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PayPal Attempts To Kill Another Crowdfunding Dream; Kill PayPal Instead [UPDATED]

Yatagarasu Attack on CataclysmAt this point, I am not sure why anyone would trust PayPal enough to use them as part of any kind of funding program. It just doesn’t make sense. Paypal has a long and sordid history of arbitrarily withholding funds in the name of “fighting fraud”. For a few months, we even had a PayPal link on the side of our page asking for donations through it. But that is gone now.

Over the years, PayPal has shown itself to be an unreliable form of payment processing. It is rather easy to search the internet and find stories of Paypal either closing accounts due to arbitrary rules or perceived infractions.  They even find themselves acting as if they are some kind of morality police. Recently they have been glutting themselves on withholding of legally raised funds through the service IndieGogo. Earlier this year, they withheld part of the funds of Skullgirls. Just last week they withheld half the funds of the secure email client, Mailpile.

Despite all this, and the many many retractions of these actions, PayPal still keeps going. Just this past day, PayPal froze half the funds of the recently successful Yatagarasu Attack on Cataclysm demanding that it complete the game with only half the funds it raised in order to get the rest of the money. This is insane.

The email from PayPal advises us that they have ‘reserved’ the funding and will release ‘up to 50% of the funds’ before Yatagarasu AoC is released and the rest only after they have verified copies of paid invoices. What’s more, they provide no option to discuss, stating we should ‘contact us closer to the release date beginning of next year’ to arrange release of the funds.

Project creator Seon King states that not only is PayPal’s demand ironic, but it threatened to derail the whole project.

We appreciate irony as much as the next person, but PayPal refusing to provide funds legitimately raised to complete a game until after the game is released isn’t just beyond ridiculous – it potentially derails the game development. To add insult to injury, not only do Nyu Media and the Yatagarasu developer team have rock solid track records, but we’ve already provided PayPal with documents providing the bona fides of Nyu Media, the developer, and the campaign.

This action on the part of PayPal got a lot of media attention, something that PayPal probably wants to avoid after last week’s Mailpile incident. Because of that, PayPal quickly freed the frozen funds.

I’m relieved to announce that today we received an email from PayPal’s ‘Office of Executive Escalations’, advising us that they have released all reserve funds and removed all reserve settings from our account.

While it is great that King had his funds released quickly, this does not bode well for anyone that relies on PayPal for their payment processing needs. While it is great that this relatively popular project was able to put enough public pressure on PayPal to result in them reversing their decision, what about all the smaller projects and lesser known people who have their funds frozen regularly? These people are the real victims of PayPal’s dominance in the online payment market. These people don’t have the pull required to get out of PayPal’s withholding nightmare.

If anyone is still using PayPal or plans to use them at any point in the future, I highly recommend switching to something more reliable. Amazon Payments is one such alternative. The Humble Bundle and Kickstarter use it quite extensively and have had no problems as far as I can tell.

But for IndieGogo, I think it is about time that you rethought your partnership with PayPal. This has happened far too often to projects using your service. As such, your reputation is on the line. If projects are going to be continually blasted with frozen funds due to PayPal, people are going to be less likely to use your service to fund their projects. So please, ditch PayPal.

Update: Not long after posting this article, I received an email from a PR representative of Paypal. She had asked me to post the following statement, which I will do along with some commentary.

We have reached out to Nyu Media and the issue has been resolved. We want to reiterate that supporting these campaigns is an exciting new part of our business. 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.

First of all, this statement is being sent to every media outfit that writes on this story. This is your basic “cover your butt” statement blasted to everyone. So it isn’t anything special. Second, this is nothing new from what they told Arstechnica after the Mailpile incident. It also comes just a little over a week after the PayPal president wrote about updating its customer focus.

But the big issue is that they claim to be working with IndieGogo on this issue but haven’t yet seemed to figure out that “IndieGogo means good.” They have even been a partner of IndieGogo for years, yet are just now realizing that crowdfunding is a thing.

I honestly don’t see PayPal moving too quickly on fixing the underlying issues of its fraud prevention processes to actually stop these pointless and frustrating freezings. But maybe we will be pleasantly surprised. But until they can be shown to be trustworthy, I still feel it wise to avoid them when at all possible.

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