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.)
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.
So why do they actually do business with IndieGoGo? I would expect the vast majority of IGG campaigns not to be able to deliver within 20 business days. Since the users of IGG obviously intend to use the money to fund a lengthy process of building a product that sort of invalidates the use-case.
Presumably they've done the kind of review of IndieGoGo's business that they stated they'd like to do of Mailpile and found that IndieGoGo has their risk spread broadly enough (and has a cash buffer large enough) to underwrite the risk of a particular project going down.
As far as I understood the paypal payments came in as part of the IGG campaign, not separate from it. So the Ubuntu Phone campaing would face the same problem. As would face any other IGG campaign. I seriously don't understand the rationale behind that:
a) either Paypal/IGG can afford the risk
b) issues like this will crop up again and again and again, leaving frustrated businesses and a bad impression behind, regardless of who's technically to blame.
or c) I'm missing some point here.
The other thing I'm desperately trying to understand is why PayPal claims that the refund risk is high. Almost all benefits given by the IGG campaign are intangible or of neglectable value compared to the funding you give. The first tangible item starts at the 67USD tier (a postcard from iceland [!]). Later items include a T-Shirt for 256 USD and some overpriced USB-sticks. If someone at PP actually read through the descriptions, it would be pretty obvious that any backer was aware of what he's doing.
"PayPal's position particularly ridiculous when contrasted with IndieGoGo's policy of transferring all funds to successful campaigns within 15 days of their conclusion. If IndieGoGo can do it, so can PayPal."
This seems to me to imply that the PayPal fundraising was done in parallel to IndieGoGo.
"The bad news is, PayPal have frozen our PayPal account. This means roughly $45,000 of the $135,000 we have raised so far are in a state of limbo and we don't know when we will get access to the money"
And the campaign is currently at 137.000 USD. IGG offers PayPal as payment method along with CC payment and from what I've gathered those funds are handled via PayPal. AFAIK the funds at kickstarter are split in a similar fashion depending on the payment provider.
The gist is: For flexible funding campaigns the amount given via PayPal are transferred directly to the campaigns PP account (minus the fees obviously). For fixed funding campaigns the given amount is transferred after the campaign meets the funding goal. Money given via direct Credit Card payment will be cashed out after the campaign reaches its deadline and should arrive within 15 business days.
Mailpile is a flexible funding campaign, so the first rule applies and funds are directly placed in their PP account.
I don't get your point. PayPal works as a payment provider for IGG campaigns. If IGG is willing to absorb the risk, then PayPal, as their payment provider should as well. Or, if PayPal is not willing to follow through and act as payment provider for high-risk crowdfundings, then PayPal should not be payment provider for IGG campaigns. But the middle way, first offering payment through PP and then not cashing out the money just doesn't work in my eyes.
I'm in full agreement with your demonstration, however, as to the case at hand, it appears to me that it's not really the point : the fact is that it should not be qualified as a "presale" and Paypal here is not a trade intermediary but a postman.
If that's not the case, Paypal needs to explain how "crowdfunding", which depending on the viewpoint could be characterized either as a capital investment or as a donation and therefore in any case NOT a commercial transaction, intersects "presale" which definitely is a commercial transaction...
As has been pointed out elsewhere, PayPal has an explicit policy about how they handle presales. Why can't I turn your argument around and say that if somebody doesn't like that policy, the onus is on them to not use PayPal?
I don't grant your premise that crowdfunding constitutes "presales."
Crowdfunding is an inherently speculative activity, a way to invest in a team with the hopes that they will create a product that you'd like to see in the world. Trying to fit Indiegogo into a presales model to justify PayPal's outrageous behavior here is a Procrustean approach that helps no one.
Yeah, it's "gambling" the way donating to an artist you like is gambling.
And who's trying to entice them? Again, if doing business with Indiegogo projects is incompatible with Paypal's risk profile they shouldn't do business with Indiegogo projects. That seems straightforward.
Bizarre to think we should be sympathizing with, enticing, or otherwise fellating PayPal in this situation.
Bizarre to think we should be sympathizing with, enticing, or otherwise fellating PayPal in this situation.
