In an other thread, ezee posted this story [zdnet.com] about people getting ripped off by an unscrupulous seller on eBay. The issue was that they used the PayPal service instead of credit card payment, and PayPal offers no safeguards against fraudulent businesses, the way credit cards do.
It's true, PayPal has no legal obligation to cover these customer losses. But it's a big business mistake not to do it anyway, IMO.
The key point I see here, which has relevance to anyone in business and especially to eCommerce, is that keeping a customer is much more important than the outcome of any one transaction. Stonewalling on legal grounds may seem "right", but it can also put you under. Being right when you're bankrupt is little consolation.
Customer retention and goodwill can be easily shortchanged by a business as they focus on finding and converting new prospects. But making another sale to a previous customer (retention marketing) has lower associated costs than finding new customers (prospect marketing). Small merchants often do not fully grasp this, and apparently, neither does PayPal.
There is already a considerable investment in the established customer base -- the money it cost to develop them in the first place. That asset should not be casually thrown aside.
Over the lifetime of their relationship to a business, one customer (and all their referrals) can mean a lot of profits. If a business needs to take a hit once in a while to keep a customer, it's still less expensive than finding a new customer.
I once worked for a small natural foods store that grew into one of the biggest natural food chains in the US. This outfit really understood risk-reversal, which shuld be a major tool for any eCommerce endeavor. Online shoppers are, on the whole, a skittish lot. The medium is still new and strange, very much like natural foods used to be. Anything you can do to increase confidence matters a whole lot.
This natural foods store used to offer five times your money back if you're unhappy with any purchase. And in a grocery business, the inventory is usually eaten -- a total loss for the company on that transaction! I once saw a $500 purchase of organic beef for a dinner party end up as a $2,500 refund one week later.
But the store really built a customer base with that policy, and they also encouraged people to try new items and buy more than they might have ordinarily.
PayPal blew it. You can be sure those ripped off consumers will not be using the PayPal service again.
If I were running PayPal I'd cover the losses, plus a bonus for their trouble. And the bonus would be cash, not money in their PayPal account, which would heavy-handedly require them to use the service again.