Business of Fintech

Has PayPal soured on crowdfunding?

Does PayPal’s announcement that the company will eliminate its Purchase Protection coverage for crowdfunding payments indicate a lack of confidence in crowdfunding?

PayPal says ‘no.’ In an email exchange with Tradestreaming, PayPal said the payment company is the only platform that has customized its policy and processes to support crowdfunding, and added that the firm would continue building strategic partnerships with crowdfunding platforms “to make it even easier to offer flexible and secure payment options, so that it is simple for people with great ideas and important causes to raise money.”

But the move is the latest chapter in a historically rocky relationship between the online and mobile payments giant and the crowdfunding industry. It reverses a March, 2014 commitment to closely examine crowdfunding projects to ensure they fit legal definitions of “donation” (as opposed to “commerce”) but to continue offering buyer protection for payments made to crowdfunding sites. That program offers to refund a buyer’s money if an item purchased online doesn’t arrive, or doesn’t match the seller’s description.

The 2014 decision followed a series of clashes between PayPal and crowdfunding project owners, mainly focused on unilateral decisions by the company to freeze donations to campaigns that PayPal determined to be pre-selling merchandise instead of fundraising.

At the time, PayPal kept crowdfunding payments under the umbrella of its Purchase Protection scheme, but also added that the company would “engag[e] directly with campaign owners ‘early on’ to ensure they comply with PayPal policies and government regulations — and help bring them up to snuff if they don’t.”

(Crowdfunding) times are a changin’

“Together with the crowdfunding sites, we identify if campaigns are strictly fundraising or pre-selling merchandise,” said PayPal’s chief risk officer, Tomer Barel, said in a blog post at the time. “We enable their campaigns without interrupting payments under the condition that the campaign owner is explicit and transparent to their contributors that there is no guarantee of delivery regarding the rewards being offered upon contribution.”

Two years later, however, PayPal appears to have decided the risk associated with crowdfunding is too great to shoulder. One London-based representative for the company would not confirm that the decision represents a “lack of confidence” in crowdfunding as a source of fundraising, but at the time she stressed that the move “is consistent with the risks and uncertainties involved in contributing to crowdfunding campaigns, which do not guarantee a return for the investment made in these types of campaigns.”

At issue is the legal distinction between the categories of “donation” and “pre-sales”. In the latter case, the seller makes a clear commitment to eventually provide goods, and buyers have a reasonable expectation of receiving a refund in the event they do not receive the goods they have purchased. For “donations”, there is no such expectation, but PayPal has now decided not to address that distinction by removing crowdfunding payments from its buyer protection program altogether.

Accountability problems

In addition to legal ambiguities, there are some indications that the move was also driven by concerns about the crowdfunding industry.

Several publications, including Consumer Reports, have documented a lack of accountability among people who run crowdfunding projects, and about difficulties that donors have had in recouping their donations. In one recent example, a smart watch campaign by Central Standard Timing ended when the company declared bankruptcy, leaving over 7,600 backers with no watch and no recourse.

Also, industry observer Glenn Fleishman noted in February that the collapse of the Zano drone project resulted in a messy refund situation that was made more complicated by the fact that some customers who pre-ordered a personal drone outside of Kickstarter received their units before crowdfunding investors. The investigation also revealed that customers were able to receive refunds, while people who had backed the Kickstarter campaign had trouble receiving their money back.

In an industry that raised $34.4 billion in 2015, and could surpass total venture capital investment in 2016, even a small percent of chargebacks from crowdfunding sites would add up to a lot of money that could potentially have to be refunded.

Crowdfunding platforms moving on

Notably, the only major crowdfunding platform that will be affected by PayPal’s decision appears to be the only one that accepts payments via PayPal, Indiegogo. Some smaller platforms, including Fundrazr, also work with Paypal, but other platforms, such as Kickstarter and GoFundMe, accept payments via online payment platforms such as Stripe and WePay, but not PayPal.

GoFundMe simply says the platform “no longer uses PayPal to accept donations for campaigns,” and instead refers donors to the Stripe and WePay websites, both of which offer a series of tools designed specifically for marketplace sites, including fraud protection.

PayPal spokespeople said in response that the company would “continue building strategic partnerships with crowdfunding platforms like Indiegogo and FundRazr to make it even easier to offer flexible and secure payment options, “so that it is simple for people with great ideas and important causes to raise money.”

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