is going to make sure he withdraws all of his PayPal money as quickly as it comes in. Please let me know if anyone has any thoughts or comments on this. Also, please check back regularly or subscribe to my RSS feed as I will be posting many more eBay stories to come.