Throughout 2013, PayPal and crowdfunding project creators repeatedly found themselves at odds. First it was Lab Zero Games, the company behind the hugely popular campaign for Skullgirls. Paypal froze Lab Zero’s account only to later release all but $35,000 of Lab Zero’s Indiegogo cash. It actually led Lab Zero to file a complaint against PayPal with the Consumer Financial Protection Bureau.
It didn’t stop there. Mailpile also got hit with a freeze. Sigmo and GlassUp were also subject to frozen accounts, although none of the three were on the wrong end of an ongoing freeze like Lab Zero was. (We reached out to Lab Zero to find out if the freeze was ongoing but never heard back.)
It’s easy to brush the entire situation off and chalk it up to PayPal being an evil company that doesn’t care about its customers, but the truth is more complicated than that. Welcome to the (heavily regulated) world of online payments.
In a follow-up to repeated instances of frozen accounts, VentureBeat‘s John Koetsier asked PayPal senior director of global initiatives Anuj Nayar about the difficulties of compliance for payment providers.
That stuff’s difficult. In the U.S. alone, between federal rules and state rules, we have maybe 75 licenses to manage our systems. Once something’s gone through the PayPal network, the money’s clean … so we have a responsibility to the markets we’re in to be compliant.Anuj Nayar, PayPal
Related: PayPal announces Customer First, a sweeping plan to ‘catch more sharks and fewer dolphins’ [VentureBeat]
It’s not just PayPal. All payment providers active in crowdfunding will deal with the inherent challenges of the model, one that occasionally leaves backers out in the cold and looking for a refund.
In an effort to help clarify the details behind these situations, WePay VP of Marketing Tina Hsiao facilitated discussions between representatives from WePay and Crowdfund Insider. What we learned can be a valuable lesson for crowdfunders that want to avoid any pain in securing their payments.
What do crowdfunders need to know?
First, know that payment providers are underwriting their merchants, and in the case of rewards-based crowdfunding those merchants are not the platforms. They’re the project creators.
Occasionally project creators are companies with a long history of delivering on promises made, eg: “we’ll ship you this product for this much money.” This is the exception to the rule, though; most project creators are individuals with no such history, or at least limited history.
As a merchant, it is important to understand how payment providers go about measuring risk and attempting to limit fraud through their systems.
How do payment providers gauge risk?
In general, payment providers will lean heavily on automated tools, algorithms that have been honed to try and find bad little needles in a haystack of good intentions. If you find yourself on the wrong side of the conversation, it is probably best not to panic or overreact. (We’ll discuss what to do about this situation later in this article.)
WePay VP of Risk John Canfield helped to clarify this, explaining that there are generally two kinds of risk at play in rewards-based crowdfunding: identity risk and merchant quality risk.
Identity risk is simple: is this person who he or she claims to be? For the purposes of answering this question, payment providers are looking to verify readily available information: names, addresses, a birthdate, email addresses, etc. If you have to enter a social security number when signing up for a merchant account, this is why. It’s an effort in mitigating identity risk.
WePay also nods to their own proprietary and patent-pending beta technology, Veda, stitches together a variety of data sources in order to better understand a platform’s users. One aspect that Veda loops in is a merchant’s social history. In other words, WePay is specifically looking at the longevity and legitimacy of social media accounts as an indicator of risk. If a merchant has no social history, WePay determines that they’re a riskier merchant to underwrite.
Why is a social presence a good indicator of risk? Because it’s extremely difficult for a fraudster to build a social presence overnight. Consider it just one more reason why crowdfunders should consider building a social presence ahead of a campaign.
Defending against fraud is a multi-step process. There is no silver bullet for it.John Canfield, VP of Risk – WePay
Merchant risk is more complex, and it ties directly to risk of reward delivery. For a campaign where all the rewards are t-shirts, the risk is relatively low. For a new, bleeding-edge technological device from a nascent manufacturer, the risk may be much higher. Canfield actually explains that WePay will sometimes reach out to project creators early in a campaign to better understand this form of risk, asking questions like whether the product is a prototype or further along in the production cycle.
What WePay is certainly trying to avoid are situations in which they become less comfortable with underwriting the merchant as the campaign grows in scope.
What’s the big deal?
Crowdfunding is a pretty straightforward concept for most, right? Why is this so complicated?
The answer: Chargebacks.
A chargeback occurs when a credit card holder contacts his bank or credit card company to dispute a charge on his account. Common reasons for chargebacks include:
- The cardholder does not recognize the charge or recipient on the statement.
- The cardholder did not receive the product or service.
- The cardholder was unsatisfied with product or service.
- The cardholder’s credit card was stolen or used without their permission.
When a chargeback is issued, the total amount of the chargeback is forcibly removed from WePay’s bank account. In turn, the total amount of the chargeback is removed from your WePay account. The funds will be removed from your available balance and held in reserve until the chargeback process is complete. The chargeback process is long and largely dependent on banks and issuers. If you choose to challenge the chargeback, the process typically takes about 45 days from the date of the chargeback.
This is the exact type of thing payment providers are looking to avoid. How many chargebacks are acceptable? An infinitesimally small fraction of online transactions can result in chargebacks before they begin to threaten the economic model of providing online payments. It’s a low margin business that is made profitable via scale, but with scale comes the challenge of policing and regulating transactions. It’s a tough space.
Therein lies the natural tension between payment providers and crowdfunding platforms. Rewards-based crowdfunding platforms enjoy a largely unregulated existence. This is contrary to payment providers, who are subject to stringent rules and regulations governing how they do business.
What do I do if I’m singled out?
So, a payment provider is not releasing your crowdfunded cash. What do you do?
The answer to that question is largely subjective and depends on the context. The main answer: don’t panic. Realize that payment processors are just trying to navigate their own challenges, and there is occasional collateral damage on that front. Reach out and be prepared to tell your payment provider more about yourself and your project. They want to know that you aren’t a huge risk. Being honest and forthright can go a long way.
If that doesn’t yield just results in your opinion, social media – and the press – can also play an important role in holding payment providers accountable…
— Lab Zero Games (@LabZeroGames) August 29, 2013