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Crowdfunding's Secret Enemy Is PayPal

How the ubiquitous online payment system has systematically crippled project after project, until creators go public and criticize the company in exchange for help.

For the past six years, three ex-SNK fighting veterans have been toiling away at their own independent fighting game, Yatagarasu: Attack on Cataclysm. Hoping to expand, the team turned to Indiegogo and asked for $68,000. Fans rewarded them with enough enthusiasm to raise $118, 243, nearly twice the original goal.

If you use the Internet to pay for things, most likely you use PayPal on a regular basis.

Then, the money disappeared. PayPal, which handles transactions between creators and fans on Indiegogo, locked down the developer’s account, and said it could only have 50% of the funds. The rest would be released as development continued, based on PayPal’s assessment of the situation. PayPal was, essentially, going to become a producer on Yatagarasu going forward.

“This has nothing to do with payment processing,” said Nyu Media founder Seon King, one of the project leads. “And they’re kind of allowing themselves to join the project in a policing role where we become accountable to them. That was really ridiculous to read, to have to consider.”

Millions upon millions have been raised by game fans, and with FTL and Shadowrun Returns proving it can work, there’s few signs this new funding mechanism is going anywhere. If anything, we can expect more players to get involved. But the money is a pretty key component.

At the heart of the problem is PayPal, the eBay-owned financial transaction service that’s become one of the most ubiquitous mainstays on the Internet. Most sites these days offer PayPal payment options, so it’s impossible to avoid, forcing PayPal’s structural problems to the surface over and over again.

Just recently, PayPal president David Marcus posted a blog talking about how the company’s focus on global expansion “had taken precedence over our customers’ experiences for too long,” and it was launching a “Customer First” initiative. When you have to launch a program called “Customer First,” you have a problem.

King had been receiving emails from PayPal daily--more than 7,000--as fans contributed to the project. He’d started to zone them out. Two of those emails were notifications about the account status, but King didn’t find them until after discovering the account had been locked, a move that did not occur until after funding had closed and Yatagarasu had been promised to backers. PayPal asked King for information about his company, the game, and other details to establish legitimacy, which PayPal accepted. But the account was still locked, with PayPal asserting it would dole out funds for Yatagarasu as the months went on.

Yatagarasu was not the first to encounter the problem, and wasn’t even alone in dealing with the problem that week. Months prior, Skullgirls developer Lab Zero Games had encountered similar issues on a different scale. Skullgirls raised an astounding $828,768 on Indiegogo, despite only asking for $150,000. It was a monstrous, unexpected reaction from the game’s beloved fans, and it gave the game a new life.

Two weeks after Skullgirls’ campaign closed, Lab Zero went to access its mound of funds.

“I had pulled out like $700,000 and dumped it into our bank,” said Lab Zero founder Peter Bartholow. “I get a call from a [PayPal] guy who’s like ‘yeah, I can’t believe they let you do that, I’ve locked down the $35,000 you have remaining in your PayPal account.’ Just because.”

That “just because” is PayPal fears chargebacks from upset fans if a project falls through or doesn’t live up to expectations. Several developers were given this line. Despite crowdfunding having gone on for years at Kickstarter, this has not broken Amazon Payments, which handles transactions for Kickstarter. Nonetheless, PayPal touted this repeatedly to projects, in addition to citing concerns about potential fraudulent activity.

Lab Zero was in contact with PayPal long before its account locked. A PayPal representative touched base with Bartholow, asked about the campaign, and offered to present them with a merchant rate, which meant PayPal took a lower cut. Since a merchant rate required a campaign sustaining itself for three months, Bartholow passed, but the phone call ended with the representative wishing Bartholow good luck.

“That was it,” he said. “I thought the call was going to be super ominous.”

“I get a call from a [PayPal] guy who’s like ‘yeah, I can’t believe they let you do that, I’ve locked down the $35,000 you have remaining in your PayPal account.’ Just because.”

When the account became locked, Bartholow was presented with the same options as Yatagarasu: let PayPal become a producer and determine how the money is spent.