While I understand how easy it is to sympathize with the merchant here, as none of us will ever be payment processors, the reality is that the sum of your suggestions or assertions, if explored just as a thought experiment, quickly lead to a world where nobody can do payment processing without imposing absurdly high fees. Of course we can all see how unfair it seems to have all this money promised by seemingly wide-eyed and clear-minded open source software supporters. But Paypal has millions of clients and has to act in a way that generalizes across all of them, and which requires the least amount of trust to be placed in those clients. The only argument that Mailpile has is "but we're not evil," which is true, but still insufficient.
The other thing is, things don't work like that in the real world. If you go to court over this, the judge will check the material evidence (for example, that MailPile's page says they will deliver a beta by Jan2014) and will want to know if that was delivered.
>Crowdfunding is an inherently speculative activity,
Crowdfunding is only popular because it's got a high success rate though. If only 50% of projects succeeded and provided rewards, and 50% took your money and ran, how many supporters do you really think would be left?
Because PayPal's job is simply do deliver money from Party A to Party B. It's not their job to worry about how the money is used, the USPS does not audit the check your Grandma sent for your birthday.
Crowdsourcing is a gift, like a donation to PBS, where you might get a coffee mug, but if PBS decides to to stop showing Downton Abbey, you can't rescind your donation.
If PayPal has a problem with charge backs, they could simply stop taking payments for indiegogo projects (which its indiegogo's job to vet projects, not PayPal's) or put in big fat letters that THIS IS A NON-SALE OF GOODS TRANSACTION AND ABSOLUTELY NO CHARGE BACKS WILL BE ALLOWED FOR MONEY SENT TO THIS ACCOUNT AFTER FUNDS HAVE BEEN PROCESSED before they click the final confirmation button. Which is basically in writing already when you agree to send funds to indiegogo or Kickstarter. Problem solved. If you have a problem with projects not delivering, don't donate, take it up with indiegogo, or take it to small claims court.
> Credit cards fundamentally allow chargebacks; you can't turn them off. If you want to do business with no chargebacks you cannot accept credit cards either directly or indirectly.
So why is this not a problem for IGG? Since it obviously isn't - they cash out 15 days after funding closes. If the difference is that IGG takes a higher cut, then fair enough, let PayPal take a higher cut.
If the difference is that IGG takes a higher cut, then fair enough, let PayPal take a higher cut.
So you're asking PayPal to create a new level of service. (They probably won't, but their business is up to them.) That's fine, but you should probably do that before using PayPal. And if PayPal doesn't create the new service you want, don't use PayPal.
 By "you" I really mean anyone who's crowdfunding.
> So you're asking PayPal to create a new level of service.
No, I'm just saying that the problem seems not to be a fundamental one. And the point here is that PP does accept payments on behalf of IGG. If I decide to fund a campaign, one of the payment options is PayPal (obviously that can be configured and turned off, since it's off for mailpile atm). The funds donated to mailpile via PayPal were donated via the IGG website. That means to me, that PayPal is well aware that the user is trying to fund a risky endeavour, since by definition all IndieGoGo campaigns are presale and likely to fail.
What I don't get here is: Why does PayPal as Payment Provider for IndieGoGo suddenly cop out and say "My dear, but that's too risky. I'll freeze the funds."
ACH also has chargebacks. Also, I think one of the merits of PayPal is its simplicity, so having to track the difference between "chargebackable money" and "real money" in every account would add significant complexity. ("I have plenty of money in my PayPal account, why can't I spend it at this particular merchant?" "Sorry, you have fake money but the merchant wants real money.")
Your argument might be stronger if it didn't rely on labeling ("absurd apologism", which is itself an absurd accusation when you think about what apologism means) and appeals to emotion. The short answer to your question is that you should concern yourself (not sympathize) with their problems when those problems intersect with yours and guide their decisions.
Your argument might be stronger if it didn't rely on labeling ...
The argument doesn't rely on labeling, though it does call a spade a spade.
A definition of "apologism" is "a defense or excuse, a speech or written answer made in justification."
I'd love to hear why this is an incorrect characterization of the comment.
