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Paypal Won’t Protect Crowdfunding Payments Because Crowdfunding Fails a Lot

Here is how people think crowdfunding works: Someone pledges money to a project, and in exchange they receive exactly the item that they contributed money toward. This can be in the form of notoriety (a thank-you) or, more often, material goods.

Here is how crowdfunding actually works: You throw money into the Phantom Zone and maybe something comes out of the Phantom Zone. It is almost never precisely what you imagined you would receive.

This uncertainty when it comes to crowdfunding is why Paypal has decided to stop protecting transactions made on crowdfunding platforms like IndieGogo. In a statement to TechCrunch, the payment service wrote:

This 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. We work with our crowdfunding platform partners to encourage fundraisers to communicate the risks involved in investing in their campaign to donors.

By routing contributions through Paypal, backers could add an extra insurance policy to their crowdfunding work, and then dispute the charge if they didn’t receive their rewards on time, or at all. Crowdfunding still has an optics problem, because prospective contributors see themselves as preordering a developed product. In reality, they’re putting money into the project at a much earlier stage.

Unlike most online transactions, the possibility of a crowdfunding campaign going south are considerably higher. According to a report from Kickstarter last year, nine percent of projects funded on the site failed to deliver their promised rewards. (Statistics for other platforms are not available, but based on what I’ve heard anecdotally I doubt they’re much better.) That number seems low until you frame crowdfunding as a purchase, as backers often do. Imagine if nine percent of your Amazon orders went undelivered, but you still got charged for them.

All of this is to say: Don’t contribute to crowdfunding campaigns. I mean, maybe do it if you personally know the body requesting money, or if they have a proven track record, but don’t give $75 to some bozo who developed an iPhone case that maybe glows in the dark. Or, at least, if you do give money to one of these things, don’t expect anything in return. If the product is really good enough, odds are you’ll be able to buy it via regular means soon enough.

Update: This post has been edited to clarify that Kickstarter’s payment system is not integrated with Paypal.

Paypal Won’t Protect Crowdfunding Payments Anymore