Magazine article American Banker

PayPal Veterans Share State Licensing War Stories

Magazine article American Banker

PayPal Veterans Share State Licensing War Stories

Article excerpt

Byline: Sean Sposito

As financial-services startups debate whether it is better to ask regulators for permission or beg for their forgiveness after signing up customers, PayPal's history might offer some lessons.

Once a startup itself, PayPal, now a unit of eBay (EBAY), argued for years with officials over whether it was, or wasn't, an illegal banking operation. Now, PayPal has licenses wherever it needs state-approval.

In 2002, Louisiana regulators nearly banned PayPal from operating in the state, sending the company a warning that it might be operating there illegally.

"I think it's a great example," remembers Eric Jackson, who was PayPal's first marketing director and wrote about his experiences in a 2004 memoir, The PayPal Wars, "because it points out how regulators say, 'If we don't know what you are, you must be dangerous, and later on we'll figure out what we'll call you.'"

The Louisiana Banking Department quickly reconsidered after meeting with PayPal's lawyers and other state officials. According to Jackson, it probably helped that hundreds of angry PayPal users phoned the state to complain.

"It has a funny ending, but it's not a funny story," says Jackson, who is now the CEO of CapLinked, an online platform for managing financings and M&A deals. "Because people were using PayPal to sell online -- and it was making life easier for consumers -- and [regulators'] first reaction was: 'We think you might be a bank, but we don't have any approval for you, so we're just going to ban you.'"

In its home state of California, PayPal is among those that have lobbied to amend a notoriously onerous money transmitter licensing law. The company met with Assemblyman Roger Dickinson, D-Sacramento, who has sponsored a bill that would make the Department of Business Oversight's licensing decisions more transparent and lower capital requirements. …

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