The short answer to your question is that you should concern yourself (not sympathize) with their problems when those problems intersect with yours and guide their decisions.
If I retain Matasano for work, I shouldn't need to obsess over the details of your cost structure or employee benefits packages; our contract should suffice. Similarly here, Patrick's description of Paypal's theory of underwriting is interesting, but irrelevant. Deflecting blame based on these issues is, indeed, absurd.
If PayPal's risk profile does not support doing business with Indiegogo projects, they should cease doing business with those projects rather than seizing thousands of dollars on spurious grounds. Feel free to debate the merits, if you actually have a difference in opinion.
No. Were you to retain Matasano, you'd discover that our relationship would be governed by a series of contracts. If you were of any significant size, those contracts would be scrutinized on your side by your counsel. If you were a typical client of size, your counsel and management would likely have questions or concerns about those terms, which would then be the subject of negotiation. Our risk tolerance and cost structure would very much matter to those negotiations.
Regarding the label you used: what makes it absurd is the notion that Patrick would be motivated by an urge to justify the actions of a 3rd party business he's barely engaged with. Here it pains me to cite Paul Graham's "Things You Can't Say" on the semiotic significance of deploying labels to make arguments.
Our risk tolerance and cost structure would very much matter to those negotiations.
Sure, those negotiations would happen before significant money or services are exchanged. And, presumably, we wouldn't enter into an agreement unless we were mutually satisfied. But arbitrarily deciding to withhold payment for your services after the fact, pending an audit of your workplace practices, for instance, would probably land me on the wrong end of an adverse action from you. And deservedly so.
Regarding the label you used: what makes it absurd is the notion that Patrick would be motivated by an urge to justify the actions of a 3rd party business he's barely engaged with.
I didn't (and wouldn't) claim that. I do however think that his well-reasoned, but irrelevant argument for why Paypal feels justified in holding $42,000 of Mailpile's money does indeed serve as apologism in the thread, motivations aside. If you think I'm arguing that Patrick is some shill for PayPal, you're barking up the wrong tree.
Here it pains me to cite Paul Graham's "Things You Can't Say" on the semiotic significance of deploying labels to make arguments.
And it's painful to watch. The argument hardly relies on this supposed labeling and I'd be surprised if you actually believe that. At this point you've already done more labeling, imputing of motives, and purely rhetorical arguing than you seem to think I have.
I don't understand what the difference is between Paypal's handling of payments and remittance of funds, which are governed by its contracts, and the terms and conditions of the work we do, which are also under contracts.
You're describing negotiations that happen before significant money and services have been exchanged; this PayPal "negotiation" occurs after. This turns out to be a rather large difference. Indeed, it's the difference between a contract negotiation and a hostage negotiation.
For the better of part a decade, Paypal has published a "Terms of Service" which you are required to agree to before you can use the service. Business users are required to agree to the TOS again. They regularly email customers regarding changes to the terms of service, and these terms of service are always publicly accessible.
If someone chooses not to read the TOS, that's on them and it is their failure as a business operator. If they wanted to renegotiate the standard terms of the TOS, they should have approached Paypal before agreeing to the TOS or before launching their business activities.
It's not a hostage negotiation--there's no requirement that you start using, or continue to use Paypal.
I agree that what happens to Mailpile is A Bad Thing, but the reasoning as to why it makes financial (not moral) sense for PayPal to withhold the money is solid. There are other ways to send money across the world, maybe the lesson for crowdfunders is to switch to one that is more instant and less reversible, or at least offer them as alternatives.
If Indiegogo projects are fundamentally incompatible with PayPal's risk profile as you imply,
He didn't imply this, he laid out a very eloquent case for it.
...the onus is on PayPal not to accept money for those projects. Full stop.
No, please don't stop with a naked assertion completely unsupported by any other statements you've made. Please describe for me how a business operating in one of the most regulated industries in our country, whose disclosures are voluminous and thorough, and whose business model is turnkey merchant accounts, has this obligation.
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.)
