PayPal gets boost from FDIC in regulatory fight

A spokeswoman for Internet payment service PayPal today said the company was pleased the Federal Deposit Insurance Corporation issued an opinion that PayPal is not a "bank."

PayPal recently has come under scrutiny by state banking regulators in Louisiana, California and New York. Spokeswoman Julie Anderson said PayPal solicited an opinion from the FDIC's legal department because it wanted FDIC insurance for PayPal's customers' funds.

"We think the letter will help with our ongoing discussions with state regulatory agencies," said Anderson. "PayPal doesn't make any loans," she added.

When PayPal filed its initial public offering last month, it disclosed an investigation by Louisiana officials into its "money transmitter" status. According to Anderson, the definition of a "money transmitter" varies by state.

"Banking regulations are set up for institutions that take deposits and loan out money," she said. "They don't want a customer to not be able to get his money because the bank loaned out too much."

According to a written statement issued Tuesday by PayPal, the FDIC opinion said, "PayPal does not physically handle or hold funds placed into the PayPal service."

"We are delighted to be able to enhance the safety of customer funds as they move through our payment service," PayPal CEO Peter Thiel said in a written statement. "While customers will continue to be able to request a check or electronic funds transfer at any time, those who do not immediately request a withdrawal have two attractive options: a nightly sweep into a money market fund where their funds earn a rate of return, or a deposit on their behalf at a financial institution where it is eligible for FDIC insurance."

News source: Newsbytes