“So I sent him [the PayPal rep] all the documentation,” said Bartholow, “and he’s like ‘yeah, this all checks out. We still need to hold the reserve. It will last another six months or whatever, and you can contact me if you need me to release money and stuff like that. If you can demonstrate you are spending your money wisely and stuff.’”

With PayPal not presenting many decent options, Bartholow’s next move was to go public, and tell his backers what the problem was. If enough people rattled PayPal’s cage, maybe it would decide another way. It worked, and the problem was quickly resolved. When the Yatagarasu team encountered the same problem, it called up Bartholow, seeking advice. It was quickly decided that Yatagarasu would go public, as well.

When King disclosed Yatagarasu’s issue with PayPal, he was boarding a flight from Canada to the UK. When he stepped off the plane, the issue had been resolved.

“When I arrived, I had an email from PayPal saying ‘we’d lifted the restriction.’” said King. “No apology or anything like that.”

PayPal did follow-up with King days later, but seemingly remained confused at why a project would have trouble with restrictions that released the money in waves.

These are the most recent examples of PayPal’s tense exchanges with crowdfunded creators, but others have been dealing with PayPal for much longer. Back in March, Red Thread Games finished collecting $1.54 million from excited fans looking for a new entry in The Longest Journey. It offered a PayPal option, which generated more than $70,000. Almost immediately after the project closed, that money was locked away.

Red Thread Games founder Ragnar Tornquist sighed almost immediately when we started talking, and his story is familiar. Like Skullgirls and Yatagarasu, PayPal didn’t reach out until the campaign had closed, long after it had finished launching, promoting, and closing a successful crowdfunding campaign on a legitimate service. PayPal asked Tornquist for details about the company, the project, and the plans for the future, all in the interest of fraud concerns. PayPal noted the information, but refused to lift the restriction, and told Red Thread it would hand over the money when the game was finished, bucking the whole idea of crowdfunding.

“At that point, we had had a successful $1.5 million dollar Kickstarter,” said Tornquist. “You would think that would prove that we have something that was kosher. But it’s been incredibly difficult to get any answer from them, and every time we get in touch with them, it’s impossible to find phone numbers, it’s impossible to get in touch with people, nobody ever knows our story--we have to start over again every single time.”

Worse still, sometimes Red Thread would contact PayPal and reach someone who wasn’t even aware of what Kickstarter was, despite the service’s prominent existence for several years now.

“Our general manager had to spend time explaining to the first representative what Kickstarter was,” he said. “He was looking it up online as they were speaking. After that, they were like ‘oh, that sounds interesting!’ and nothing happened.”

But Tornquist wasn’t overly concerned about his company’s scuffles with PayPal, considering most of the funding had come through just fine through Kickstarter and Amazon Payments. But when plans were set in motion for JourneyCon, a convention celebrating The Longest Journey series, Red Thread was forced to accept ticket sales through PayPal. As those sales came through the same account, PayPal locked it down.

“Now, it started directly affecting our fans and backers,” he said. “That’s when I said ‘fuck this, now I’m just gonna make an issue out of it because it’s directly hurting people.’”

Red Thread started making noise on Twitter, alerting the @AskPayPal account to its problems. This was the same day as Yatagarasu’s conflict with PayPal. After our interview, I sent a PayPal rep a question about it, making note of Red Thread’s ongoing issues. Not long after that, Tornquist told me it has been resolved.

Lab Zero found resolution in the same unorthodox manner. When PayPal's "Customer First" policy was unveiled, Bartholow contacted PayPal, figuring this was an opportune moment. Instead, Bartholow was told his contact had changed departments, and PayPal couldn't assign him a new contact. Perplexed, Bartholow tweeted at @AskPayPal, which responded with a direct message request for the account's email address.

"Two days later, I logged into PayPal to pay contractors and the reserve had been lifted," said Bartholow.

PayPal was quick to issue statements in support of these campaigns with an apologetic tone, but the piles of stories make it difficult to take the company seriously, considering how many times this issue has been resolved by developers reaching out to the media and making it public. What happens to smaller campaigns?

