PayPal’s Policies and Zano Drone Pre-Orders
This is a follow-up to Mark Harris’s investigative article about the failure of the crowdfunded Zano drone project, intended to answer a few questions about PayPal policy related to pre-orders. Mark hired me to edit that original article. This follow-up was not commissioned nor requested by Kickstarter nor any party, nor have I been compensated for it.
After the Torquing Group finished out its highly successful Kickstarter campaign on 8 January 2015, raising £2.3m, the firm almost immediately began taking additional pre-orders through its web site. Archived pages retrieved via the Internet Archive indicate that pre-orders started no later than 13 January, promising a July 2015 delivery date. It used PayPal to collect funds for these pre-orders.
Kickstarter has no involvement in financial transactions that occur after a campaign (nor off-site during a campaign), and it’s typical for successful campaigns of any kind, no matter how modest they are, to suggest more things to backers that they can purchase—like upgrades or multiples—and solicit new purchasers, who are reassured by the scale of fundraising that just closed.
As Mark Harris details in his story, about 600 Zano drones did ship in early September, and most of them went to those who placed pre-orders via Torquing’s web site, rather than to the many thousands of Kickstarter backers. That rankled backers, as Mark describes. The reason for this diversion to later buyers was to release funds held by PayPal, which allows pre-orders, but can impose a partial or total freeze on money collected until a company provides proof of delivery.
PayPal provides straightforward guidance for what it terms “presales” that cannot be delivered with a 20-day window (governed by a different set of rules) after an order is placed:
If you are selling goods or services in an online store (not eBay), you may be allowed to presell items but we may hold your money in a reserve account or limit what you can do with your account to reduce the higher risks associated with presale items. We recommend that you delay authorizing and capturing the money until you have the product available or until you plan on delivering the product or service.
In Torquing’s case, however, the money was immediately captured, and not released to the firm until—it seems—that individual orders were shipped. Torquing continued to accept pre-orders at its site until mid-October 2015, according to our sources. Mark found that £561,794 was received in post-Kickstarter orders, the vast majority through PayPal, and that about £200,000 remains in Torquing’s PayPal account after some funds were released and some refunds honored. Torquing filed for liquidation on 18 November.
During his reporting, Mark heard from and communicated with some people who had ordered with PayPal and had varying experience in obtaining refunds. Some had received products, declared it non-working to PayPal and received a refund. Most had applied to cancel their order without ever having received a product.
Based on drones shipped and the funds remaining, a substantial number of PayPal-based buyers were able to receive a refund, but not all.
One reply to Mark’s article noted the following:
The part I found interesting was the bit about Paypal holding back funds to protect themselves. So, why won’t they give me my money back. Sounds like they never gave it to Torquing. (I was a Preorder in January 2015 — post CES).
Another responder received a drone but, since it was faulty, complained and received a refund from PayPal:
I was a pre-order customer and thankfully got a refund via Paypal. I still have my Zano, and as a software developer I would love to get involved in an open-source project to see it fly.
On a forum that Zano backers and pre-order customers used to discuss the project as delays mounted, several people described their experience both with credit-card chargebacks (essentially, fraud reports by consumers to their credit-card issuer) for the Kickstarter charges and varying responses from PayPal in obtaining a refund. (At the end of this article I address Kickstarter’s chargeback policy fully.)
One web site customer asked PayPal for a refund and was told that because it was over 180 days since the original order was placed, it was too late to obtain his money back. Yet he never received a product, and Zano never fulfilled the terms of the order.
There could be a Catch-22 in place: Those who placed orders early enough might have kept the orders in place past 180 days without obtaining a product or a refund assuming it was yet to ship.
PayPal’s responses on pre-orders
I asked PayPal about its policies to clear up some of these differences. A spokesperson provided answers to several questions. Generally, there is a time limit for refunds:
PayPal buyers do not have unlimited rights to refunds; if time limits have passed, they may no longer have a right against PayPal to obtain a refund.
The firm pointed me for reference to its official UK user agreement, which governed payments in this case.
On the 180-day limit. PayPal won’t necessarily issue refunds after 180 days have passed from placing the order, even if the item is “not received” in its specific terminology, and even calls out the possibility of forfeiting the right to dispute a charge if the delivery time is more than 180 days in the future:
We may refuse to accept any Dispute that you open in relation to that purchase after the expiry of that period (please be aware of this if you agree a delivery time of an item or performance of a service with the Payment Recipient that falls after the expiry of that period).
Given that Torquing promised delivery within 180 days — July 2015 — until at least 6 May 2015 (based on archived pages) and continued pre-orders with a less-certain timeframe after it removed that delivery date, it would be impossible for any PayPal user who ordered in the original rush in January to meet that 180-day cutoff. Even ordering in March, if you believed through October you might still get your drone, you could have missed the period before the liquidation filing happened.
The “may” in that user-agreement reference above certainly gives PayPal wiggle room, but it’s unclear how much it engaged in that.
Who controls the funds now? Even though some orders remained after 18 November within the 180-day ostensible cutoff period, PayPal says it can’t comment on Torquing specifically, but that as soon as it is aware that a company has become insolvent or has gone into liquidation, it freezes any funds that would otherwise be released to the company. “We have a legal duty to release the funds to the liquidator, who takes control of the insolvent company for purposes of liquidating it,” the spokesperson says.
In November, a pre-order customer noted that information they received from Gary Stones, the liquidator handling Torquing, included this message:
We would inform that if you have not received the product ordered or have received a faulty product then if you paid via Paypal then you may wish to take the matter up with them. Alternatively, if you paid by credit card then you may be entitled to a refund from your credit card provider under the Consumer Credit Act 2006.
Mark spoke to Stones later, in January, at which point he was considering taken legal action to recover PayPal funds and parts inventory that wasn’t delivered (nor, of course, paid for at close to the full amount).
