Crowdfunding Paradigm Breaks PayPal, Company Vows To Adjust

If you’ve read this site even casually lately, you know that crowdfunding is here in force. Sites like Kickstarter and Indiegogo offer entrepreneurs, startups, and otherwise unfunded techies with a prototype and a dream the chance to engage the world and excite backers to front some money for their projects. It’s a powerful, grassroots way to both gauge the potential success of a given product and raise cash in the meantime.

Of course, like any new technological or financial paradigm, crowdfunding has also created some problems. PayPal, after some public flogging due to its freezing of a few campaigns’ money, has openly acknowledged that its payment platform is not equipped to handle crowdfunding yet.

While pointing out that some of its competitors don’t even bother with crowdfunding campaigns, PayPal’s VP of Risk Management Tomer Barel said, “When done right, crowdfunding is a powerful catalyst for innovation. However, it's clear that our existing policies and processes aren’t working quite right for this particular fundraising model.”

MailPile Indiegogo PayPal
Mailpile, one of the campaigns with frozen funds

Barel said that PayPal is working with “major crowdfunding players” to change its policies so that it will be better able to handle and process crowdfunding and avoid “unnecessary account limitations”. Until the company figures that out completely, Barel pledged that a senior member of PayPal will review every crowdfunding campaign before any action is taken. (Read: action taken by a customer service underling who ignites an Internet firestorm of criticism.)

In defense of PayPal, if a company that holds thousands of dollars of other people’s money errs on the side of caution, concerned that fraud may be afoot, that’s better than being too lax and allowing fraud to persist. It seems easier to unfreeze a legitimate entity’s money after some back-and-forth than tracking down a thief and trying to recover stolen funds.

That said, PayPal really needs to get its act together on crowdfunding. It’s somewhat baffling that it hasn’t addressed this quickly-growing trend and adjusted its products and policies to better facilitate this new paradigm of online fundraising. PayPal has pledged to do so, so here’s hoping they nail it as soon as possible.