Wednesday, October 22, 2008

American Express Customers: Don't Try This At Home

I hate writing these kinds of stories.

On the one hand, it will help those who are currently doing -- or thinking about doing -- what I am about to write about. On the other hand, there will be some readers who will now go out and do exactly what I am trying to dissuade them from doing. That said, I can't control what my readers do. They'll do what they're going to do.

Here's the deal. A reader of mine got a call from American Express yesterday. Turns out that American Express wants to know about a particular purchase that was made on this person's American Express card. Why? The Amex card was used to fund a purchase that ultimately got funneled through a Paypal account. Let me explain.

It works like this: you buy something. The person on the other end of the transaction has a Paypal account and allows you to pay for the purchase using your American Express card. That's usually not a problem. However, it is a problem when you're on the other side of the transaction as well. Or when you have a friend who is on the other side of the transaction -- and the transaction is nothing more than a sham.

People do these kind of sham transactions when they need cash. If you "purchase" something from a friend who happens to have a Paypal account, the friend could simply turn around and hand the cash back over to you. Think about it. I could pretend as though I am buying something from a friend -- even if there isn't a product to buy. The friend will take my American Express payment and then turn around and hand the proceeds over to me (minus the Paypal transaction fee). It would look like a purchase in every way.

Except, it would really be nothing more than a cash advance. American Express, if it knew that I was doing this, would be highly interested. That's because I would be depriving American Express from collecting interest from the cash advance (at more than 20%). Instead, I would be getting the purchase APR if I could effectuate a transaction through Paypal. So, American Express cares.

But here's a twist. Some people have been known to use these sham Paypal transactions to do things that are not allowed by credit card companies. For example, card companies (we'll use American Express here) do not allow customers to use one card (an American Express Blue card) to pay off another card (an American Express gold card, for example). It's just not permitted. You cannot take two cards from the same card company and use them to pay off balances. Throw a sham Paypal transaction into the mix, though, and you can see exactly how to get around that rule.

By using Paypal, though, you could make a "purchase" and then take the proceeds from that "purchase" to fund your other credit card from the same company. In our hypothetical, I would use the Blue card to make the purchase. Then I would use the cash proceeds from the transaction to pay off my gold card balance. That's a big no-no. And this is exactly what got my reader into trouble. The reader must now explain the purchase to American Express.

If you've ever read your American Express card agreement, you've seen the disclosure saying that you can only use your card for goods and services. Of course, you can also use the card for cash advances, but you will be assessed a huge interest rate for the trouble. You cannot use your card to make a fake purchase (at the purchase rate) and then pocket the cash (without being assessed the cash advance rate).

American Express is very hip to this game, by the way. Paypal purchases are always scrutinized by American Express. They're scrutinized because it's so easy to do what I've just described. Small purchases won't likely gain anyone's attention at American Express, but you can bet your bottom dollar that big purchases won't go unnoticed.

American Express, once it has flagged your account, wants to know two things: one, are you essentially doing a cash advance or balance transfer? And, two, are you broke? Indeed, if you are doing these kinds of sham transactions, you're likely strapped for cash. If you're strapped for cash, and doing these kinds of deals, then you're likely a high-risk customer to American Express. If you're a high risk to American Express, it's going to reduce your limit substantially or cancel your card altogether.

If you're going to do these kinds of Paypal transactions, don't use American Express to do it. They're on top of the game when it comes to this stuff. Better still, just don't do it at all. Indeed, this is not the credit environment in which to test the cards companies' computer systems.

More likely than not, you're going to get caught.

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  1. clutchcargoOctober 22, 2008 at 4:28:00 PM EDT

    Also, they have cash machines in the Las Vegas casino's that report back as "MGM casino"... great way to get a cash advance at a purchase price.

    I guess.

  2. Clutch, just another way to get cash at the purchase rate. Kind of like buying coins from the U.S. Mint. Yet another way to buy currency without paying cash-advance rates.

    But using Paypal to do it is risky. Card companies are all over it.

  3. Not if you have a company that is a corporation- and it's got a different name and bank account as you do.

  4. Have done this maybe a hundred times in last 5 years.Works perfect:)

  5. Avoid round numbers. Go for something weird and random, like $37.95.

  6. To the first anon. But at the end of the day it's still just a way around the rules, right?

  7. GlobCredit.comOctober 22, 2008 at 7:18:00 PM EDT

    To the second anon. Congrats on making it work hundreds of times. No hate here. Just be careful. More and more the card companies are watching. Amex, though, seems to be watching closer than anyone else.