I think we're in substantial agreement as to Paypal desiring to shift losses due to fraud or non-performance onto the merchants. Since they desire to do this, they will not accede to Mailpile's desired world, where Mailpile gets 100% of the money on day 1 and then Paypal can seek recovery on day 120 or 365 if a chargeback comes in. Many HNers wish we lived in Mailpile's desired world 100% of the time regardless of merchant risk profile, but we don't, which was the general thrust of my comment.
In terms of predicting Paypal's disposition on this particular case, I think it's a little trickier than a 90 day rolling reserve, because the product doesn't exist and shipping is binary rather than mapping to the rolling window of binary events like a physical goods business. If they were selling trendy iPhone cases and had bitten off more orders than they could presently chew, then an X% rolling reserve for Y days would likely be sufficient to insulate against the risk of some orders not shipping. Software businesses can fail on day 91 in an explosive a fashion as they can on day 1, and it appears from the report of Paypal's communication that Paypal is aware of this and is disinclined to do a fractional rolling reserve absent shipping. One would assume that if they ship this business goes to fairly low-risk instantaneously [+] and a reserve is probably unnecessary at that point.
Ultimately that's up to Paypal rather than either of our guesses.
[+ Well, it would be low-risk with respect to new orders instantaneously after shipping. It might not be low-risk with respect to pre-orders for a while yet, as customers could suffer from buyer's remorse, be dissatisfied with the product as shipped, not remember the transaction, or engage in friendly fraud, at rates substantially higher than transactions with lower delay between purchase and delivery.]
yeah, I totally agree. My only nit was your claim that Paypal bears risk. Its true that their model comes with risk and they've built their business model in a way that they shift it to third parties as extensively and quickly as possible. Its a sore point with me in how Paypa, Visa, etc. operate. The merchant is rarely right.
They bear risk if the merchant has just registered a new account, and that's the only PayPal transaction for the foreseeable future. How should they go recovering the chargebacks if your company has already filed bankruptcy?
If you transact $30M/yr, it's a totally different situation. When PayPal shifts the chargebacks/fines on you, they KNOW that at any given time you will be processing enough money through them that they can seize part of it in case you are not paying the fines.
Am I missing something here? Things like IndieGoGo and KickStarter are inherently risky, but not for the payment processor, for the one doing the backing. If you back a project and it goes belly up or for whatever reason fails to deliver or under-delivers that is not "failure to provide service", that was the risk you took when you decided to back them. That money is gone, the horse has left the barn, you have no right to request a chargeback in that case. That's part of the reason why trying to weed out fraudulent campaigns is such an important thing for both IndieGoGo and Kickstarter, once the money has been paid out, unless you can pretty concretely show that the campaign was a deliberate fraud, you're out that money.
Unless your CC was stolen and used to back something without your knowledge I see no reason at all why a chargeback against a campaign should ever be granted (or maybe if the campaign is proven to be a fraud, but in that case I'd expect IndieGoGo or Kickstarter to eat that cost).
I don't know. I honestly don't really know how the chargeback system functions. I mean, what's to stop me from ordering for instance some hugely expensive item from say Amazon, waiting for it to show up, and then filing a chargeback on it? Does it make a difference if I go through say Paypal to do it? Is there anything stopping anyone from filing a fraudulent chargeback (which is essentially what a chargeback against a Kickstarter or IndieGoGo campaign would be)?
My experience has been that credit card companies act as an arbiter. They give the merchant an opportunity to respond to a chargeback... but they also charge you a fee just for handling it (or maybe the fee comes from the processor... I'm not sure). Too many chargebacks can also put you in a higher risk category which means higher fees for everything.
If you challenge a refund request, PayPal will ask you for additional information and then (at their discretion) fight the chargeback with the credit card company on your behalf. In my experience, this process is huge pain, but it usually works out OK.
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!
Not all of IGG's campaigns are for pre-sales of non-existent products. IGG also handles campaigns for charities and art projects (Indeed, when I went to the IGG website, the 8 projects displayed were for charitable programs.)
I wonder how much of Paypal's margin it would eat to just require a phone call with everyone who signs up for a Business account, asking precisely what kind of business they'll be doing (with the real possibility of denying their request.)
