Indulge me in a flight of fancy in which we pretend, for the sake of argument, that
a) Paypal is run not by Snidely Whiplash clones but
b) by smart geeks working with thin margins in a highly regulated industry where
c) customers are at risk essentially never,
d) merchants eat 100% of the risk if they stay in business, and
e) Paypal eats 100% of the risk if the merchant doesn't.
Why is Paypal very skeptical of pre-sales? Because, if the business fails (as new businesses often do), customers will file chargebacks. Their banks will hear "Internet merchant did not deliver as promised" and sustain the chargeback automatically. Paypal will lose that argument with the bank, 99.999% of the time, and have to seek restitution from the merchant.
Paypal has to do underwriting -- basically, guessing at probable risks and likelihood of partial repayment -- for new merchant accounts. What percentage of sales are at risk of chargeback in a pre-sales business? A Very High Percentage (TM). What is the probable chance of failure of a new business in developing a new product? Fairly high. Given product failure, what assets will be available to Paypal (in the Paypal account or the linked bank account) for automatic recovery from the failed business? Very Little (TM). What is Paypal's margin on this business? A fraction of a percent.
Now we break out the Hadoop cluster and use several billions of dollars of transactional data to construct a model of what the expected loss is, expected recovery given loss, and expected margin in event of non-loss is.
This puts us in an incredibly uncomfortable position as we do not feel that it's remotely in their jurisdiction to ask for a detailed budget of our business, any more than it is within our right to ask for theirs.
This communication is incredibly useful from Paypal's perspective among multiple axes:
1) It signals very strongly "We are not only unwilling to comply with the table stakes of every underwriting process for businesses everywhere, we are so inexperienced at business as to be unaware that this is table stakes, and accordingly you should dramatically revise upwards your estimate of our risk of failure."
2) It provides Paypal a simple, face-saving out for declining this business without having to say, in so many words, that "You seem, oh, 93% likely to ship this year. You get an A! This means, however, you are 7% likely to lose all the money, and we only make .9% margins, so this is going to be a No. We get that you don't like this. We don't like having to decline hundreds of dollars of revenue either, but we have the experience of losing hundreds of millions to fraud and know that some revenue just isn't worth the risk. We respect that you might not agree with this, but don't feel the need to spend additional resources paying for our computer programmers, underwriters, lawyers, and accountants to give you an expensive education in the realities of e-commerce on our nickel."
Let's talk about the difference between Paypal and Indiegogo:
1) You pay Paypal ~3% when their costs are probably approaching ~2%. Indiegogo would charge ~7% for the same thing. One of the luxuries when selling something which is five times as lucrative is that you can self-insure against project failure.
2) Indiegogo believes it has a different business model than Paypal and that they have a uniquely better understanding of the risks of crowdfunding, whereas Paypal has had their filters tuned by too many middle Americans selling Beanie Babies.
3) Paypal has lost hundreds of millions of VC money to fraud and Indiegogo hasn't. Paypal decisionmakers might at this point give Indiegogo the sort of look a school psychologist gives a C student with a drug habit who has just announced that they're taking a semester off to find themselves, man. They know which way this story is going to turn out, which is in its own special way as bad as not knowing how the story is going to turn out.
Are the risks larger because we are successful?
Ask a simple question, get a simple answer: yes! Paypal loses more on a $1,000,000-in-transactions account which goes bad than a $1,000-in-transactions account which goes bad, clearly. You might wonder "Well are we more risky than the same aggregate volume spread over N accounts?", in which case the answer is available to Paypal's Hadoop cluster but plausibly "Yes, with a p value which would make a statistician weep." Accounts which go 0-to-60 in processed transactions are hugely disproportionately likely to be outright fraud (Paypal has had many, many, many encounters with carders smart enough to have invented the suborn-a-botnet and make-a-lot-of-small-donations attack prior to having seen it on Breaking Bad). Additionally, it is quite plausible that Paypal could demonstrate that success is a curse to new businesses and most which blow up proceed to, well, blow up. (Which they would, of course, not love to disclose publicly.)
This dynamic is not unique to pre-sales or crowdfunding. It also explains Paypal's active hostility to many other business models, including money services businesses, third-party payment aggregators, and travel agents. (Most people don't immediately associate travel agents with having a lot of payment industry problems, but they do: they make lots of big-ticket sales but have low working capital, and if a cruise gets canceled or a hotel goes bankrupt or any of the standard vicissitudes of the industry causes them to eat a bunch of chargebacks all at once, they go bankrupt and their payment processor is on the hook for hundreds of thousands or millions of dollars as that bankruptcy causes cascading failure to deliver promised goods or services.)
And yet this story keeps happening, over and over and over across the years. Remember the $1 million-plus raised for hurricane relief raised after Katrina that PayPal threw down the drain by declaring that they wouldn't release it until long after it mattered?
If PayPal has good reasons not to accept donations and crowdfunding, they shouldn't fucking accept donations or crowdfunding, instead of letting users get in deep enough to get screwed before dropping the hammer. Maybe it's buried in the small print that they don't expect anyone to read. The burden is on them to communicate effectively. They need to either openly refuse to accept those accounts in the first place, or else come up with a separate way of dealing with them that works for all involved. Holding funds in escrow should not be a complicated problem.
In particular I like the bullet point under "I’m a legitimate business selling products and services in advance. Why do I have reserves on my account?", which is lengthy, worth a read, and which you'll have to click to expand.
This is absurd apologism. If Indiegogo projects are fundamentally incompatible with PayPal's risk profile as you imply, the onus is on PayPal not to accept money for those projects. Full stop.
Why on Earth should we sympathize with PayPal about internal aspects of their underwriting at the expense of a small business whose funds they've practically seized?
