20 July 2017
Have you ever accepted pre-orders via PayPal? Are you currently doing so? You may be at risk for a funding freeze.
Over the last year, there have been several notable instances in the gaming industry where a publisher accepted a significant number of pre-orders via PayPal, only to see those funds frozen until after they delivered the games.
The first instance involved Leder Games, publisher of the acclaimed Vast: The Crystal Caverns. In a detailed post on BoardGameGeek, Patrick Leder wrote the following about his experience accepting pre-orders for the second printing of Vast:
After Gencon I had some of the funds raised in my business checking as well as a Paypal account. I continued spending from my business account and honoring the few pre-Gencon agreements I had that I still had inventory. A fair amount of money piled up in my Paypal account and we started taking pre-orders for the second print run there.
On September 25th (A Sunday) with no preamble or warning Paypal said they were going to lock my account and ask me some questions about my business. I cooperated fully providing them with answers about how I ran my business, how pre-orders from the end of the KS to Gencon had or were being delivered and how I was satisfying my customers needs by providing a pre-order link for the second printing.
Despite this Paypal moved the majority of my money into a reserve and will release it six months after we have shipped inventory. The amount of money reserved far exceeds the actual liability I present to their company, something I have argued with them and provided evidence supporting. The speed at which they are looking and the questions they ask when I called them out suggests to me a pattern of not really being concerned about the appeal process. In addition to reserving this money all money coming in right now is being moving into a reserve. This money is to provide funds for charge backs in case of dissatisfied customers.
A strikingly similar situation happened with Portal Games in February. As detailed in this post (which includes links to primary sources), “Not only are they [PayPal] freezing the money Portal Games has taken in for the pre-orders, but they are also not releasing any of the money that Portal Games takes in for selling items from their online store.”
Are PayPal’s actions justified? Did Leder and Portal do something wrong?
The answers fall into two categories:
PayPal is acting on behalf of customers (and themselves). PayPal has very clear guidelines about preselling via their transaction service: “If you sell items in an online store (not eBay), you must guarantee delivery within 20 days from the date of purchase and make sure that the customer knows they are buying a presale item…. Unfortunately, businesses that presell items can run into unexpected problems that can leave you, the seller, unable to deliver what the customer ordered.”
Whether or not this is a reasonable practice, it is their policy. So by accepting PayPal payments (an option you can turn on or off via most e-commerce platforms), creators like myself are agreeing to abide by it.
PayPal isn’t using common sense. As both Leder and Portal pointed out, PayPal froze funds above and beyond the pre-ordered receipts. Not only that, but by freezing Leder’s funds, PayPal actually decreased the chances that Leder would be able to deliver what the customer ordered–this is in direct opposition to their stated justifications. (Fortunately, Leder was able to get a bridge loan and run a Kickstarter for the second printing.)
As for whether or not they can freeze funds, they say, “We use reserves to help minimize losses and create a safer shopping experience for your customers.” This is such a vague statement that leaves PayPal a lot of wiggle room in terms of how much of your money they choose to freeze.
The unfortunate thing about this entire situation is that PayPal is pretty great as a pre-order transaction option. It’s universally used, familiar, and trusted by consumers, and it’s user-friendly for sellers.
How can you avoid this PayPal pitfall? Here are a few options:
- Follow PayPal’s policy precisely as stated.
- Use PayPal sparingly for pre-orders, and whenever your PayPal balance reaches certain thresholds (say, $10k), immediately transfer half of the funds to your bank account so you don’t build up a huge balance that PayPal could potentially freeze. (Update: PayPal can withdraw funds from any linked accounts as they wish [presumably to cover reserve amounts], so be wary about this option.)
- Use separate PayPal accounts for pre-orders versus selling in-stock inventory to mitigate some of the risk. (suggested by Primetide in the comments)
- Turn off the PayPal option on your e-commerce platform(s).
Perhaps you have different thoughts, information, or solutions, and I’d love to hear about them in the comments. The primary point of this post is to make people aware of the potential danger of accepting pre-orders via PayPal, not to scare people away from using the PayPal platform, which has been incredibly useful for Stonemaier Games.