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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 Mr_Scumbag

I have to disagree, Patrick. I think crowd funding's secret enemy is itself. It's a complete over saturation of people and "companies" with their hands out for money. So many that a good number of them don't have the ability, motivation or foresight to be able to complete a project. There are ones who will, or course, but there rarely any way to tell and it just leads to potential investors like me throwing their hands up in the air and praying for the whole idea to die.

That sucks, too. The idea or crowd funding is good, but like many things that start off good, people begin to pile on and after a while it becomes a mess.

That's how I see Kickstarter and Indiegogo now. Just a mess of aspirations and promises. Meanwhile, there are thousands of games out there that are complete and ready to buy and play. It's a pretty easy choice for me.

Posted by peritus

well, fuck. That's some high level bullshit from paypal if this is correct.

Posted by Zevvion

This is ridiculous and fucking disgusting.

PayPal is just the means to which the money is donated to those companies. They have no right to hold it back from them. If I had invested in one of these titles and I found out my money was held back from the thing I want to invest in, I'd be pissed off. And all because they fear I might not like how it turned out?

It's a donation; I'm backing it. There is implied risk to that, that I have to accept before I give them any money. If it doesn't quite turn out how I would have liked, that's too bad for me. I will have learned something about making investments at least. PayPal needs to mind its own business and not question mine.

That said, I already knew PayPal was bad news the first couple of months I tried it out. It's a terrible service that only adds more pain to payment. When I finally obtained a credit card, a whole new world opened for me. I can pay anything, anywhere now with extreme ease and it's more safe and apparently also more trustworthy than PayPal. There is no need for any other service.

In essence, PayPal is saying: use our service and we might, eventually get your money where you want it to go, but only if we are satisfied. What a joke.

Posted by bluefoxxy
@gaspower said:

@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.

Very well said duder. I don't remember what Brad said on the bombcast about it. Maybe I disregarded it? I'll have to find that segment sometime soon. I can't agree or disagree but I'll take your word for it! :)

@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.

If you don't want PP to handle how you get your cash, then you would receive the total amount, NQA right? Then PP would send a bill for 37% of your profits gained from the crowdsourcing due to chargebacks + whatever fees that come with chargebacks. So you are fucked either way.

Someone has to eat the cost of the chargeback, and it certainly isn't going to be the payment gateway. So why not let PayPal work with you to reduce chargebacks?

PayPal does have to handle these in a case by case scenario. That or maybe have some kind of buffer for cash received in case things go bad.

Also, I have to disagree on what you said on scale. PP can EASILY handle the scale of any transaction. It's the risk profile you have to assess. For instance, if all of this money transacted was from Bank Accounts, PayPal would issue you a check for the full amount NQA. But since there is alot of credit transactions, they have to assess the risk of how much they should give you based on the potential for chargebacks and how recent the transactions were. (Chargebacks expire after X days.)

@umbaglo said:

@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.

Only because you said please! PayPal isn't holding the money hostage. There isn't a threat, or a reward from PP if you get your money. Holding Hostage is bad terminology on your part.

It's not fair that fraudsters are making us go through these hoops. But what choice do we have? Just hope that fraudsters don't use a loophole to make free money? Is PP making it easy for us? No. But these are requirements that we gotta get through to process transactions safely and securely.

And as for your third "please" I can't give you a solid answer but here goes. The simplicity of it is if it gets funded or not right? Put in X amount, get X back. But that money has alot of responsibilities tied to it. And who are we to trust that you, the recipient are to be trusted and/or experienced to handle the financing of the money? PP looks at that and created this idea of protecting you from yourself. I'm not defending them though. It's not a solid plan. But it works.

PP does thrive off of reserves. It's an obvious truth.

Posted by bluefoxxy

@kinapuff said:

@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.

You got it. Yeah I came off as immature. I was angry about it. I apologize there. It's not that I don't like Patrick. The dude is pretty spot on. Just these articles that get spun into something that they aren't. I came to GB because I wanted to get away from that. And Patrick seems to be the one that brings all that bullshit in. Just a personal perspective on that one.

Posted by Hassun

I had never heard of this problem before you brought it to my attention, Patrick.

Thanks for letting me know, PayPal had better start adapting to this ASAP.

Posted by Bunny_Fire
Edited by bluefoxxy

@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.

One problem is the PP account holders are not telling PP in advance that they are doing this.

so they fit a different credit / risk profile

In fact I don't think paypal does credit checks per se. Banks do, but always deny unless you've been in business for at least 18 months with 100k in the bank etc.

Posted by GaspoweR

@bluefoxxy: Sure man just thought I'd like to share that just to put it in perspective in regards to how other people from mainstream media viewed it at that time. :)

Posted by twelve1784

Knowing exactly how the collection and distribution process works, the outright statement that the money is "locked away" is absurd and makes me want to drop to my knees, and fire my gun up in the air whilst screaming.

Posted by Rongaryen

This who things makes Pay Pal look and sound super fucking nefarious.

Edited by bluefoxxy

@gaspower said:

@bluefoxxy: Sure man just thought I'd like to share that just to put it in perspective in regards to how other people from mainstream media viewed it at that time. :)

Love u duder. On a complete other note, I want to publicly apologize to everyone here for how rude I was earlier. I had a 96 foot pole in my ass and that was SO not cool in any way shape or form. I was caught in a moment in my company, and the crossfire was this forum. Apologies all around. I'll definitely try to be a better person and choose my words carefully next time.

Posted by Omberone

Are they perhaps locking down the account so that they have time to invest in the buisness? They after all get first peak and assessment from the source itself, and they control the money/funding in the end.

Posted by ptys

This was an interesting read.

Posted by wedgeski

Great read, Patrick. It's disappointing to hear that this is how Paypal operates for crowd-funded projects. They claim they have the best interests of the backers at heart, but why then do they immediately buckle without explanation as soon as a big enough developer makes noise publicly about the situation?

Because that's when someone with actual decision-making power gets involved.

It certainly seems that this is a "straightforward" customer service policy issue. I'd imagine crowd-funded exchanges set off most or all of the alarms for fraudulent activity, because they're new and weird and people are still learning to deal with it all. It will straighten itself out.

Edited by YukoAsho

@wedgeski said:

@dr_robocop said:

Great read, Patrick. It's disappointing to hear that this is how Paypal operates for crowd-funded projects. They claim they have the best interests of the backers at heart, but why then do they immediately buckle without explanation as soon as a big enough developer makes noise publicly about the situation?

Because that's when someone with actual decision-making power gets involved.

It certainly seems that this is a "straightforward" customer service policy issue. I'd imagine crowd-funded exchanges set off most or all of the alarms for fraudulent activity, because they're new and weird and people are still learning to deal with it all. It will straighten itself out.

Pretty much this. Crowdfunding isn't that old, and megalithic corporations are notoriously slow.