Why Are There Zero Articles Covering PayPal’s New Scandal?
I was surprised to find that there still isn’t a single article on Seeking Alpha covering the class action lawsuit against PayPal (PYPL). I’ll keep this short. We don’t regularly cover PayPal, and I don’t intend to add it to coverage. However, this should be getting more attention.
Quick Disclaimer: I am not a lawyer. I do not practice law in any setting. I never have. I’m sharing my opinion with you. Nothing in here is treated as being a “fact” and all readers are encouraged “to do their research”. In other words, I don’t want PayPal to sue me for alleging that they’ve committed fraud to the tune of billions. So keep in mind that this is just my opinion. They haven’t lost any court cases yet or admitted any wrongdoing. However, I would encourage everyone who dislikes theft or extortion to evaluate their relationship with PayPal carefully.
Position Disclaimer: No stock or option positions in PayPal.
Giving Credit Where Credit Is Due
This whole thing was broken wide open by a Youtuber. Not a stock analyst on Youtube. Just a guy who makes occasional videos about some tech stuff.
It’s a fairly long video (23 minutes) but MegaLag demonstrated the evidence that resulted in a class action lawsuit against PayPal’s “Honey”. Following MegaLag’s discovery, a group of video producers filed a lawsuit against honey. As of a few days ago, the plaintiffs were seeking class action certification. In addition to damages, they are seeking an injunction.
In my opinion, it would be ethically correct for the court to issue a permanent injunction in addition to damages. Damages that should (ethically speaking again) be a multiple of Honey's gross revenue. I suspect most of you will agree by the time we’re done.
What Does Honey Do?
Honey is a browser extension. It was also the name of the company that owned the browser extension.
Here are a few of the things Honey can do:
- Records coupon codes used on websites.
- Automatically try coupon codes on retailers to find customers the *best deal. Note: It’s not always the best deal.
- Lie to consumers about finding them the best deal.
- Steals affiliate commissions.
- Allows PayPal to “negotiate” with retailers. The way they can negotiate is so similar to extortion that I cannot see any difference, but that’s probably why I’m not a lawyer.
PayPal Acquired Honey
In 2019, PayPal announced they would acquire Honey. In early 2020, PayPal announced the Honey acquisition was complete. The acquisition cost about $4 billion in cash.
Once upon a time (before PayPal owned it), Honey was extremely useful to customers. I uninstalled it years ago, before the scandal broke, simply because it became annoying and far less useful.
What Are Affiliate Commissions?
Sometimes someone advertises a service and has a special link for members to click. The members still pay the same price, but it credits the sale to the person who helped them. This can be a great system when it works right. Say you review computer keyboards on Youtube. You would probably have affiliate links for every product you review. You could overrate bad products, but then you would lose your audience. So you can review the new keyboard that stinks, mention the one you actually like, and provide affiliate links to each keyboard. Viewers can agree with you or not, but you’re providing value. If they want one of the keyboards, they will probably click the link.
Decent system.
It costs you nothing, so you click the affiliate link before buying the keyboard you picked. This puts a tiny cookie on your computer. When you go to check out, the website sees the cookie and credits the reviewer for creating the sale. That’s the only thing that cookie ever does.
How Honey Steals Affiliate Commissions
When Honey sees you’re about to check out, it starts offering you coupons (many of which don’t work in my experience). Whether it finds a coupon or not, the goal is simply that you interact with the browser extension.
When you do, Honey does two things:
- Delete the original affiliate cookie if there was one.
- Insert their own “honey” affiliate cookie.
Did honey produce that sale? Absolutely not. Does Honey deserve that affiliate commission? Absolutely not. But the website sees the Honey cookie and pays the commission to Honey instead.
Call it theft. Call it fraud. Either way, it’s stealing.
How is this different than a car salesman swapping records at the last second to claim he sold a car after someone else did all the work? This way is automated with a browser extension, duh. You gotta think! Swapping records would be dangerous. What if someone (like the person you robbed) found out? Besides, manually changing the record to steal a commission is so old school. Automate that!
How Honey Negotiates with Retailers
The original Honey app was absolutely brilliant. It built a huge database of coupon codes and the websites they worked on. As more people used it, it could gain new codes faster. Seems great for the consumer, right? But some companies rely on offering huge discounts frequently. They may have only intended to offer that coupon code to a few people, but then Honey can apply it to thousands of orders an hour. As Honey gained vastly wider distribution (more people installing it), it became a huge problem for those retailers.
Those retailers had to consider overhauling their business model because their coupon codes would be compromised.
But Honey had a solution.