Whoa there. Paypal loses nothing to fraud. Just like all the other middlemen, Visa, MC, etc., they shift their losses onto the merchants.
The way this works out is that Mailpile files an answer to Paypal's RFI, Paypal reviews it and says something like "There's a 90 day hold on funds deposited to your account until you can demonstrate that you aren't high risk", Mailpile complies and everyone walks away happy.
(Background: I'm a Paypal merchant and we're processing close to $30m/year through them. Over the years I've paid Paypal hundreds of thousands, if not millions of dollars, in chargeback fees, fraud fees, Visa fines, etc.)
If Paypal are so concerned about presales, then in my opinion they should get out of the market. Or force their customer base to get some sort of insurance. You know, do their risk management before they let the vendor take payments?
It amazes me that their marker for freezing money is for how many sales the company does. Because you wouldn't want to accept money from a successful business now!
You are glossing over one important point: PayPal has a financial stake in keeping money within their network for as long as possible.
For every month they keep $X within their network instead of releasing to the rightful owners, they have effectively seized whatever could have been earned by investing $X for that month. For smaller amounts (individuals, small campaigns like ours), this is negligible, but in aggregate, when you consider how much money PayPal is sitting on, this is a decidedly nontrivial sum. They have a strong incentive to routinely and as a matter of course withhold funds from legitimate businesses just because they can. This is what we are up against.
Their talk about risk could very well be a smokescreen to justify the above behavior. This is not at all implausible, if they were only concerned about risk they could withhold fractional amounts for reasonable periods of time, on a rolling schedule. This is how less predatory payment processors I have dealt with handle this problem.
We understand and accept that they may want to hold onto our funds for a reasonable amount of time to mitigate their risk. We don't expect them to release all the funds immediately.
However we consider their threats to hold ALL THE MONEY for a FULL YEAR to be entirely unreasonable and not in good faith. In the face of such unreasonable demands we balked and sought help from both the community (public outrage) and our legal counsel, the Software Freedom Law Foundation in New York.
In the case of mass merchants where the risk profile of their business model is low (i.e they are not crowd funding or pre sales receivers of funds from end users), the paypal model works well for everyone. Risk is equally distributed between paypal and the merchant (since their risk of going bankrupt is less and not binary) and the end consumer continues to enjoy 0% risk.
But in a crowd funding (or any VC) model, the end consumer is 'donating' / 'contributing' to a project because they a) they love the product/concept b) they trust the project team c) they are feeling generous d) willing to take a gamble e) all of the above. And inherently, the reason they are participating indicates that 'they are willing to take some or all of the risk' . The problem here is that the current paypal model is unable to take advantage of their 'willingness/promise of sharing the risk', and hence not having/needing to be so draconian towards such crowd funding to cover their own behind. Probably there is no such model currently anywhere.
It is quite possible that these end customers who were willing to bet/gamble, in the end when a crowd funded project fails, having realized that they don't have to take the risk after-all, are probably more than willing to take advantage of the system (bank chargebacks) to recover their contributions. But what if there were a model where we hold them to their willingness to "bet/gamble/take the risk" decision and only be a completely/mostly passive middlemen entity that only facilitates the transaction , like an eschrow account model (but where the funds go the intended beneficiary right away , if that is what the donaters want ).
Can paypal not build such a model where they can legally get confirmation/indemnification from end consumers/contributors to be willing to accept the risk completely/mostly upon themselves (or deal directly with merchant and indemnify paypal) if the project goes kaput? Or is the banking chargeback model so deeply ingrained, complex and inflexible that it cannot be molded in any way to achieve this purpose?
What if there were a banking/credit card concept of "funds that are not eligible for chargeback per customer's decision", and only such funds are used to pay to crowdfunding campaigns etc?
The issue with PayPal is not that they take steps to insulate themselves from fraud and chargebacks.
The issue is that their process for doing so is unilateral and -- as is well-documented -- offers essentially no options for resolution unless you are lucky enough to be able to bring significant media pressure to bear on them.
That is a problem. Unfortunately, I think the only solution is to encourage people to basically sue PayPal at the drop of a hat. PayPal has the most abysmal processes in the world because those processes are cheap; if those processes become expensive (because people run to a courtroom every time PayPal freezes so much as ten cents), then and only then will PayPal change the processes.
It's not just presales. When any kind of fraud alert is triggered, PayPal freezes the account. There is no way to get a human being on the phone to understand why the account was frozen, when it will be unfrozen, etc. Even if it's obvious to any reasonable human that no fraud occurred.
Masterful explanation. Only thing I'd add is that a sole proprietor business account from a venture obviously involving three people also reeks - it might be a lot easier if Mailpile had been configured as a regular or non-profit corporation, even if that meant paying fees to a state entity to register it.
and of course, paypal only discovers all that risk when there is a lot of money on the hook? And their only action is to make a move that's hugely profitable to them ?
Because now customers are charged (they won't pay by another mean) and the company is dry.
This entirely misses the point. Merchants do not and should not care about PayPal's plight. They care that customers paid them while a third party is preventing them from accessing those funds. They care that they can't pay their employees and/or suppliers, or in this case, that they can't use any of the money raised as intended. Merchants can and should gravitate toward providers that do not have a reputation for this kind of thing.
These are good points all, I basically agree. However, if one understood the culture of Open Source and crowdfunding, it would be relatively easy to see that Mailpile is a pretty low risk for outright disappearance and chargebacks. Also, a project like MP has serious PR risk for Paypal being such dicks.
I suspect someone in-the-know at Paypal made this argument, and to their credit they backed down quickly in the face of potential Twitter disaster.
These are all excellent reasons to have a review process and refuse to do business with certain customers. Nothing in there justifies the theft of a risky account's existing earnings.
