PayPal Faces New HurdlePayPal Faces New Hurdle

PayPal Inc., the online payments provider teetering on the threshold of a public offering, has suffered a second setback, this time charges from states that it violates banking regulations. Authorities in Louisiana have shut down PayPal's service, and more states could follow.

The company last week postponed a planned $70 million IPO after a patent infringement suit was filed by rival CertCo Inc. PayPal disputes the allegations. It had rescheduled the IPO for this week and may still push through the offering by Friday.

In documents filed Monday with the Securities and Exchange Commission, PayPal stated its belief that bank licensing regulations established by federal and state agencies did not apply to its service. Nevertheless, New York and Louisiana had written the company warning that PayPal "constituted an unauthorized banking business."

"We have taken steps to address these states' concerns, but cannot provide assurances that these steps will be effective in any of these states," PayPal wrote. The company faces penalties of up to $5,000 per day in New York and $1,000 per day in Louisiana until those steps are implemented. PayPal is applying for money services business licenses in 15 states and the District of Columbia; it already has licenses in Oregon and West Virginia.

PayPal's latest stumbling blocks represent a general backlash against the company by the banking industry, says Celent Communications analyst Gwenn Bezard. There two reasons: the high fees charged to merchants for credit-card processing on the Internet and the lack of a flexible method for electronic payments. Says Bezard, "The banks know there are two major problems in the payment market today, and PayPal is the one company that addresses these problems the best."