For some of their business products, you do actually have to get pre-approval. For example, I filled out approximately ~10 questions (about a page worth of text, about business model, business history, shipping/refund policies, anticipate monthly revenue, etc) to get Appointment Reminder the payments gateway to charge credit cards offsite. I got asked to call in with some elaboration. It went something like:
"So this business hasn't actually sold any software yet?"
"That's correct, we're anticipating opening to the public next week."
"And you charge people monthly for the software? That's after they actually get the software, right?" [+]
"Yes. The software is already written and we are capable of fulfilling immediately, we just haven't opened to the public yet."
"That's great Mr. McKenzie. You're going to be approved, and will get an email when the account is ready."
(We use Stripe these days for AR and substantially all of our other CC payments. Stripe asked very similar questions prior to provisioning the account, but didn't require a phone call or elaboration.)
[+ If you ever get asked a question phrased this way by someone not in the software industry you should probably not respond by saying "Hmm, technically they don't 'get' anything, well OK technically they GET lots of things, but the software is actually physically only on our servers and provided to them on a software as a service model, which means..." When people not in the software industry talk about downloading Gmail just smile and nod -- you don't understand their job, either.]
If you ever get asked a question phrased this way by someone not in the software industry you should probably not respond by saying "Hmm, technically they don't 'get' anything, well OK technically they GET lots of things, but the software is actually physically only on our servers and provided to them on a software as a service model, which means..." When people not in the software industry talk about downloading Gmail just smile and nod -- you don't understand their job, either
Ummm, maybe. I understand that you are paraphrasing and the actual conversation was probably more definitive, but the question as you phrased it may have actually been, "So if you go out of business the people will still actually have what they bought, right? We're not going to get a lot of angry customers wanting charge-backs...."
I've done two accounts with Braintree now, and both times have had very similar conversations with people there. They were fairly painless, but they did want all the documentation that you mentioned as well as assurances that we were not pre-selling anything.
Sounds like those are fairly typical unwritten rules for all payment processors. Which makes sense to me.
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.
I totally understand that this inconveniences you a lot. Be that as it may, your conspiracy theory has no basis in fact whatsoever. Paypal will, in fact, not make large amounts of money on transaction float -- they're already probably losing money on your account by talking to you too darn much. Interest rates are presently something like 15 basis points ($150 per year on $100k). Even if we count their underwriter as free, if you've spent an hour on the phone total, they're already in the red. They'd like nothing better than for you to be riskless and for them to be able to release all your funds tomorrow and for you to sell another $100,000 every day this year. (It also isn't clear to me that Paypal can licitly get any float on your money, due to banking regs, but that is deeply technical and not the kind of technical that I'm good at.)
But that isn't the world we live in. In the one we do, pre-sales is an incredibly high-risk business model.
f they were only concerned about risk they could withhold fractional amounts for reasonable periods of time, on a rolling schedule
As I mentioned in a separate comment, while rolling fractional reserves do insure against risk in some business models, they don't do a great job of insuring for the risk of software not getting written or not meeting expectations. Assuming you have a multi-month development timeline, every risk your business is exposed to at N-1 days (your team members or your families falling ill, the project being technically beyond the capabilities, the money running out and you guys needing to delay shipping while mixing in freelancing to stay afloat, etc etc) is still a risk at N+1 days, unless you have shipped on day N.
You're totally within your rights as a businessman to try to fight this in the court of public opinion or attempt to convince Paypal's legal department or a court of competent jurisdiction that they're in breach. I sympathize with you because I sympathize with people who are making things, but I think that Paypal has a better understanding of the risks involved in your enterprise than you do (and, unfortunately for the both of you, their upside being sharply less than your upside means they will tend to have more of a hair trigger with regards to that risk than you will).
Oh, I am sure PayPal are doing what they believe to be in their best interests. However, I think you overestimate their competence. The people we spoke with on the phone didn't even know what Open Source software is, let alone have an understanding of the risks involved. They were just following procedure.
I'd say that's because they're the people who talked to you on the phone, and a major part of their job is to be a liason to walk businesses through their rules. You should look at them as someone who can inquire within the organization on your behalf, rather than someone to challenge the competency of.