PayPal's habit when shutting down an account is not just to stop doing business, but to keep all the money earned by the merchant and never speak to them again.
What credit card company allows a chargeback after more than 180 days? The only one I can find that does that in any circumstance is Master Card, and they only do that for "interruption of service" on prorated services.
In addition to all the other arguments here, I have a problem with your assertion that Paypal is run by smart geeks. a) I think its a common knowledge that it is actually run by business pointy heads b) their API and dev environment are so horrendously bad and hostile to developers its not even funny. And its been like this for years. If it was really run by geeks, getting the API and dev process in order would be high on priorities list.
At the core of your very well crafted considerations and arguments lies one critical flaw; Paypal's risks or issues are none of our problems and the burden for which should not be rolled over and down the chain of responsibility or power. Unfortunately, it is a systemic problem in the American business culture and society as a whole that responsibility and consequences are constantly passed down to to the point where responsibility and power intersect, leaving the powerless holding the consequences of the powerful.
I, nor anyone else that pays Paypal cares, nor should have to care what their particular drama-issues are when conducting business with them. The time is rife for a system that is not as corrupt, abusive, incompetent, and dishonest as Paypal. How many more stories of someone's funds being frozen, i.e., stolen for a year do we have to hear where companies and individuals will start shying away from doing business with Paypal. Paypal is about as much of a pal as a backstabbing, draining, sabotaging, untrustworthy piece of shit as a company can be, why are people still working with them.
Paypal needs to suffer the same demise that MySpace did when they became a harbor for pedophiles and the scum of the earth .... with blinking flair all over their screen.
I don't know why, in 2013, people are surprised when they use PayPal and wind up without access to the money for months or years. Paypal apologists will say that this is relatively rare. Even if that is true, since the criteria they use to take these actions are often beyond the control of merchants, using PayPal is an unacceptable risk for any business that doesn't have at least 6 months of working capital.
Always avoid PayPal if you need access to the money. Even if you feel that your business falls squarely within PayPal's AUP, always have a backup implementation with an alternative payment provider coded and ready to go (I recommend using Stripe and skipping PayPal altogether). You don't want to lose new sales on top of the money PayPal decides to hold indefinitely.
I've seen PayPal nearly put several small businesses out of business.
There are some things that cause PayPal to just freeze an account, and it's next to impossible to speak to a human or to otherwise get the situation resolved.
Pretty much the only threat to Stripe's eventual world domination would be PayPal getting its act together.
Everyone always recommends Stripe as an alternative to PayPal. Sure, it's an alternative to PayPal for accepting credit cards. But it doesn't accept payments from PayPal accounts, which is the only reason most people use PayPal in the first place. I have a business in the SEO sector, and many of my clients are foreign without credit cards. Over 50% of my transactions are from PayPal (the that option is direct credit card through a traditional gateway).
They just don't want to, and we cannot help but wonder why.
The risk of complaints, refunds, and chargebacks for non-delivery would be my guess.
"Please provide an itemized budget and your development goal dates for your project"
This puts us in an incredibly uncomfortable position...
...of having a roadmap for your product's development. It's really not unreasonable, and if you don't have even a vague idea right now, that's a big warning sign.
... we do not feel that it's remotely in their jurisdiction to ask for a detailed budget of our business
Which is unfortunate, as PayPal's business boils down to risk management, and they're asking you to reduce their risk.
Note that they had previously stated that they wanted to release the funds as slowly as possible. Asking us to provide a detailed budget is basically asking us to justify that and give them a timetable so they can withhold the maximum amount of cash for the maximum amount of time.
Mailpile sets off alarm bells for me. The web page seems big on promises, and decent webmail isn't the eaiest thing in the world to make a decent UI for. Never mind that it's all wrapped around some kind of seamless background application.
I'm doubtful that they'll do what they think they can do. Good luck to them, but I'm unsuprised that paypal has witheld funds.
People should start to understand that crowdfunding is not a trivial business from a legal and regulatory perspective.
Yes, PayPal sucks, but you can run into this crap with any bank or payment service provider you don't have clear and direct business dealings with, and who you haven't informed upfront about what you're up to.
Also, it's just plain lazy and irresponsible of IndieGogo to pay out via PayPal, at least not without big fat warning signs. Of all the options available, this is pretty much the worst.
It's very naive to think that you can just accept money in exchange for unverifiable promises and not set off all kinds of alarm bells. Expect frozen assets to start to happen more and more often with crowdfunding, and not just at PayPal.
I'm surprised PayPal still haven't taken a clear stance against crowdfunding like Amazon Payments have. That's part of the problem - it's really vague as to what situations PayPal will intervene in.
I work at GoCardless.com, a UK-based payments startup (YC S11), and thus I have a above-average insight into these kinds of issues from my day-to-day work.
From the point of view of fraud protection and risk management, I can see why PayPal take this kind of unilateral action. Payments providers are always at high risk, and since they deal with and indemnify other financial firms further up the chain, they're the ones taking the risk.
Even when you're charging relatively high fees as PayPal does, one case of fraud or even something as simple as a project that doesn't materialise (not that I think that'll happen with Mailpile!) can eat up tonnes of your revenue and make your business unviable.
As such, GoCardless sometimes has to make decisions that account holders won't like. However, the difference between us (as well as, I believe, other providers like Stripe) and PayPal is that we will be (a) reachable and (b) reasonable.
For me, PayPal's failing is in the lack of customer engagement on these issues. Every story like this shows PayPal as cagey, unhelpful and unwilling to have a discussion or reconsider at all. Everyone can, to a degree, understand why PayPal has to make unpopular decisions to protect itself from unacceptable risk (as all businesses will have to do in various ways), but their approach and manner in doing so is what is unacceptable.