“We want to reiterate that supporting these campaigns is an exciting new part of our business,” said a PayPal representative. “We are working closely with industry-leaders like IndieGoGo and adapting our processes and policies to better serve the innovative companies that are relying on PayPal and crowd funding campaigns to grow their businesses. We never want to get in the way of innovation, but as a global payments company we must ensure the payments flowing through our system around the world are in compliance with laws and regulations. We understand that the way in which we are complying to these rules can be frustrating in some cases and we've made significant changes in North America to adapt to the unique needs of crowd funding campaigns. We are currently working to roll these improvements out around the world.”

It’s easy to say the right thing. The true test, of course, will be the next wave of crowdfunding projects.

Patrick Klepek on Google+
167 Comments
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Edited by swedmiro

A bit late to the party but I do have some insight. PayPal is avoided to almost all cost when setting up online stores. PayPal had a very bad rep for holding back payments for every little complaint from customers. This is of course good for the customer but is hell for the store and i have personal exprience from helping store trying to get payment for goods delivered. Let just say that from people in the online store "community" noone is surpriced that PayPal is causing troubles.

EDIT: don't drink and write

Posted by bluefoxxy

@jokful said:

@bluefoxxy said:

I said it at the Evo article you wrote, and I'll say it here. Stop this horse shit dude. You are making me not want to come to GB and renew my subscription. Everyone else I'm cool with. Brad gets on my nerves sometimes, but he's knowledgable. I have the upmost respect for all the crew at GB. But you. You are unique. You are right most of the time but FUCKING HELL when you are wrong, it is so far off, I can't stand it. You are the Glenn Beck of GB when you write these fluff pieces.

umm some dude into fighting scene said the fighting games article was great so you're wrong.

Some dude huh? Totally valid then. I thought everyone were smart here? Every day I'm being proven wrong.

Posted by GaspoweR

@bluefoxxy: What is your problem with the EVO collusiong rule article?

Edited by randombattle

PayPal does this shit with personal accounts all the time too. They can and will just lock your account and in most cases just take your money and never give it back. They are the worst fucking company on the planet for money management and I'm honestly surprised no one has used them yet.

Posted by zkillz

So when the next huge crowd funding failure occurs and Paypal isn't able to reimburse backers because they let the developer run away with the money, what are the odds we'll see another article criticizing Paypal for not having any oversight or fraud prevention?

Edited by bluefoxxy

@gaspower:

The article I'm talking about was his "When Passions Flare, Lines Are Crossed" story.

It talked about sexual harassment and how cross assault was a reflection of the FGC as well as how much of a fluff article it was just to raise tension and cause a flurry of useless discussion.

Edited by archimedes83

Very good article Klepek.

Edited by JordanaRama

Bravo on the excellent article, Patrick. This is some shiiiiiiit. Thank you for bringing it to light.

Edited by PurplePartyRobot

I have no disagreement with PayPal's practices regarding "locking accounts down" in the interest of potential fraud. PayPal, as a transaction processing business, ends up flipping the bill if things go south and the seller commits fraud or does not produce the product as stated. "Locking down accounts" helps to mitigate the risk PayPal would potentially incur as the result of fraud.

What I do have a problem with is PayPal's practices concerning freezing the accounts of sellers with legitimate causes. Yeah, okay-- I can see PayPal needing additional documentation concerning the product to instill confidence that the seller is legitimate.The part of it that breaks bad for me is what happens afterwards. If the seller "checks out", why not give the party the money at that point? Shit, if PayPal has decided that the seller has provided sufficient information to prove their legitimacy, then why leave the account frozen? I don't think the reason of the final product not meeting expectations would is a viable reason in this scenario; the seller, in this case the developer, already has a deep obligation to the buyers to produce a quality product, and if the developers are legitimate, they will more than likely make damn sure that the end result satisfies the project backers. If developers can prove satisfactorily prove their legitimacy to PayPal, then the developer's account should not be frozen.