  8. And to the third anon, I am sure that's much wiser. Also, as I said in my story, probably won't be noticed if you're making smaller transactions. It's the biggies that probably get flagged.

  9. JoshOctober 22, 2008 at 7:22:00 PM EDT

    Has anyone seen other issuers get tipsy when they see PayPal transactions?

    Also, what does Amex ask you for exactly? Receipts? I bet it's another negative point on your account if they are in the mood for an F/R.

  10. I am waiting for my reader to report back. The reader had to respond to Amex today. I will let you know Amex asked for.

    Not sure about other card companies. But everytime I hear one of these stories, it's always Amex.

  11. Vibe The Bounty HunterOctober 22, 2008 at 7:29:00 PM EDT

    Kiting used to be illegal in Afghanistan.

    It is "illegal" in American Express.

    (You bank tellers should know what I'm talking about.)

  12. Vibe The Bounty HunterOctober 22, 2008 at 7:30:00 PM EDT

    It is a form of kiting, is it not (In banking terms)?

  13. This could be the easiest way to get a Centurion card!!!! :> Although my bank would curious as to were I got 250k all of a sudden...LOL. I think I'm going to try this to make enough points to cover the annual fee on my Platinum card....what would 45k cost with Paypal fees, Amex interchange fees, etc.

  14. Haha. I can just see a bunch of my readers going out tonight and opening up Paypal accounts for the sole purpose of borrowing cash against their cards at the purchase rate.

  15. Bob WangOctober 22, 2008 at 11:17:00 PM EDT

    Human ingenuity never ceases to amaze ;-)

  16. Yep. No doubt about it, BW.

  17. I've always wondered how they handled the cards used by people at the slots. Really seems like a cash transaction but then again if they give you the card whether you use the money as cash or not the only difference is the rate they charge.

  18. Well, you learn something new every day. I never even occurred to me that people were doing this. My Amex is actually my back up funding source on my PayPal, should there be a problem with my bank account (I have never had a problem and don't expect to). I'll be sure to keep receipts, lol

  19. Hey, M. Nice seeing you here. Yep. People do use their Paypal account to do this stuff. In fact, it looks like some of my readers (above) use the technique.

    This could be a pretty widespread practice.

  20. UPDATE: the reader was able to keep the accounts open. But the balances must be paid in full before the cards are released.

  21. Amex let someone keep an account open after what they deemed to be "shenanigans?" Let me go look out the window and see if it's snowing...

  22. Yep. And it's not snowing outside. But Amex let the customer keep the accounts. This is a long-time customer. This customer did not make a habit of doing this. Was just unaware of the ramifications of doing it.

    This customer told me that it is a live and learn situation. It won't happen again.

  23. DrewOctober 23, 2008 at 3:02:00 PM EDT

    I have two paypal accounts. I use them to move money between my U.S. Bank account and a European Bank Account. The exchange rate isn't as good as the banks, but the fees are much lower and the transactions happen much faster. There is a point, as you increase in dollar amounts, where a bank wire transfer is cheaper, but I never need to move that amount of money at once. Additionally, the Banks (PNC in my case) won't allow me to set up the transfer electronically, where as paypal has all the links in place.

    I know it's not quite the same thing, but if I was in a pinch, I could use my credit card to send myself some Euros much cheaper than just swiping the card.

  24. GlobCredit.comOctober 23, 2008 at 3:04:00 PM EDT

    Drew, not the same thing as the situation I described, but thanks for the lesson regardless.

  25. KnightOctober 23, 2008 at 8:23:00 PM EDT

    Is their a grace period on the cash advance transactions for credit cards if we want to avoind the hefty interest rate?

  26. GlobCredit.comOctober 23, 2008 at 9:09:00 PM EDT

    Knight, there is not a grace period for cash advances. Interest accrues from the first day that you do a cash advance.

  27. I use PayPal as my merchant services provider and i have noticed that they are very strict about Amex transactions. There have been several (embarrassing) times when Amex froze my client's accounts because the saw the transaction coming from PayPal - even though technically, it was the merchant services group..not the regular paypal.

    Here is my question: am i doing my clients a disservice by processing their with PayPal Merchant Services? I would be mortified if one of my clients received an F/R because of one of my transactions.

  28. Powers, my reader, the one I highlighted in the story, had a Paypal merchant services account as well.

    Not sure if you're doing your clients a disservice, but I think it's enough to know that American Express is watching those transactions so very closely. You'll have to decide how you want to conduct business.

    I highlight the information. You decide what to do with the information I've provided.

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