What strikes me as really disappointing here is that the person has no idea why PayPal has frozen their account. It's surprising to me that they don't understand the inherent risks to PayPal from a kickstarter program (how dare they ask me for my business plan?!). In this post at least it seems like they just think PayPal doesn't like them and wants to hold their money for a long time. I guess they should have done more reading up around the financial side of a kickstarter.
And PayPal is clearly at fault that this person is so confused and upset too. How hard is it for them to say "In the past, we have seen crowd funding sites/services that never delivered anything. That resulted in a lot of unhappy end users going to their credit card companies and initiating a chargeback which we're on the hook to pay. As you can see, if you took the money from your account and disappeared we'd be on the hook for that entire $X. That's why it's important we understand more about what you're up to"
It would be ideal if this happened pre account/money collecting but I don't know all the details around that (Perhaps this is a long term account used for "normal" credit card processing who then decided, without informing PayPal, to run a Kickstarter. Who knows)
Two things people need to keep in mind when using PayPal.
1) The company functions as an uninsured bank while essentially skipping the label thereby giving itself a legal loophole to function as it pleases. However, unlike a bank, you can't get to an actual human being in a timely manner unless you're dealing with hundreds of thousands of dollars or even millions. You're simply not important enough and PayPal is big enough that none of your complaints will really make a dent.
2) PayPal puts a value on risk. Your perception of this risk may be markedly different from PayPal's, however it is still there and if you trip over that threshold, you will be shut down with extreme prejudice. Projects like Mailpile function in a different world than even digital goods of a few years ago. You're not really donating for a product, but the expectation of a service which will, hopefully, come to fruition. The risk threshold set by PayPal is still under the older digital goods model which is an ill fit for Mailpile to begin with.
Those two aren't the only reasons why no one should use PayPal, but keep in mind that nothing you do, show or even consider reasonable matters to them as it's their assessment that ultimately holds sway. You're dealing with a banking megalith with an equivalent responsiveness.
Or you could read the terms of the business relationship with PayPal:
Am I allowed to presell?
Yes, you are allowed to presell items as long as you follow these guidelines.
Off eBay presale requirements
If you sell items in an online store (not eBay), you must guarantee delivery
within 20 days from the date of purchase and make sure that the customer
knows they are buying a presale item.
[...]
If you are selling goods or services in an online store (not eBay), you may
be allowed to presell items but we may hold your money in a reserve
account or limit what you can do with your account to reduce the higher risks
associated with presale items.
Or as the ruder ones of us said in the 90s on Usenet: RTFM.
PayPal is fine for a certain class of limited transactions - usually when they involve selling physical or digital products which actually exist and can be delivered today.
Rightly or wrongly though they have a very[1] long[2] history[3] of freezing the accounts of projects they deem to be remotely 'risky' to them. By definition this would seem to include almost any crowdfunded project where an actual product or service which people are paying for does not yet exist.
Given how well documented this is I can't help but wonder why a company like IndieGoGo would touch PayPal with a bargepole - their interests seem diametrically opposed !
IndieGoGo should be protecting their users by disabling PayPal as a payment option for all projects.
Part of the reason we open-sourced Selfstarter was to prevent situations like this happening to other companies. With Selfstarter and by extension Crowdtilt's Crowdhoster [1] if you have a problem like this, it would merely be a setback rather than a crisis.
You manage your relationship with your customers, not someone else. If your payment processor gives you trouble, have your customers re-auth with a friendlier provider like Stripe, WePay or Amazon. If nothing else, even having the option to do so gives you more leverage should you find yourself in this position.
Wow, I'm really surprised by the amount of snark on this thread aimed at mailpile. They are following IndieGoGo's standard process. For PayPal to take exception with them and single out their funds is ridiculous. If PayPal wants to start requiring IndieGoGo campaigns to submit business plans, they should work that out with the site, not an individual campaign, and certainly not after the whole thing is funded. This is not Mailpile's fault for following procedure.
You need to get Indiegogo involved and IGG need to take serious measures, such as threatening to completely disable the paypal option from all their future projects.
This is exactly why our company stopped focusing on our Paypal integration and started focusing on other gateways, such as Stripe and WePay. We had built a really great Braintree gateway, but they to came out with a policy against crowdfunding.
As far as I can tell, you can still get through and/or avoid messes like these by communicating with the gateway up front in order to get permission. Robert Space Industries did this with Amazon and Paypal before launching. They were forced to provide much of this documentation, but in the end, it helped them avoid any major hiccups.
Of course, IndieGoGo should be working with merchants to help them through this. If they are going to be the intermediary between the crowd and the company, they should do the same when dealing with payments. Sadly, all of the major crowdfunding platforms lack in this regard.
If you're thinking about crowdfunding and are nervous about being shut down, I recommend you run either as donations or pre-orders. In the case of the latter, you are best not taking funds until the goal is met or you've reached a certain development milestone.
I do think that this sucks for crowdfunding in general, but perhaps it will curtail the money grab that has been in place for some time.
And of course, if you want to have as many options as possible, check out http://IgnitionDeck.com. A WordPress install and you can have your choice of gateways.
Good luck to the Mailpile guys. I recommend providing this information. It will be good to have in the event that an investor knocks on the door.
...and that is why you don't use PayPal, no matter how loud people scream that they want to use PayPal.
Seriously, PayPal has screwed over so many individuals, businesses and projects in the past, the obvious conclusion is that PayPal isn't an option when you run a small business (esp. IT/software-related) or a crowdfunding campaign.
It's not the first time I have heard about them freezing funds - the last time was a few years back. From what I remember they were worried that the customers would ask for their money back if the product wasn't completed (explaining why they want to see a budget). This has nothing to do with fraud. They are allowed to do whatever they want with your money because they are not a bank.