Such people can be pretty handy. Yes, I know, it's frustrating that they don't understand a lot about your business, but again, their job is communication, so it probably just means they don't have experience with talking to projects like yours. Why not educate them so the next project down the line has an easier time?
Finally, the people who actually set those policies are very likely experienced and I'm going to guess are also pretty competent. If you are reasonable and have a positive attitude with the people you speak with on the phone, you might get to talk directly with such a person. I personally think that would have probably been the easiest way to resolve this matter.
But so what? You knew what sort of firm they were before you started this project, and while they may have their heads under a rock it's not really their responsibility to understand every business model out there, or to explain all the many ways that people have tried to scam them. To be honest, I think you ought to have had a chat with your legal counsel before setting the ball rolling; given that Paypal has a reputation for being inflexible with merchants, you could have been better prepared in terms of either your business structure or finding out what documentation they'd want to release your funds.
What does the license of the software have to do with the risks involved? What is the special case that they didn't understand that makes your project a smaller risk? What are the exact mechanisms in place that will prevent the project from failing miserably in any of the myriad ways software projects routinely fail after most of the money is spend and trigger a non-trivial number of chargebacks?
That for example this is not a software project where people for receiving the software. For example the perk for the $4096 backer tier is
"In addition to the previous perks you and your logo will be the most prominently featured in our credits. You also get a custom feature / design theme per your specs (see the FAQ for some fine print). In addition, if you fly to Iceland we'll meet with you to discuss the implementation and then take you on a road trip through the Icelandic countryside, taste fermented shark and our traditional alcohol Brennivín, whilst we talking tech, politics and security."
That's a pretty expensive chat to have, even if it includes the flight. Yet, two backers were willing to pay that price. All other tiers have a similar relationship between price and value provided. This cannot be explained in a rational business relationship - a solid gulp of idealism is included here. That influences the risk of chargebacks - backers paid to see this project worked on, not to receive their individual copy of the software.
That last paragraph is I think they key people aren't getting about IndieGoGo and Kickstater. You aren't paying for goods or services when you fund something on those sites, you're essentially donating towards the development of something, and gambling that in the future you'll receive something. The expectation is that the company/people you back will make a good faith effort to provide what they've said they will, but there's no guarantee you'll ever actually receive anything.
I don't know a lot about finance, I also don't believe in conspiracy theories, but how is it that I can open a savings account with my local bank and easily earn 1.5% interest but you're saying PayPal can't do better than 0.15%?
Not only is it a 12-month rate, but it's also only on balances of under £50,000. The extra interest is a bounded cost the bank is willing to pay for customer acquisition knowing the average value of a new customer in terms of fees and other revenue generated. A business that wants to earn some interest on millions of pounds without agreeing to switch revenue-generating services to that bank as well is not going to get the same offer.
In addition to customer acquisition and introductory rates and so on, also be aware that interest rates differ by currency. I can get significantly more interest in CAD (1.35% - 1.9% in Canadian banks, up to 3% with some limited accounts) than in USD (in either Canadian or U.S. banks). AUD has different rates still and so would GBP.
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?
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.
Pretty much. I refuse to use Paypal for anything unless I absolutely have no choice in the matter. I'd be really happy if they'd just do the world a favor and go out of business so someone less shifty could take over. I would rather they deny someone an account than wait until that account has racked up a huge pile of money before suddenly deciding it's too risky to be doing business with the company that money legally belongs to, and that they need to just hang on to all of someone else money just in case they go out of business... say from some shifty company stealing all their money right when they need it most. There's something of a self fulfilling prophecy here, Paypal decides a company is at risk of going out of business even though they're pulling in lots of money so Paypal decides to freeze a substantial portion of the companies assets. How many companies do you think can survive having most of their assets frozen for an unknown number of months? Not many I'd bet, so at a guess I'd say Paypal probably has a near 100% success rate at predicting companies going bust after they've frozen their accounts.
"Paypal's risks or issues are none of our problems"
While that obtains for any business which does not do business with Paypal, the converse obtains for any business which does to exactly the degree that those risks or issues are expressed in the structure of the agreement with Paypal.
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.
