Update on PayPal and Crowdfunding

March 14, 2014 Fintech Services, Fundraising, Investing, Trading, Venture Funding and Building 2 Comments

Pay Pal | Tomer Barel, Chief Risk Officer | March 13, 2014

Following my post in September, I wanted to update everyone on the changes that we have put in place to address the problems around PayPal limiting the accounts of a few people who were using crowdfunding sites to support their ideas.

First, let me take a step back and explain the core of the issue. Crowdfunding is fundamentally different from regular ecommerce. There is a distinction between crowdfunding and “preselling”. In crowdfunding, the process involves speculatively supporting a new concept that may, despite the best of intentions, not make it to market. In “preselling” there is an expectation that you will get something tangible for your money…even if it takes months for delivery.

Many crowdfunding sites allow their campaign owners to pull money out before they have reached the final goal in order to begin creating and funding the concept, a process that often begins even while the crowdfunding process using PayPal is continuing. If it is not made clear that there is no guarantee of product delivery, this can cause regulatory and risk issues (and upset customers) when the final goal isn’t reached.

Related: Crowdfunding Policies Risk or Reward?

Here are some of the key changes we have made to help make sure this doesn’t happen:

PayPal has started to engage crowdfunding campaign owners early on to clearly understand their campaign goals and help them ensure their campaigns are compliant with our policies and government regulations.

Together with the crowdfunding sites, we identify if campaigns are strictly fundraising or preselling merchandise. We enable their campaigns without interrupting payments under the condition that the campaign owner is explicit and transparent to their contributors that there is no guarantee of delivery regarding the rewards being offered upon contribution.

You can read more about the changes here.

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2 Responses to Update on PayPal and Crowdfunding

NCFACanada says:

March 17, 2014 at 5:15 pm

Hi Suzanne, while I haven’t spoken directly to PayPal about this, Daryl has been consulting and wrote an article that we posted here: (https://ncfacanada.org/crowdfunding-policies-risk-or-reward/).

My take away after reading both Daryl’s post and PayPal’s update (https://www.paypal-businesscenter.com/content/crowdfunding-help-successful-campaign) is that they are making changes that will affect crowdfunding transactions but are working with major portals to find common ground and a reasonable solution for all parties.

Changes include that portals must capture risk acknowledgement that customers are aware that they are buying presold products and that the product may never arrive. Further it looks like they are introducing clearer rules around what they deem is a heightened risk for a presale product/project.

1. High likelihood of negative customer experiences from chargebacks, refunds, or fraud.
> This is probably based on their real life experience to date. Daryl may have more insight into this one and schedules permitting we can ask him on the group NCFA call this Friday.

2. Non-compliance with our Anti-Money Laundering Policy.
> shouldn’t this worry everyone involved

3. Negative publicity about a campaign causing donors to ask for their money back.
> Some action would have to trigger this kind of negative publicity however PayPal is in effect just reducing their risk at this point including the negative exposure to the campaign and portal operator

4. Accepting payments unrelated to the campaign for a high risk business through the same account.
> Not sure but it sounds dodgy to me (i.e., money laundering)

So, at the end of the day, it’s really only pertaining to projects at high risk of chargeback. Over time I imagine these categories to be filtered out (less represented or not allowed on portals).

As you say, one can always use an alternative payment processor and work with them to create a new set of rules.

Education (i.e, risk acknowledgement) and analysis of the transactional data is key. We’re also looking at a preventative fraud program that could be rolled out to ‘higher risk campaigns’.

Hope to speak with you Friday…/thanks, Craig
Suzanne Paschall says:

March 16, 2014 at 9:11 pm

Craig: Paypal indicates they are going to start putting holds on payments in rewards-based campaigns that are pre-selling. It appears to me from their definition of pre-selling, that many rewards-based campaigns (ours included) would fall under their definition (though their definition is somewhat contradictory).

I understand their need to protect customers from risk who purchase rewards using their payment system, but holding the funds until products have been delivered just isn’t on! The whole point of crowdfunding is to finance projects so they can be made! Withholding the funds makes this impossible. This makes no sense whatsoever to me.

I’m sure I must be missing something here. Please enlighten me! All I can say is,if this is true, we will have to work with portals that use different payment system vendors.