PayPal, and for that matter all the alternative payments providers, operate with little federal regulatory oversight. Is that smart? PayPal’s revenues at more than $4 billion put it in the upper tier of banks by income, and the question of whether it should be, in fact, regulated like a bank, was raised on LinkedIn.

The argument goes something like this:

With the high crime rate of stolen credit card numbers and cyber theft, restitution with companies like PayPal, Square, etc take valuable time, all while the consumer is in the negative on their funds, paying interest on fraudulent charges and more. Customer service is null with these companies, most connection is via email all offering a higher rate of frustration. Absolutely, these companies have a lower interchange rate, processing fees and more; however, where do you draw the line? …

With $4 billion in earnings last year, PayPal has become one of the largest “banks” in the world without insured deposits, a charter, examinations, disclosure or other typical oversight afforded banks, except the requirements to provide transparency to the investing public. Local check cashing stores have it more difficult.

Valid points. But the answer to the question of whether PayPal and its ilk should be federally regulated is … maybe. Here’s why:

We all agree that the less financial regulation the better, so the central question is not whether PayPal is of a particular size, but whether PayPal — or rather payments companies as a group — in and of itself requires regulatory oversight.

Stating the obvious first, we all know that the Federal Reserve is quite focused on payments today. The Fed’s March report on mobile banking and mobile payments exemplifies this most recently. Therefore, at least on some level, the Fed is clearly “watching” the sector, PayPal included. That’s something. Additionally, PayPal has notable oversight from state financial services regulators. Again, regulators are watching.

Beyond that, and I think most crucially, when it comes to payments the market is a far more brutal regulator than the federal government ever would be. If even a small number of consumers, say, lose their stored cash or don’t get paid via PayPal Here, they will ditch PayPal so fast eBay’s shareholders won’t have the time to dump their holdings. In fact, within the last year, there was a bit of an online outcry about PayPal’s shoddy customer service. PayPal wasn’t “screwing” anyone — it just wasn’t replying to customer requests in a timely manner. Oh, what an uproar! I have no doubt that PayPal’s business would crash to $0 if it started “screwing” people.

So before we jump to the conclusion that PayPal and the other payment providers should be federally regulated like banks, let’s first determine whether there is sufficient risk to the consumer/user to merit the additional oversight, which would demand taxpayer dollars, let’s not forget. My determination: maybe.