@britishfilth The held funds are used if you refuse to refund the buyer and the buyer escalates to a claim which paypal then find in their favour. Also Paypal no longer returns the fee you were charged when your buyer paid as part of any refund that you issue. Paypal processes your buyers original payment and then the refund for you, the fee is for providing that service so if you just had the payment from the buyer in your balance and have not added the 'fee element' then you would not have had enough to issue the buyer a full refund.
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