It's completely ridiculous because participants in crowd funding are aware of the risks - they may never see their money's worth (even though that isn't the case here).
Either way, I would raise a massive stink if they don't buckle - I see you have a WIRED article, maybe approach them about writing about this encounter with PayPal. That's some pretty bad publicity right there. You may also be able to demand interest if they do continue to illegally with-hold the funds for that long (again, they are not a bank, but that means that this time they are not protected by those very same laws).
> "... unless Mailpile provides PayPal with a detailed budgetary breakdown of how we plan to use the donations from our crowd funding campaign they will not release the block on my account for 1 year until we have shipped a 1.0 version of our product."
I'm a little confused by this. What crowd-sourced funds is PayPal withholding, as I thought that went via IndieGoGo? (answer: IndieGoGo uses PayPal)
What on earth does PayPal care about the financial planning of the recipient of the funds? This doesn't seem like it has anything to do with fraud detection.
I am sorry this happened to you. As a consumer I used to love Paypal, buy anything with one click. After using them as a business owner for online transactions I absolutely hate them.
I won't go into my situation but the horror stories are endless:
This is not the first time Paypal did that [1] and it most certainly won't be the last time. That's one of the reasons Bitcoin was invented. I hope that events like this will drive its adoption as a safe alternative for crowd funding and online shopping.
I believe the whole story and comments can be summed up as:
1. People want paypal to act as a big dumb money pipe from point A to point B
2. Paypal refuses to act as a big dumb money pipe from point A to point B when the risk is high that point A may want their money back, and paypal cannot shift the loss allocation to someone else.
3. Their risk mitigation strategy in the case of #2, while not atypical of the industry, upsets a lot of people who are not familiar with this type of thing occurring, and seems "unfair".
[+] [-] patio11|12 years ago|reply
a) Paypal is run not by Snidely Whiplash clones but b) by smart geeks working with thin margins in a highly regulated industry where c) customers are at risk essentially never, d) merchants eat 100% of the risk if they stay in business, and e) Paypal eats 100% of the risk if the merchant doesn't.
Why is Paypal very skeptical of pre-sales? Because, if the business fails (as new businesses often do), customers will file chargebacks. Their banks will hear "Internet merchant did not deliver as promised" and sustain the chargeback automatically. Paypal will lose that argument with the bank, 99.999% of the time, and have to seek restitution from the merchant.
Paypal has to do underwriting -- basically, guessing at probable risks and likelihood of partial repayment -- for new merchant accounts. What percentage of sales are at risk of chargeback in a pre-sales business? A Very High Percentage (TM). What is the probable chance of failure of a new business in developing a new product? Fairly high. Given product failure, what assets will be available to Paypal (in the Paypal account or the linked bank account) for automatic recovery from the failed business? Very Little (TM). What is Paypal's margin on this business? A fraction of a percent.
Now we break out the Hadoop cluster and use several billions of dollars of transactional data to construct a model of what the expected loss is, expected recovery given loss, and expected margin in event of non-loss is.
This puts us in an incredibly uncomfortable position as we do not feel that it's remotely in their jurisdiction to ask for a detailed budget of our business, any more than it is within our right to ask for theirs.
This communication is incredibly useful from Paypal's perspective among multiple axes:
1) It signals very strongly "We are not only unwilling to comply with the table stakes of every underwriting process for businesses everywhere, we are so inexperienced at business as to be unaware that this is table stakes, and accordingly you should dramatically revise upwards your estimate of our risk of failure."
2) It provides Paypal a simple, face-saving out for declining this business without having to say, in so many words, that "You seem, oh, 93% likely to ship this year. You get an A! This means, however, you are 7% likely to lose all the money, and we only make .9% margins, so this is going to be a No. We get that you don't like this. We don't like having to decline hundreds of dollars of revenue either, but we have the experience of losing hundreds of millions to fraud and know that some revenue just isn't worth the risk. We respect that you might not agree with this, but don't feel the need to spend additional resources paying for our computer programmers, underwriters, lawyers, and accountants to give you an expensive education in the realities of e-commerce on our nickel."
Let's talk about the difference between Paypal and Indiegogo:
1) You pay Paypal ~3% when their costs are probably approaching ~2%. Indiegogo would charge ~7% for the same thing. One of the luxuries when selling something which is five times as lucrative is that you can self-insure against project failure.
2) Indiegogo believes it has a different business model than Paypal and that they have a uniquely better understanding of the risks of crowdfunding, whereas Paypal has had their filters tuned by too many middle Americans selling Beanie Babies.
3) Paypal has lost hundreds of millions of VC money to fraud and Indiegogo hasn't. Paypal decisionmakers might at this point give Indiegogo the sort of look a school psychologist gives a C student with a drug habit who has just announced that they're taking a semester off to find themselves, man. They know which way this story is going to turn out, which is in its own special way as bad as not knowing how the story is going to turn out.
Are the risks larger because we are successful?
Ask a simple question, get a simple answer: yes! Paypal loses more on a $1,000,000-in-transactions account which goes bad than a $1,000-in-transactions account which goes bad, clearly. You might wonder "Well are we more risky than the same aggregate volume spread over N accounts?", in which case the answer is available to Paypal's Hadoop cluster but plausibly "Yes, with a p value which would make a statistician weep." Accounts which go 0-to-60 in processed transactions are hugely disproportionately likely to be outright fraud (Paypal has had many, many, many encounters with carders smart enough to have invented the suborn-a-botnet and make-a-lot-of-small-donations attack prior to having seen it on Breaking Bad). Additionally, it is quite plausible that Paypal could demonstrate that success is a curse to new businesses and most which blow up proceed to, well, blow up. (Which they would, of course, not love to disclose publicly.)
