Not every PayPal user has come away satisfied with the company's business practices. In fact, so many people feel the company has abused them that entire Web sites exist to discuss problems with PayPal. The most prominent is PayPal Sucks.
The biggest criticism of PayPal is that it acts like a bank, but it isn't regulated like one. This means that PayPal offers none of the protection that real banks offer, and it isn't required to maintain any of the security, customer service or dispute resolution services that banks provide. At the same time, PayPal holds large amounts of their customers' money, makes millions of financial transactions, and even offers credit and debit cards.

So why isn't it considered a bank? In 2002, the Federal Deposit Insurance Corporation (FDIC) declared that because PayPal didn't meet the federal definition of an entity accepting deposits as a bank, hold any physical money, or have a bank charter, it was not a bank [ref]. In other words, PayPal isn't a bank because it doesn't call itself a bank. As a result, most states license PayPal as a "money service."

One of the most common problems encountered by PayPal users is the sudden and inexplicable freezing of their accounts. If your PayPal account is frozen, you can't add or withdraw any funds from your account, and you're required to go through a long, complicated process to verify your identity. Some users claim that PayPal has simply seized their funds and never returned them.

I had my PayPal account frozen with about $50 in it in 2003. Apparently, a change of address caused a red flag that led to the account freeze, although I followed the proper steps for changing the address on the account. A phone call to PayPal customer service resulted in a sudden unfreezing of the account.

Reports by former PayPal employees indicate that this freezing and unfreezing is arbitrary and not subject to any serious scrutiny. They also claim that company executives look at this process as a revenue stream. Some feel that PayPal intends to make money to cover losses due to fraud by seizing funds from customer accounts [ref].

You can find a thorough and open-minded (if slightly outdated) examination of various complaints against PayPal here. Other charges levied against PayPal include:

Despite these criticisms, PayPal continues to be the most popular money transfer service for online transactions.