Posted by GaspoweR

@bluefoxxy: I thought out of all the articles in regards to that particular issue (Cross Assault) at that time, that was probably the most neutral-toned out of all of them (Evan Narcisse's article about the issue I found to be even more inflaming). I found Brad's comments about it on the Bombcast to be more irritating (considering that he was being very judgmental about it) then Patrick even. Since then he had covered more topics about the more interesting aspects relating to fighting games in general since that time.

Posted by TehBuLL

Fantastic article Patrick. Learned a lot.

Posted by McGhee

The only time I've had to use PayPal in many, many years was when I was selling something on Ebay. Otherwise, I never use it because it's just a pain in the ass.

Posted by hxcaleb

I'll be sure to use Amazon payments from now on when it comes to this sort of stuff.

Edited by MATATAT

@bluefoxxy: Chargebacks can only occur if the product is never delivered or if a product is significantly different than what was advertised (also unauthorized access to the card, but that's an entirely different issue). Yeah they should protect themselves from chargebacks but they also are opening the door for people to claim chargebacks by restricting resource access causing a product not be delivered on time. They're kinda fucking themselves over.

If PayPal is deciding at any time to release funds based on the current state of the product then they inherently become a producer in some way. I do disagree with Patrick in saying the fault lies with PayPal. Honestly PP shouldn't be involved at all. It's policies aren't set up to deal with financial capital at any scope, it was designed to handle small scale private transactions. If they indeed want to be in that space then they have to step up to the plate instead of fumbling around with all this budgeting bullshit.

Posted by Tiangou

As much i think this is a crappy situation, i don't out right think paypal is wrong. Moving around such large quantities of currency with ease may give way to money laundering i would think. Then again what do i know.

So where is indiegogo role in all this? Don't they take a cut? If so, why aren't they obligated to take action?

Posted by PoisonJam7

@patrickklepek Very interesting story. You may also want to look into Kickstarters that get cancelled after successful funding and the hassles the developers have in trying to refund their backers. Specifically, I'm talking about this game, but I'm sure there are more. Apparently Kickstarter has no tools in place to make this an easy process.

Edited by umbaglo

@bluefoxxy: Please explain how holding the money hostage from the person receiving the money is going to stop chargebacks. Please explain how fraudsters using a fake or stolen credit card justifies demanding information about business practices and timetables. Please explain how this isn't as simple as explaining to purchasers that if you are investing in a project, then a nil return is still getting what you paid for.

I don't think anyone is honestly arguing that chargebacks and fraud are not serious concerns. But the reality is that the demands being made by PayPal seem to not be targeted towards minimizing these concerns, and are instead designed to keep money in PayPal's bank account longer so they can get free interest on it. Or worse, free money period.

Edited by tourgen

Paypal is a bank. They need to be fully regulated as a bank. This is exactly why we have banking regulations.

Posted by Lydian_Sel

This comes as no surprise, paypal's customer support is atrocious! Multiple times I've had to get in touch with them to resolve money issues and their answer is almost always "Not our problem".

I really hope a public eye on this sort of behavior will force them to rethink they way they conduct themselves.

Posted by Xeiphyer

The crazy thing about Paypal is that they aren't a bank. People trust them with so much money but they aren't tied to any restrictions like a bank is. They can fuck you around all you want.

I just hope the company becomes more honest in the future.

Edited by joshwent

@tourgen said:

Paypal is a bank. They need to be fully regulated as a bank. This is exactly why we have banking regulations.

No, they're not. PayPal is an escrow service that holds money from one party until it can be transferred to an intended party, allowing the sender and the receiver to exchange while having their actual bank info remain anonymous. They're the middle-man between banks that allows cash transfers in ways that many banks can't or won't.

Although it's really besides the point. As I said earlier in this thread, in any bank that is regulated they must report any transaction over $10,000 to the federal government. This can result in that money being being withheld exactly like PayPal has done until the source of the funds and the use can be established. Regulations don't mean stop the mean people you don't like and help the ones you do.