But conversely, the processes are abysmal* because Paypal is cheap. If you want to be given first-class treatment and have your hand held every step of the way, then I'm sure there are plenty of firms that would be willing to do that...in exchange for 10-15% commissions.
* I think they're annoying but not abysmal. 90% of the tantrums I see on HN about Paypal involve a lack of preparation on the part of the counterparty.
So include arguments against whatever clause in the ToS in your filing. Even if it takes their lawyer five minutes to write a response to that, five minutes of a corporate lawyer is usually more expensive than a full day of a CSR's time, which achieves the goal.
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.
> Maybe it's buried in the small print that they don't expect anyone to read.
Maybe you don't expect people to read the fine print, but PayPal clearly does, and frankly if you are going into business then you should be making a point out of always reading the fine print.
> 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.
Money is money, so if you are dealing with people who apparently won't consider reading "the fine print" or even doing some trivial due diligence in the FAQ, you can't somehow not accept these use cases.
> Holding funds in escrow should not be a complicated problem.
Correct, it isn't. This is why that's what happened: PayPal doesn't just steal your money and leave, they put various restrictions on your account that mitigate the risks involved in your business.
The most simple thing that they can do, and which tends to be the first recourse (and thereby the one that, if you don't go insane with a public rant you can negotiate down from) is a 180-day hold.
If you call PayPal, however, and demonstrate that you shipped these products, showing some kind of documentation of shipment, PayPal will release your funds immediately. That is an "escrow".
"Maybe you don't expect people to read the fine print, but PayPal clearly does, and frankly if you are going into business then you should be making a point out of always reading the fine print.
Money is money, so if you are dealing with people who apparently won't consider reading "the fine print" or even doing some trivial due diligence in the FAQ, you can't somehow not accept these use cases."
Fine print is an odd problem. In a world of rational actors, yes, obviously everyone should read all the fine print all the time, just like everyone should every word of the manual for every product they buy. The problem is, a typical internet power user is signing up for new services on a weekly basis, and most of them have 20 goddamn pages of fine print of which 19.5 are useless, meaningless gibberish. Corporations train their users to not read fine print, because 99% of the time it's half an hour wasted to learn nothing of value, and then exploit that training to slide shit past the radar. I don't think it's unreasonable to expect a company that cares about its users' welfare to put the really notable bits up front in full-size print.
Just as an example, did you know that, by signing up for a comment account on any Gawker Media site (Lifehacker, Gizmodo, Gawker.com, Deadspin, io9, Kotaku, Jalopnik, Jezebel), you give them explicit blanket permission to sell any positive comment you make about a commercial product for use in that product's advertising? I bet you didn't, and Gawker counts on you not knowing that when you sign up.
I am going to repeat this, as I don't think you caught the key noun: if you are going into business then you should be making a point of always reading the fine print. You don't hear about "power users" running into serious problems with PayPal because "users" are the core of PayPal's risk model. In stark contrast, this failure of a situation is a business attempting to deal with over one hundred thousand dollars via PayPal... I have absolutely no sympathy for them--or any other business--that can't take a few minutes to read "the fine print", doing even basic due diligence into "am I allowed to use this service for this purpose"; reading the contracts you agree to for critical services like payment processing is fundamentally different than reading the terms of service on your Gawker account: you should understand what you are agreeing to in full, and should not be relying on some cribbed cheat sheet of "the big stuff" handed to you by the service (as you argue should be provided, in this and other threads). Business involves lots of agreements, these agreements have to deal with tons of complex contingencies, and if you don't take agreements seriously (and likely it you don't actively enjoy reading them) you simply shouldn't be in business.
So wait. You want Paypal to require everyone who opens a PayPal account to have to write up what it's going to be used for, and wait in a queue before you can receive funds so that they can review it to ensure that it's not something like crowdfunding, and then require that you either never change what you use your PayPal account for, or submit any changes back to them, so that they can re-review it and approve your new use?
As far as I know, PayPal allows anyone to open an account and start using it without any review (I've never received funds with PayPal, only sent funds, but I don't recall any extra hoops that would be necessary to receive them).