This dynamic is not unique to pre-sales or crowdfunding. It also explains Paypal's active hostility to many other business models, including money services businesses, third-party payment aggregators, and travel agents. (Most people don't immediately associate travel agents with having a lot of payment industry problems, but they do: they make lots of big-ticket sales but have low working capital, and if a cruise gets canceled or a hotel goes bankrupt or any of the standard vicissitudes of the industry causes them to eat a bunch of chargebacks all at once, they go bankrupt and their payment processor is on the hook for hundreds of thousands or millions of dollars as that bankruptcy causes cascading failure to deliver promised goods or services.)
[+] [-] PhasmaFelis|12 years ago|reply
If PayPal has good reasons not to accept donations and crowdfunding, they shouldn't fucking accept donations or crowdfunding, instead of letting users get in deep enough to get screwed before dropping the hammer. Maybe it's buried in the small print that they don't expect anyone to read. The burden is on them to communicate effectively. They need to either openly refuse to accept those accounts in the first place, or else come up with a separate way of dealing with them that works for all involved. Holding funds in escrow should not be a complicated problem.
[+] [-] patio11|12 years ago|reply
https://www.paypal-businesscenter.com/content/presale-policy...
In particular I like the bullet point under "I’m a legitimate business selling products and services in advance. Why do I have reserves on my account?", which is lengthy, worth a read, and which you'll have to click to expand.
[+] [-] _pius|12 years ago|reply
Why on Earth should we sympathize with PayPal about internal aspects of their underwriting at the expense of a small business whose funds they've practically seized?
[+] [-] freejack|12 years ago|reply
The way this works out is that Mailpile files an answer to Paypal's RFI, Paypal reviews it and says something like "There's a 90 day hold on funds deposited to your account until you can demonstrate that you aren't high risk", Mailpile complies and everyone walks away happy.
(Background: I'm a Paypal merchant and we're processing close to $30m/year through them. Over the years I've paid Paypal hundreds of thousands, if not millions of dollars, in chargeback fees, fraud fees, Visa fines, etc.)
[+] [-] chris_wot|12 years ago|reply
It amazes me that their marker for freezing money is for how many sales the company does. Because you wouldn't want to accept money from a successful business now!
[+] [-] HerraBRE|12 years ago|reply
For every month they keep $X within their network instead of releasing to the rightful owners, they have effectively seized whatever could have been earned by investing $X for that month. For smaller amounts (individuals, small campaigns like ours), this is negligible, but in aggregate, when you consider how much money PayPal is sitting on, this is a decidedly nontrivial sum. They have a strong incentive to routinely and as a matter of course withhold funds from legitimate businesses just because they can. This is what we are up against.
Their talk about risk could very well be a smokescreen to justify the above behavior. This is not at all implausible, if they were only concerned about risk they could withhold fractional amounts for reasonable periods of time, on a rolling schedule. This is how less predatory payment processors I have dealt with handle this problem.
We understand and accept that they may want to hold onto our funds for a reasonable amount of time to mitigate their risk. We don't expect them to release all the funds immediately.
However we consider their threats to hold ALL THE MONEY for a FULL YEAR to be entirely unreasonable and not in good faith. In the face of such unreasonable demands we balked and sought help from both the community (public outrage) and our legal counsel, the Software Freedom Law Foundation in New York.
[+] [-] nine_k|12 years ago|reply
I'm happy to use PayPal to pay couple hundred dollars when buying an item from a mass merchant. This is what PayPal is intended for.
If I sold a hugely expensive one-time unique product (which a crowd-funded effort essentially is), I'd probably consider something different.
[+] [-] vubuntu|12 years ago|reply
In the case of mass merchants where the risk profile of their business model is low (i.e they are not crowd funding or pre sales receivers of funds from end users), the paypal model works well for everyone. Risk is equally distributed between paypal and the merchant (since their risk of going bankrupt is less and not binary) and the end consumer continues to enjoy 0% risk.
But in a crowd funding (or any VC) model, the end consumer is 'donating' / 'contributing' to a project because they a) they love the product/concept b) they trust the project team c) they are feeling generous d) willing to take a gamble e) all of the above. And inherently, the reason they are participating indicates that 'they are willing to take some or all of the risk' . The problem here is that the current paypal model is unable to take advantage of their 'willingness/promise of sharing the risk', and hence not having/needing to be so draconian towards such crowd funding to cover their own behind. Probably there is no such model currently anywhere.
It is quite possible that these end customers who were willing to bet/gamble, in the end when a crowd funded project fails, having realized that they don't have to take the risk after-all, are probably more than willing to take advantage of the system (bank chargebacks) to recover their contributions. But what if there were a model where we hold them to their willingness to "bet/gamble/take the risk" decision and only be a completely/mostly passive middlemen entity that only facilitates the transaction , like an eschrow account model (but where the funds go the intended beneficiary right away , if that is what the donaters want ).
Can paypal not build such a model where they can legally get confirmation/indemnification from end consumers/contributors to be willing to accept the risk completely/mostly upon themselves (or deal directly with merchant and indemnify paypal) if the project goes kaput? Or is the banking chargeback model so deeply ingrained, complex and inflexible that it cannot be molded in any way to achieve this purpose?
What if there were a banking/credit card concept of "funds that are not eligible for chargeback per customer's decision", and only such funds are used to pay to crowdfunding campaigns etc?
[+] [-] ubernostrum|12 years ago|reply
The issue is that their process for doing so is unilateral and -- as is well-documented -- offers essentially no options for resolution unless you are lucky enough to be able to bring significant media pressure to bear on them.