Should Stones decline to claim the PayPal funds — an unlikely circumstance — PayPal could then proceed with refunds, as there would be no party except the original payers who had a stake in that money. As PayPal’s spokesperson notes, “We comply with our duties under UK insolvency law and transfer funds to administrators when required to do so. We also honor our obligations agreed with buyers to provide refunds.”
In a follow-up, PayPal emphasized that shift in relationship more strongly:
…the passing of their rights against PayPal does not affect their rights against the seller. The seller is no longer in charge of its affairs, but buyers can claim a refund from the seller’s administrator, although, again, time limits will apply.
Catch-180
It seems as if we’ve found another weak point in the chain of crowdfunding in particular and speculative purchases in general. I’ve had many experiences with PayPal over the years dealing with both selling products and buying them, and found their process fair and reasonable. As a separate company from eBay since last July, they face a lot more direct competition from other payment firms, and should be exercising substantially more effort to keep sellers and buyers happy.
In the past, PayPal has been seen as overly aggressive at protecting buyers — or at least stalling sellers. Several people I know and many stories you can find online describe how someone was surprisingly successful in launching a product or business, only to find PayPal had frozen the release of funds for weeks or even several months, even when the seller could demonstrate delivering products.
This is in part because PayPal relies heavily on credit cards, despite its early and ongoing efforts to provide an alternative to cash and credit transactions. Credit-card processors can impose extremely long periods for chargebacks — as long as 120 days after the transaction posts. For businesses or people without a track record, holding funds for more than four months keeps PayPal from eating the cost of cleverly designed frauds. Pre-orders would be a particularly ripe place to engage in that kind of deception.
But the flip side of that is this Zano variation: Although PayPal discourages exactly what Torquing did — a pre-order charged immediately with a long period before delivery — PayPal allowed it. Even without the issue of a liquidation, PayPal doesn’t seem to account for both permitting this behaviour and providing an effective way for purchasers to obtain relief.
What could PayPal do to improve this for both post-crowdfunding pre-orders and this category of aspirational ordering in general?
- Explain rights and risks to its customers better for pre-sales that extend beyond the 20-day period, for which it already has more specific and tighter rules. PayPal’s spokesperson tells me, “[I]t’s important that consumers know the time limits before making a purchase, or pre-ordering products or services.” But that’s not baked well-enough into the process. PayPal could tell customers before they consummate the order precisely that, and that long-term pre-orders have the risk of a product not being fulfilled—and that it may require more effort to cancel an order or obtain a refund than something in stock or near-term. These kinds of pre-orders are more akin to crowdsourcing than, say, something being out of stock or en route from a manufacturer to a supplier.
- Require sellers to state a guaranteed delivery date, after which point orders are automatically refunded unless negotiated with customers through a PayPal process. That might entail sending out a revised date and having customers opt in.
- PayPal could also email customers on a recurring basis, as frequently as monthly, to remind them of upcoming deadlines for cancellation or delivery.
- Don’t allow open-ended pre-sales. Six months should be the maximum, if that, and potentially only for established companies with a track record of shipping similar items, or the proof that production is underway and paid for. While this may restrict the ability of entrepreneurs to raise funds outside of crowdfunding sites or more investors, it also ensures better protection for buyers.
While PayPal isn’t designed for crowdfunding, it also suffers from the same problem regarding promises for future delivery.
Kickstarter and Chargebacks
One aspect Mark didn’t explore and I didn’t prod on (we were both unaware of it as an issue) is how Kickstarter handles chargebacks, which can be costly and time-consuming for firms that accept payment by credit card. Card issuers tend to be aggressively pro-consumer in this one aspect of their business, and some of how they handle the process is covered by consumer-protection law in the country in which an order is marked as taking place.
When a credit-card customer files a dispute within a specified period following a charge and the issuer accepts the dispute, the issuer starts a process with the processor that handles charges for the merchant. Chargeback requests can often include incomplete information, and that doesn’t help the merchant. Without a response the issuer finds valid, the charge is reversed and the merchant assayed a fee that can be $25 to $35 per incident. With enough chargebacks, a processor may drop a merchant entirely.
In Kickstarter’s case, because it considers the campaign to be fulfilled at the time of its completion if the project’s goal has been met, it directs its payment processor to charge cards immediately. Kickstarter gets its 5% via the processor directly. The funds are then released within a couple of weeks to the account associated with the campaign.
Kickstarter takes zero responsibility for fulfilling rewards—it vests that responsibility entirely in the contractual relationship it sets up between a backer and a project creator. Thus, it seems to reject out of hand that failed or fraudulent project reflects on the original charge at all.
Some Zano backers filed chargeback claims and posted email received from Kickstarter in which the company noted that the charges weren’t fraudulent, and that those who lodged disputes would no longer be allowed to back campaigns — either ever or if they didn’t withdraw the chargeback request.
One backer posted this message they received from Kickstarter, which reads in part:
Please review the project listed below. If you created this account and made legitimate pledges to the listed project, please respond to this email letting us know that you intend to contact your bank to drop this dispute within 10 days. We will also gladly help you in reinstating your account.
If you did not authorize pledges to the listed project, please respond to this email so that our Integrity team can investigate further.
Another received this reply in part:
We understand your frustration with this project. While Kickstarter is a system where projects sometimes fail, the level of transparency and communication provided by this creator has been unsatisfactory.
Pledging to a project is helping bring a creative idea closer to life, not buying a product that already exists. We expect chargebacks to be reserved solely for transactions that are credit card fraud, which does not appear to be in dispute in this case. We would ask that you please keep this in mind as you use our site.
This is an area ripe for further exploration on Kickstarter’s interpretation of chargebacks and how they fit within credit-card issuers rules.
