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If you're among the roughly 16 million people signed up to use PayPal, you know how handy the online payment service can be, and chances are, you've never had a problem.

That said, customer service has long been a trouble spot for the company, as we reported last October in Consumer Watch. And although PayPal says it has improved its service, two law firms have launched class-action suits against the company because of customer service problems.

Sheila Stawicki of Woodville, Alabama, knows those problems firsthand. She used PayPal without a hitch for two years. But in January someone fraudulently accessed her PayPal account and liberated $3000 from her bank account. She recovered half the money through her bank, but needed PayPal's help with the rest. After calling and e-mailing PayPal repeatedly for 45 days, Stawicki says she'd received only disconnects and canned replies. She got a refund after PC World contacted PayPal.

PayPal says Stawicki's case was an anomaly, caused partly by a now-complete move from paper to electronic affidavits. PayPal also added customer service staff: 280 agents are now available daily, says Vincent Sollitto, vice president of corporate communications. Most complaints are resolved within 24 hours, he says.

Lawsuits Pending

The two possible class-action lawsuits paint a less-rosy customer service picture.

One suit, handled by Girard Gibbs & De Bartolomeo of San Francisco, alleges PayPal places barriers between itself and users, hindering those who experience problems. The suit also contends PayPal goes overboard in its fraud prevention, sometimes erroneously freezing or closing accounts.

The other suit, filed by national firm Jacoby and Meyers, makes similar claims. Even without advertising the suit (it's unlikely to get class-action status for a few months), the firm already has nearly a thousand complaints about PayPal, says Gail Koff, a founding member of the practice.

PayPal's Sollitto says neither lawsuit has merit and they will be contested "vigorously."

PayPal has made a business decision to save money by offering sometimes inadequate support to users who aren't business-class, paying customers, says Avivah Litan, vice president and research director at Gartner Research.

Sellers pay per transaction, but buyers get to use PayPal's service for free. PayPal isn't concerned about losing some nonpaying users, Litan says.

Sollitto vehemently denies that PayPal offers poor service to any of its customers.

Not A Bank

Paypal's customer service troubles highlight the fact that while PayPal looks like a bank, it has carefully avoided becoming one, says Steve Schutze, the American Banking Association's e-strategies director. Banks must abide by regulatory and internal audits, and by other rules, he says. But "there is no regulation that says they [PayPal] must work with you to resolve the problem."

PayPal's chief competitor, EBay Payments (formerly BillPoint), follows banking regulations because it outsources all payment banking functions to Wells Fargo, a national bank which once owned 35 percent of BillPoint. Citibank offers C2It, another rival, so it too falls under banking rules.

All in all, negative press over the pending suits and poor customer service don't seem to be diminishing users' appetite for PayPal. Gartner analysts project that the company, which debuted in 2000 with about 10,000 users, will reach 25 million users by 2003.

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