Edited by RenegadeDoppelganger

@mars said:

I've never understood the worlds love affair with PayPal. I'm not a fan.

You are basically 3-4 click away from buying anything on the internet. It is just about the easiest way to pay for purchases. You don't need to enter your credit card info every goddamn time. It's pretty appealing if you do a lot of shopping online.

Posted by Homelessbird

@bluefoxxy: Paypal had every opportunity to make all the necessary credit checks before these Kickstarters close - they have a very clear timeline and promises they are making to their customers. You may be "in" the industry, but if you read this entire article, it seems fairly clear that Paypal is having trouble communicating with its users, at the very least. Which should be hardly surprising.

Locking down these funds isn't a horrible thing to do as a payment processing firm, but they should be much more communicative with their clients, do their credit checks and profiles BEFORE they accept half a million dollars from customers, provide workarounds and solutions, and most importantly be up front about the way their business works. It is not inherently difficult to do these things, and it's not unreasonable to say that the fact that Paypal seems to not care very much is a shitty thing.

Posted by Cybexx

The main problem is that crowdfunding is treated the same as the purchase of a product. But the reality is that you are not actually purchasing anything while backing a project. You are giving a gift of cash and maybe if things go well for the project you are getting a gift in return.

And it has to be this way otherwise the whole thing doesn't work. Yes that means that someone could run away with your cash but you have to take that chance which is why you should never back anything that seems suspicious and you should never use money you can't afford to lose.

Paypal needs to treat crowdfunding similar to how it treats charities, there is no refund.

Posted by Viking_Funeral

PayPal has been nothing but trouble for me. So much time and money wasted.

Posted by Lazyaza

As an artist who basically survives due to PayPals existence I am constantly in a state of worry they may randomly cut off my finances some day "just because". Really wish their was an alternative service that did the same as they do without all their bs.

Posted by jasondesante

paypal isn't a publisher and if they are going to be douches about it then they need a taste of their own medicine.

Posted by c0l0nelp0c0rn1

@mars: It allows me to transact business over the internet in a semi-secure way. I don't have a credit card, and if my debit card number has been stolen it would be real bad for me.

Posted by Demoskinos

This is why I refuse to use Paypal. I don't like them being the mediators of my money like that. I've heard all sorts of horror stories relating to people getting accounts and money hijacked because Paypal suspended accounts for really crazy reasons.

Posted by Tackchevy

They just need a policy change: if you want to fork over money to crowdfunding, it's all on you. Don't cry and file a case if the people disappear or deliver inferior results.

They'd save a lot of internal effort, bad PR, and apparently a lot of customers time as well.

Edited by sir_tonk

@mars: What're they going to use instead, bitcoin?

Edited by Will_3rd

Never use PayPal as a payment processor period, just a greedy and lazy company.

As the article states they just put their foot in it every time, no excuses for their poor company policies and lack of customer care.

Posted by Kinapuff

@bluefoxxy: Would you mind starting off with "I'm a screaming, raging child because I don't like Patrick" instead of ending with it next time? It'd save us all some time.

Edited by subsalicylate

@patrickklepek Did you do into any research into whether PayPal's actions are legal? Has anyone thought about suing? Are its actions permitted under the terms of service?

Posted by subsalicylate

@patrickklepek Something seems wrong the following sentence from this article: That “just because” is PayPal fears chargebacks from upset fans if a project falls through or doesn’t live up to expectations.

Perhaps there should be a "because" before "Paypal".

Edited by DocHaus

Funny how the people at Paypal wring their hands and go "oh there's just so many international fraud regulations to consider!" and yet the moment they spot bad PR on the horizon suddenly *POOF* all those regulations disappear and the money that they had to spend so much time investigating is magically all kosher!

EDIT: As for alternatives, some crowdfunding sites have begun using "WePay" and there's others considering "Dwolla" for their services. Cheaper fees and less bullshit to deal with. The downside being that, of course, neither has the widespread marketing or exclusive deals with anyone big.

