PayPal penalised for 'deceptive' practices Published duration 20 May 2015

image copyright Getty Images image caption The settlement comes ahead of eBay's planned spin-off of its PayPal division

The online payment service PayPal has agreed to pay $25m (£16.1m) of fines and compensation in the US after being accused of deceiving its customers.

A government watchdog denounced the company for adding new members to a credit-card-like scheme without making them aware of the fact.

It also said PayPal had mishandled bill disputes, among other offences.

The eBay-owned company has offered to settle the case, without admitting wrongdoing.

A judge needs to approve the agreement for it to become legally binding.

Default option

PayPal Credit is a delayed payment scheme, which allows users to spread out bills over several months, paying a monthly interest rate for the privilege. Members face additional fees if any of their payments are overdue.

PayPal is accused of making the service the default option for new sign-ups without making clear that it was doing so.

"Tens of thousands of consumers who were attempting to enrol in a regular PayPal account or make an online purchase were signed up for the credit product without realising it," said Richard Cordray, director of the US Consumer Financial Protection Bureau.

image copyright PAyPal image caption PayPal Credit is marketed as being an alternative to credit cards

He added that some customers had discovered the fact only after being charged for late fees or having received debt-collection calls.

In addition, the company is accused of failing to provide up to $10 worth of credit towards purchases, as promised in its adverts.

"PayPal [also] failed to post payments properly, lost payment checks and mishandled billing disputes that consumers had with merchants or the company itself," Mr Cordray added.

The proposed settlement states that the company will set up a $15m fund to compensate affected customers and pay a further $10m fine to the bureau.

"PayPal Credit takes consumer protection very seriously,' the California-based company said in a statement.

"Our focus is on ease of use, clarity and providing high-quality products that are useful to consumers and are in compliance with applicable laws."

PayPal Credit is also offered to users outside the US,

A spokeswoman for the UK's Financial Conduct Authority said she was unable to comment on whether or not it was carrying out an investigation of its own.

However, PayPal said it did not expect a follow-up probe.

"UK members have not been affected by the issues raised in connection with this CFPB investigation," a spokeswoman for the firm told the BBC.

This is the second time PayPal has been penalised by the US government in recent months.

In March, it agreed to pay $7.7m to the US Treasury following claims it had allowed payments that violated sanctions against Iran, Cuba and Sudan.