Paypal and Crowdfunding: don’t do it

Paypal screwed me. I was patient and gave them plenty of chances to remedy the situation but they adamantly refused to even talk about it. I was forced to start playing hardball. It ended 48 hours later with them giving me a token cash payment “for the inconvenience” and an apology from the Managing Director of Paypal Australia. You may want to reconsider if you’re planning to use them yourself. Here’s the whole story:

When using Paypal with small amounts as a consumer, I’ve never had a problem, quite the opposite in fact as it’s a very convenient service with a great level of protection for buyers. However since launching an Indiegogo campaign and receiving funds through Paypal, I’ve encountered show-stopping issues. If you are thinking of using Paypal with your crowd-funding campaign, stop right now and do some research before deciding one way or the other. If you’re considering backing a crowdfunding project and they accept Paypal as one of the payment methods you should understand the risks involved (whether or not you are actually paying with Paypal or something else makes no difference to the risk).

Imagine launching an Indiegogo campaign, reaching your funding goal, raising enough money for a manufacturing run (or whatever), then suddenly the funds are frozen with no indication of when (or if) they will be returned. You no longer have the minimum funding required to proceed with manufacturing and the project is put on hold. As the project is in jeopardy, people lose confidence and start demanding refunds or filing for chargebacks through their credit card. At that point, even if your frozen funds are returned, you still can’t proceed with your project because you no longer have the critical amount of funding. This leaves you with two choices: somehow raise more money; or refund everyone. Refunding people can be expensive work, not to mention the fact that Indiegogo won’t be refunding their own fees if this happens so you’re covering that too. So don’t expect to be back to square one if this happens, expect to be considerably poorer than when you started: think 50% of whatever your raised, but in debt. This is the kind of situation you will be faced with if Paypal decides to freeze your funding, which they do a lot, and Indiegogo isn’t saying much about it.

Paypal froze US$40k of funds raised through our campaign to support hackerspaces. I decided to reach into my own pocket to keep the project moving because otherwise the show would have ended then and there with backers losing their money. Ultimately, after practically declaring war on Paypal, having my story covered by a number of popular sites, and creating, they decided to unfreeze my account.

The reason for the freeze itself is understandable. They need ID and proof of address thanks to the AML laws that don’t make the smallest of dents in terror funding or the drug trade but are wildly successful when it comes to creating a problem for everyone else. My gripe with Paypal is that they use this as an excuse to freeze accounts for as long as they like, and earn interest on the funds. This is highlighted by the manner in which they went about obtaining the required compliance documents. I received emails asking me to upload the documents, however uploading was not actually possible through their system. I asked them about this, and they gave me a fax number instead (who has a fax?). I informed them I don’t have a fax, and finally they gave me an email address to send the documents. I was on a flight at the time and by the time I actually read this email (24 hours after it was sent), my account was limited. That’s game over because when you hit that point you have no way of knowing when (or if) you’ll be able to access your money again.

Once your account has been limited, it finally becomes possible to actually upload your documents through the Paypal interface (it’s almost like they want to freeze your account) so I went and did just that. I assumed all would be fine and wasn’t at all concerned at the time, the whole thing barely registered on my radar with everything else I had going on with the project.

After a week of patient waiting and and hearing nothing, I emailed again. I only ever received canned responses in reply. Then I called customer service, the very friendly chap on the other side told me it normally takes about 6 weeks to unfreeze accounts in this situation but he had no specific information about my account and couldn’t really tell me anything useful. I asked to speak to someone who could give me specific information and an ETA (critical information when you are manufacturing) and he told me that would be the compliance department but even he can’t talk to them (a bullshit excuse if I’ve ever heard one).

I informed the customer service representative that the funds they froze belong to a fairly switched on community of hackers, people who really know how to get things done, and if the nuclear option is the only response Paypal is leaving open to us then don’t expect anything less than unrelenting carnage and punishment to be rained down on them. As I was about to cause them significant pain, it was only fair that I give them one last shot at a peaceful resolution, so I asked again if there’s absolutely anything he could do about this situation. “No” he said, “I’d love to be able to help you but there’s nothing I can do”.

At this point I needed to let the community know what was happening. I immediately received hundreds of messages of support, most from people who’d been burned by Paypal before. A few of us spent 20 minutes and made The story was picked up by Hack A Day after a few hours and quickly spread throughout Internetland. The site drowned in 15k unique visitors with ~600 people registering for a class action lawsuit in the first 48 hours.

I filed a complaint with the Financial Ombudsman Service in Australia (Australian account was used as crowdfunding is not permitted with Paypal accounts from any other countries where I’m a citizen or resident) demanding the account be reinstated, interest be paid, and my time be compensated at my standard consulting rate. That should cost them at least a few manhours to deal with.

Forty-eight hours in now, and I had Paypal’s full attention. They reinstated my account. They gave me some cash on top to say sorry. The Managing Director of Paypal called me to apologize. Any further effort on my part would face diminishing returns and I had more important things to be doing so I called it a day instead of pushing for further compensation.

Some messages received on suggested that the only option Paypal’s policies had left them was to turn up at one of their offices with an assault rifle and I mentioned this on the site. I decided to take the site down after Paypal’s managing director let me know that Paypal’s Sydney office was just down the road from the café where Australian police a few days prior let a mentally unstable individual point a gun at patrons all day until something happened. I didn’t want to affect any of the staff more than necessary and I had the money back so I took it down.

I also followed up with Indiegogo as they are partly responsible. They are acutely aware that this is a common issue with campaigns funded through Paypal. A quick Google reveals that this happens all the time. I asked Indiegogo to place explicit warnings to campaign owners and funders that appear during the campaign set-up process as well as during the payment process for funders (they are also at risk). They don’t want to do this, I assume they believe it will hurt their bottom line, and I can see why they think that – accepting Paypal in addition to credit card payments opens up part of the market that may otherwise be closed. However, the decision by Indiegogo to withhold any kind of warning also hurts them in the long term of course as it undermines trust.

Accepting Paypal for crowd-funding campaigns creates a massive liability for the campaign owners as well as campaign funders and in my humble opinion is simply not worth it. If Paypal freezes your funding it’s going to put at least a temporary hold on your project and depending on the exact situation could kill it altogether. If you tell your  backers that your account has been frozen, you run the risk of them filing chargebacks or Paypal disputes, and you will be forced to refund them as well as cover Indiegogo’s fees (you may want to check Kickstarter’s policy). This will leave you with a dead project and not enough money to refund your backers.

All the evidence points towards Paypal’s core business model involving earning interest on funds stored with them. This provides them with all the wrong incentives and is incompatible with their payment gateway business model, though I expect the profits thus far have become a hinderance in them seeing this. Paypal isn’t going to work this out for themselves until they start seriously losing market share to things like Bitcoin, but by that point the show’s over anyway. In the meantime they are hurting people and building up a giant reservoir of bitter hatred towards them, and if the messages received through are any indication there’s a very large number of people in the US who feel that physical action is the only channel remaining to them if they really want their money. Let’s hope they don’t take too much money from the wrong guy one day and end up with a massacre on their hands. Paypal needs to become accountable and start cleaning up their act if they want to survive in the long term. As it stands their collapse is merely a matter of time and you can be 100% sure that they will feign solvency until the last second making it look like they collapsed overnight without warning, taking your money with them.