That is a problem. Unfortunately, I think the only solution is to encourage people to basically sue PayPal at the drop of a hat. PayPal has the most abysmal processes in the world because those processes are cheap; if those processes become expensive (because people run to a courtroom every time PayPal freezes so much as ten cents), then and only then will PayPal change the processes.
[+] [-] grandalf|12 years ago|reply
[+] [-] anigbrowl|12 years ago|reply
[+] [-] nraynaud|12 years ago|reply
[+] [-] pm24601|12 years ago|reply
Paypal has shitty customer service.
All of this might be true, but the shitty customer service means that they are instantly wrong.
[+] [-] downandout|12 years ago|reply
[+] [-] danbmil99|12 years ago|reply
I suspect someone in-the-know at Paypal made this argument, and to their credit they backed down quickly in the face of potential Twitter disaster.
[+] [-] unknown|12 years ago|reply
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[+] [-] superuser2|12 years ago|reply
PayPal's habit when shutting down an account is not just to stop doing business, but to keep all the money earned by the merchant and never speak to them again.
[+] [-] mistercow|12 years ago|reply
[+] [-] Vitaly|12 years ago|reply
[+] [-] unknown|12 years ago|reply
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[+] [-] cabalamat|12 years ago|reply
This is the same Paypal that fucked Wikileaks over. I don't think they should get the benefit of the doubt.
[+] [-] wahsd|12 years ago|reply
I, nor anyone else that pays Paypal cares, nor should have to care what their particular drama-issues are when conducting business with them. The time is rife for a system that is not as corrupt, abusive, incompetent, and dishonest as Paypal. How many more stories of someone's funds being frozen, i.e., stolen for a year do we have to hear where companies and individuals will start shying away from doing business with Paypal. Paypal is about as much of a pal as a backstabbing, draining, sabotaging, untrustworthy piece of shit as a company can be, why are people still working with them.
Paypal needs to suffer the same demise that MySpace did when they became a harbor for pedophiles and the scum of the earth .... with blinking flair all over their screen.
[+] [-] downandout|12 years ago|reply
Always avoid PayPal if you need access to the money. Even if you feel that your business falls squarely within PayPal's AUP, always have a backup implementation with an alternative payment provider coded and ready to go (I recommend using Stripe and skipping PayPal altogether). You don't want to lose new sales on top of the money PayPal decides to hold indefinitely.
[+] [-] grandalf|12 years ago|reply
There are some things that cause PayPal to just freeze an account, and it's next to impossible to speak to a human or to otherwise get the situation resolved.
Pretty much the only threat to Stripe's eventual world domination would be PayPal getting its act together.
[+] [-] gaius|12 years ago|reply
For better or worse, Paypal has survived and looks like it's going to go on surviving, that's why people if they only support one method, choose it.
[+] [-] chatmasta|12 years ago|reply
[+] [-] fennecfoxen|12 years ago|reply
[+] [-] mootothemax|12 years ago|reply
The risk of complaints, refunds, and chargebacks for non-delivery would be my guess.
"Please provide an itemized budget and your development goal dates for your project"
This puts us in an incredibly uncomfortable position...
...of having a roadmap for your product's development. It's really not unreasonable, and if you don't have even a vague idea right now, that's a big warning sign.
... we do not feel that it's remotely in their jurisdiction to ask for a detailed budget of our business
Which is unfortunate, as PayPal's business boils down to risk management, and they're asking you to reduce their risk.
[+] [-] HerraBRE|12 years ago|reply
[+] [-] HarrietJones|12 years ago|reply
I'm doubtful that they'll do what they think they can do. Good luck to them, but I'm unsuprised that paypal has witheld funds.
[+] [-] bowlofpetunias|12 years ago|reply
Yes, PayPal sucks, but you can run into this crap with any bank or payment service provider you don't have clear and direct business dealings with, and who you haven't informed upfront about what you're up to.
Also, it's just plain lazy and irresponsible of IndieGogo to pay out via PayPal, at least not without big fat warning signs. Of all the options available, this is pretty much the worst.
It's very naive to think that you can just accept money in exchange for unverifiable promises and not set off all kinds of alarm bells. Expect frozen assets to start to happen more and more often with crowdfunding, and not just at PayPal.
[+] [-] kalleboo|12 years ago|reply
[+] [-] timrogers|12 years ago|reply
From the point of view of fraud protection and risk management, I can see why PayPal take this kind of unilateral action. Payments providers are always at high risk, and since they deal with and indemnify other financial firms further up the chain, they're the ones taking the risk.
Even when you're charging relatively high fees as PayPal does, one case of fraud or even something as simple as a project that doesn't materialise (not that I think that'll happen with Mailpile!) can eat up tonnes of your revenue and make your business unviable.
As such, GoCardless sometimes has to make decisions that account holders won't like. However, the difference between us (as well as, I believe, other providers like Stripe) and PayPal is that we will be (a) reachable and (b) reasonable.
For me, PayPal's failing is in the lack of customer engagement on these issues. Every story like this shows PayPal as cagey, unhelpful and unwilling to have a discussion or reconsider at all. Everyone can, to a degree, understand why PayPal has to make unpopular decisions to protect itself from unacceptable risk (as all businesses will have to do in various ways), but their approach and manner in doing so is what is unacceptable.
[+] [-] unknown|12 years ago|reply
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[+] [-] jusben1369|12 years ago|reply
And PayPal is clearly at fault that this person is so confused and upset too. How hard is it for them to say "In the past, we have seen crowd funding sites/services that never delivered anything. That resulted in a lot of unhappy end users going to their credit card companies and initiating a chargeback which we're on the hook to pay. As you can see, if you took the money from your account and disappeared we'd be on the hook for that entire $X. That's why it's important we understand more about what you're up to"
It would be ideal if this happened pre account/money collecting but I don't know all the details around that (Perhaps this is a long term account used for "normal" credit card processing who then decided, without informing PayPal, to run a Kickstarter. Who knows)
[+] [-] eksith|12 years ago|reply
1) The company functions as an uninsured bank while essentially skipping the label thereby giving itself a legal loophole to function as it pleases. However, unlike a bank, you can't get to an actual human being in a timely manner unless you're dealing with hundreds of thousands of dollars or even millions. You're simply not important enough and PayPal is big enough that none of your complaints will really make a dent.