Likely what happens is that either certain kinds of activity cause an account to be flagged for a manual review, or someone gets cold feet about the crowdfunding campaign and does a chargeback, so PayPal looks into it to see what you were selling. When they see that you are in violation of their very explicit pre-sale policy: https://www.paypal-businesscenter.com/content/presale-policy... they hold your funds until you are within 20 days of shipping your product.
They have a lot of rules about what you can sell via PayPal, and there's no way they could possibly check what you are going to use funds for before each transaction, as you could start using an account that was used for permitted transactions for ones that aren't permitted at any time. So, they wait until an automated system, a complaint, or a chargeback notifies them that something is amiss, and then hold on to the money until they can resolve the situation.
"So wait. You want Paypal to require everyone who opens a PayPal account to have to write up what it's going to be used for, and wait in a queue before you can receive funds so that they can review it to ensure that it's not something like crowdfunding, and then require that you either never change what you use your PayPal account for, or submit any changes back to them, so that they can re-review it and approve your new use?"
Not at all. I want them to say up front, when you sign up for an account, which apparently-innocuous activities will likely get your funds suspended for long enough to be useless. After that, it's on you if you go ahead with it. They're obviously not communicating clearly enough right now, or this wouldn't keep happening.
Was the link I gave, about not allowing pre-sales for items that won't ship within 20 days, not clear enough?
It's not some little footnote hidden within a wall of legalese. It's a pretty clear statement of what they allow and what they don't.
And why would you think that crowdfunding counts as "apparently-innocuous"? Crowdfunding is an area that is ripe for scamming. You create a glitzy campaign, get lots of backers, keep promising something that never quite gets finished, and then disappear with the money.
Apparently, ever since the Ubuntu Edge crowdfunding campaign failed, there's been a whole bunch of fake knock-off campaigns, of people capitalizing on the interest and trying to trick people into funding things that pretend to be related but really aren't.
Any time you have some kind of "amazing new investment opportunity", there are going to be scammers. And when you get down to it, crowdfunding is just an "amazing new investment opportunity".
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.
In point of fact, in this instance they've had four phone calls and a talk with a supervisor. To add another anecdote, when my Paypal account was frozen (a client paid me on Paypal during an apartment move, which looked like "Somebody just tried to move 3 months of typical revenue through a novel IP address IN JAPAN!"), it took less than a minute on the phone to resolve.
I think people's perceptions of Paypal's fraud department are like people's perceptions of Microsoft's security: dominated by a poor record from a decade ago. Both businesses have gotten religion on this topic in the interim.
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.
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.
Amex for one starts the 180 day countdown at the day of delivery or expected delivery, so you can get them to reverse a transaction literally years after the fact if necessary -- pre-ordering Duke Nukem Forever in 2005 would still be chargebackable into 2013. They're also well-known for bending over backward for cardholders, particularly very valuable cardholders. (They require merchants to retain all records for 24 months. You can probably get them to reverse transactions after that, too, though it's an open question whether they'd eat it or have the merchant eat it at that point. For high-value customers they can be quite accommodating indeed.)
There are also fun edge cases with foreign banks, corporate/government cards, etc etc. Paypal says they (very rarely) get chargebacks 540 days out.
With crowdfunding the date of delivery is the date the campaign completes, not the date the rewards, if any, are shipped/published/whatever. At worst given the typical 30 day campaign that means they don't need to worry about chargebacks more than 220 days out. That's still nearly a year, but honestly I think once a campaign funds they shouldn't even process chargebacks against it unless the original backing can be shown to be fraudulent (I.E. stolen CC).
It seems that way to me too. Funding a campaign isn't buying a product (and that we have coming to treat it as such is a Problem). The question, I suppose, is whether the credit card company will see it that way.
Years ago, when I was working on a shareware app for the Mac (long before the App Store), I released the beta as donationware, and gave users the incentive of a free license for version 1.0 if they donated a certain amount (which increased with each update). It was very small scale, but it allowed me to bring in some income while I was working on the project, and gave me an incentive to get it done. But it was an incentive for a donation, and that donation could be any amount. It wasn't a preorder, and it would have been silly to treat it as such.
It actually hadn't occurred to me until just now that what I was doing was crowdfunding before it was called "crowdfunding".
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.