Edited by Aquablak

I can appreciate that PP would be concerned about fraud, etc., but they're going about this in an entirely underhanded and shady manner. Sitting on hundreds of thousands of dollars or more, collecting interest (I would imagine), and doling out funds as they see fit, is not their place. Fans want to give these developers, etc. their money, and PP has no right to withhold those funds, especially after everything checks out. I'll be avoiding PP as much as possible, until they change their policies.

Great article, Patrick.

Posted by sirdesmond

I have heard nothing but horror stories about Paypal for years. Add this to the long list. What a terrible company...

Posted by TPoppaPuff

I certainly understand where you're coming from Patrick, but I don't think you're looking at this from all angles. As the owner of a company that sells online and takes almost 3/4ths of our payments through Paypal, I can tell you first hand that fraud is a huge concern for Paypal, on all sides. In many cases, if someone is defrauding the consumer, Paypal is left holding the bag. The credit card companies will demand the money from the seller (the fraudster) and Paypal has to cough it up. Period. In this case, they could be held liable for the whole amount. That's a big loss, even for Paypal.

On top of that, the internet is FULL of scammers. We have to deal with fraud on our website on a daily basis. It's a huge problem. Paypal probably loses a ton every year due to fraud, and any time someone is gathering $80,000 all of the sudden, with no history with Paypal, and for potentially nebulous reasons, they have reason to be cautious.

Is there a better answer than what they are doing? I don't know. They could, and maybe should, just say, no you can't gather that much cash here. Find another way to get the money. Then it's up to the receiver to decide if that's worth it to them. I just think you probably should consider this a bit more deeply than just reflexively looking at it from one side's perspective. Things are usually more complicated than they seem, especially when talking about moving this kind of money. Where I'm from, you can buy a house for that kind of dough, and there is ultimately a higher degree of risk involved from Paypal's perspective.

Then they shouldn't offer Kickstarter or IndieGoGo their services, especially considering their entire issues could be resolved by just visiting the page of the games.

Posted by TWISTEDH34T

@patrickklepek Interesting story, I was really unaware of this (as were a lot of people I bet). Keep up the good work!

Posted by HurricaneIvan29

Always knew there was a reason I avoided PayPal. This is very unethical.

Posted by selbie

Awesome work Patrick. PayPal needs to wake up and smell the shit.

Posted by John1912

In principle what Paypal is doing sounds like kind of a good thing, though it is CLEARLY not their place to be shoving their nose in. If there is over-site it should come from the crowd funding web site. Paypal is just a middle man for holding funds. They have no business withholding money for any reason relating to how a company spends the funds given to them. Thats got to be fairly illegal I would think.

Edited by HurricaneIvan29

@john1912: Well the problem is that there hasn't been a lawsuit of this kind, I don't believe. That's why many are saying there needs to be a lawsuit against this so that a precedent is set against this practice.

Edited by Nethlem

@noelveiga: Like many others have pointed out already, Patrick has come late to this party, because this behavior by PayPal, is well known and documented and has been for many many years.

Considering how long this has been going on I'd guess the answer to your questions would be: No they do not follow up, the policies in place seem to be responsible for this behavior, them not changing them over all these years being clearly a sign of them wanting the policies to work this way.

They are also not subject to banking laws, because they do not give any actual credit. They are just playing middle man, holding funds of other people as a "payment processor", this allows them to circumvent being subject to banking laws.

There is also a very easy and obvious explanation why this has been happening for so long, and it's gonna keep happening further: PayPal finances itself by getting interest on all the money it's holding, just like banks make interest of the people's money on their accounts.

But unlike banks, PayPal has the "power" to simply withhold these funds and as such generate even more interest. Every bit of money they hold back, even for just one day, means more money for them. It's profitable for them to hold on to that money for as long as possible and make it as hard as possible for customers to remove that money from their accounts.

Sure this is gonna generate bad press, but that hasn't slowed down PayPal's growth at all, it's quite the opposite, their customer numbers keep growing as more and more people arrive in the modern internet economy.

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