2) PayPal puts a value on risk. Your perception of this risk may be markedly different from PayPal's, however it is still there and if you trip over that threshold, you will be shut down with extreme prejudice. Projects like Mailpile function in a different world than even digital goods of a few years ago. You're not really donating for a product, but the expectation of a service which will, hopefully, come to fruition. The risk threshold set by PayPal is still under the older digital goods model which is an ill fit for Mailpile to begin with.
Those two aren't the only reasons why no one should use PayPal, but keep in mind that nothing you do, show or even consider reasonable matters to them as it's their assessment that ultimately holds sway. You're dealing with a banking megalith with an equivalent responsiveness.
Do not use PayPal.
[+] [-] Uchikoma|12 years ago|reply
https://www.paypal-businesscenter.com/content/presale-policy...
[+] [-] whyleyc|12 years ago|reply
Rightly or wrongly though they have a very[1] long[2] history[3] of freezing the accounts of projects they deem to be remotely 'risky' to them. By definition this would seem to include almost any crowdfunded project where an actual product or service which people are paying for does not yet exist.
Given how well documented this is I can't help but wonder why a company like IndieGoGo would touch PayPal with a bargepole - their interests seem diametrically opposed !
IndieGoGo should be protecting their users by disabling PayPal as a payment option for all projects.
[1] http://techcrunch.com/2011/12/06/paypal-account-freeze/
[2] http://www.holdtheline.com/threads/paypal-freezes-funds-from...
[3] http://www.siliconbeat.com/2013/08/16/paypal-freezes-then-re...
[+] [-] paulgerhardt|12 years ago|reply
You manage your relationship with your customers, not someone else. If your payment processor gives you trouble, have your customers re-auth with a friendlier provider like Stripe, WePay or Amazon. If nothing else, even having the option to do so gives you more leverage should you find yourself in this position.
If you need further convincing about the benefits of self-hosting your crowdfunding campaign, please see this earlier comment: https://news.ycombinator.com/item?id=6261442
[1] http://www.crowdhoster.com/
[+] [-] jamestomasino|12 years ago|reply
[+] [-] kalleboo|12 years ago|reply
> Crowd funding is an adventure.
I don't think PayPal are as enthusiastic in joining you in an "adventure" as you think. Especially if that adventure includes credit card chargebacks.
[+] [-] crocowhile|12 years ago|reply
[+] [-] nhangen|12 years ago|reply
As far as I can tell, you can still get through and/or avoid messes like these by communicating with the gateway up front in order to get permission. Robert Space Industries did this with Amazon and Paypal before launching. They were forced to provide much of this documentation, but in the end, it helped them avoid any major hiccups.
Of course, IndieGoGo should be working with merchants to help them through this. If they are going to be the intermediary between the crowd and the company, they should do the same when dealing with payments. Sadly, all of the major crowdfunding platforms lack in this regard.
If you're thinking about crowdfunding and are nervous about being shut down, I recommend you run either as donations or pre-orders. In the case of the latter, you are best not taking funds until the goal is met or you've reached a certain development milestone.
I do think that this sucks for crowdfunding in general, but perhaps it will curtail the money grab that has been in place for some time.
And of course, if you want to have as many options as possible, check out http://IgnitionDeck.com. A WordPress install and you can have your choice of gateways.
Good luck to the Mailpile guys. I recommend providing this information. It will be good to have in the event that an investor knocks on the door.
[+] [-] _ak|12 years ago|reply
Seriously, PayPal has screwed over so many individuals, businesses and projects in the past, the obvious conclusion is that PayPal isn't an option when you run a small business (esp. IT/software-related) or a crowdfunding campaign.
[+] [-] zamalek|12 years ago|reply
It's completely ridiculous because participants in crowd funding are aware of the risks - they may never see their money's worth (even though that isn't the case here).
Either way, I would raise a massive stink if they don't buckle - I see you have a WIRED article, maybe approach them about writing about this encounter with PayPal. That's some pretty bad publicity right there. You may also be able to demand interest if they do continue to illegally with-hold the funds for that long (again, they are not a bank, but that means that this time they are not protected by those very same laws).
[+] [-] amirmc|12 years ago|reply
I'm a little confused by this. What crowd-sourced funds is PayPal withholding, as I thought that went via IndieGoGo? (answer: IndieGoGo uses PayPal)
What on earth does PayPal care about the financial planning of the recipient of the funds? This doesn't seem like it has anything to do with fraud detection.
[+] [-] kvanderd|12 years ago|reply
I won't go into my situation but the horror stories are endless:
http://www.ripoffreport.com/reports/directory/paypal-inc http://www.paypalsucks.com/
As a developer I won't use them anymore. I use Stripe now.
[+] [-] M4v3R|12 years ago|reply
[1] http://www.gamesindustry.biz/articles/2013-04-23-skullgirls-... and probably there's more of this
[+] [-] DannyBee|12 years ago|reply
1. People want paypal to act as a big dumb money pipe from point A to point B
2. Paypal refuses to act as a big dumb money pipe from point A to point B when the risk is high that point A may want their money back, and paypal cannot shift the loss allocation to someone else.
3. Their risk mitigation strategy in the case of #2, while not atypical of the industry, upsets a lot of people who are not familiar with this type of thing occurring, and seems "unfair".