Scrooge McDuck, Disney Christmas CarolOnline transactions company PayPal is taking heat from critics after forcing Regretsy to refund all donations for its holiday charity efforts, while keeping the initial transaction fees.

Regretsy is a blog that features odd and/or strange items that are for sale through arts and crafts online marketplace Etsy, while also raising money for various charities. For its Secret Santa charity, Regretsy owner Helen Killer accidentally selected the “donate” button — rather than “Buy Now” or “Shopping Cart” buttons — when setting up options for people to make a donation.

Because the money from these donations isn’t going directly to the charity (meaning, donation money goes through Regretsy first before going to the charity), PayPal is making the site refund hundreds of $2 donations. Had Killer selected the “Buy Now” option, none of this would be an issue.

“Because I used the wrong button, they have made me send them everything from bank statements to Articles of Incorporation to affidavits and notarized statements, even though I have been a verified business customer of theirs for 10 years,” wrote Killer in a blog post about the incident.

While PayPal’s policy was put in place to prevent scam artists from taking donations under the guise of being a charitable organization, it doesn’t excuse the company for pocketing the transaction fees.

What do you think about this situation? Should PayPal forfeit the fees?

Update: A PayPal spokesperson just sent us the following statement regarding Regretsy’s donation button incident:

We can’t comment specifically on the Regretsy.com account due to our privacy policy. However, we can confirm that the funds have been released and we are working directly with the account holder on this matter. We are also working with Regretsy to make a donation to help families in need this holiday season.  We’re very sorry this occurred.

For reference, we have clear guidelines for any business who uses PayPal to accept donations. For example, we require certain documentation to prevent misuse of the donated funds and, if the recipient claims charitable status, to determine whether they are properly registered.  As a regulated payment service, we’re also required by law to follow these guidelines.

We appreciate that this can be an inconvenience, but we have a responsibility to all our customers – both donors and recipients; or buyers and sellers. In this instance, we recognized our error and moved as swiftly as possible to fix it.

[via The Consumerist]