The Danger of Accepting Pre-Orders via PayPal

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:

  1. Follow PayPal’s policy precisely as stated.
  2. 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.)
  3. Use separate PayPal accounts for pre-orders versus selling in-stock inventory to mitigate some of the risk. (suggested by Primetide in the comments)
  4. 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.

42 Comments on “The Danger of Accepting Pre-Orders via PayPal

  1. I think a similar thing happened in Conan’s Campaign , January 2015. Funds were delayed for whatever reason (Kickstarter’s issue was something to do with EU -US banks transfers and delayed for 3-6 months if I recall correctly.

    I do not know if it was true, but the result was
    1. Unhappy customers
    2. Panicked creator
    3. All interest from the capital during that time was kept from KS and not creator.

    1. Harry: Thank you for sharing! I wasn’t aware of this. Was PayPal involved? As far as I know, Kickstarter uses Stripe for all transactions, but perhaps that’s just US projects.

      1. I know, Paypal was not involved at that time but #3 could still apply.

        A project that attracts 600 backers for let’s say, $25000 is not much, in terms of bank interest; whereas another with 30000 backers and $3million is another issue. If the contract between a creator and KS clearly states you’ll get the amount gathered minus fees, that’s it. No interest promised. So they MAY delay funds to their favor.

        Same COULD happen with Paypal transactions. A weekly deposit of $500 doesn’t attract , but a daily deposit of $1000 could.

        PS those are speculations, my own thoughts. I do not judge nor sentence anyone’s way of thinking.

        1. Harry: I agree, the rate at which the funds accumulate increases the chances of any payment-processing company from turning their eyes on you and finding a way to mitigate their risk.

        2. I think this was a different issue (which I touch upon in an upcoming guest post), which is US to EU bank transfer and the threat of being taken as a money launderer with US banks refusing to transfer your money.

  2. Thanks for the article Jamey. In addition to pre orders I thought I had seen some folks say that paypal reserved their Kickstarter funds as well. Have you heard of that happening or am I mistaken?

    1. Rob: I think Kickstarter only uses Stripe to handle transactions (credit and debit cards, not Kickstarter). My guess is that people are referring to pledges made outside of Kickstarter’s system, but I could be wrong.

  3. >> How can you avoid this PayPal pitfall?

    Just calling this out. Even following their policies to the letter they can arbitrarily choose to freeze your account and you have no recourse. Having lived through this myself and having customers have this issue, there seems to be little you can do. We even talked to paypal directly before these situations and STILL had it happen.

    1. Adam: Thank you for sharing! I’m sorry to hear you’ve had that experience. Perhaps the only safe way is not to use PayPal at all (or frequently transfer funds out of your PayPal account).

  4. One of the primary reasons Geekway pushed away from PayPal for preorders was the fear that they would freeze funds.

  5. Great post. I’m a fan of logic. Paypal lacks it in very many areas. This is just another, but a great warning post. Much appreciated!

    1. I sent this post to Square Reader. I’ve been hoping they’d open up more sales channels for me as they’re a far superior service to PayPal in every regard imaginable.

  6. I’ve been using Celery for pre-orders, which uses PayPal for the transactions. I think because the money goes through this additional platform, and because the money is paid immediately, I haven’t had any problems and don’t foresee any problems with PayPal funds freezing.

    1. I’ve used Celery for quite a while too. Recently we’ve had some issues with people trying to make payments through Celery with PayPal (the API doesn’t seem to be 100% consistent). However, I think you’re still at risk for PayPal freezing funds if they start to accumulate, as this is exactly what happened to Portal and Leder.

  7. Speaking as a consumer and not a seller, I appreciate that PayPal wants to protect customers. While no one here is on the scam, buyers have been screwed by ‘presellers’ of items 3-6-12 months out who were left in the dust.

    So, instead of blaming PayPal (who safeguards buyers), maybe consider blaming sellers who collected payments and didn’t deliver, but left PayPal’s guarantee holding the bag so us consumers weren’t the ones who ultimately suffered.

    1. Kathryn: This is a great point–seller should be responsible for their actions. However, I just can’t blame a completely unrelated seller for the actions PayPal has taken against Portal and Leder. Really, I’m not here to blame anyone (that’s not the point of the post)–I’m here to let my fellow creators know the risks involved with accepting pre-orders through PayPal.

  8. I preordered with Portal through Paypal precisely because Paypal was an available method. International transactions are a giant hassle since some US card carriers block them entirely by default and you have to jump through hoops to get them to unblock it for the transaction. I’ve lost count of the number of Kickstarters I’ve looked at and proceeded not to even think about backing simply because it would have necessitated an international transaction and all the hassles that go with that. With Paypal as an intermediary, it negated the need for me to do any hoop jumping. Just a customer’s perspective.

    1. knightofthewolf: I agree, PayPal is fantastic from a consumer perspective (and a seller perspective). I use it all the time, and I’m glad you’ve found it a reliable way to make payments. I hope they devote more resources to finding a reasonable way to respond to cases like that of Leder and Portal.

  9. Option 2 does not work unless you take another step on top of it. PayPal has the ability (and you have given it the right and access to) pull out money from your account. So even if you transfer the money to your account, PayPal can and will reach into your account and take these funds back.

    I believe the only way around this is to:
    – transfer all money from the main linked PayPal account to a 2nd account
    – block any transactions that might over-draw your account. This might not be possible depending on your bank (which might mean PayPal pulls funds and automatically dumps you into overdraft).

    PayPal is a pain and VERY hard to work with. I’ve had a friend who ran a Charity event taking donations via PayPal who informed PayPal of this beforehand, provided all the paperwork and they STILL froze the account.

    1. I came here to say something similar to, “– transfer all money from the main linked PayPal account to a 2nd account.”

      PayPal is not a bank, so don’t treat it like a bank. This is common sense to the artists I work with who regularly deal with PP BS, so I’ve gotten used to only using PP as a pay-through service, never something I keep more than maybe $100 in.

  10. The fact is PayPal (just as any other bank or money transaction platform ) has automated checks to redlight unusual transfers. So far this is not unusual. The problem lies in PayPal being a digital first company, so you don’t get a personal accountant or anyone that actually knows you from Adam ( or Eve as the case may be). Thus every request is routed through different people, who are not at all invested in keeping you as a customer. And compared to the amount of transactions taken, the personnel is…limited.
    A. Umber of precautions I recommend: don’t use th same PayPal account for pre orders and your other business. As the PayPal link integrated to your webpage etc. can be different, this does not create any issues for customers. For he same reason, have two bank accounts. That may seem silly, but as someone who had his account frozen by a bank I am sure as hell glad that we had another ( in our case having a PayPal account on top actually saved us funnily enough).
    Another trick that used to work (not sure if that is the case anymore) is to actually send people gift certificates for your game to redeem at a later date. This way an delivery of an equivalent value has taken place and PayPal cannot fault you, as you delivered something in time. Has anyone tried that recently?

    1. Primetide: I like your idea of using separate accounts for pre-orders versus in-stock inventory! I’ve added a note about that to our post. I haven’t heard of the gift certificate method.

    2. Primetide, very well said! My experience has given me a similar impression of PayPal: although they provide an extremely useful and (mostly) easy to use payment platform, their customer service is one of the worst I’ve ever encountered. Replies to communications are slow, will just direct you to read their FAQ unless you repeatedly contact them, and rarely result in solid information or resolutions. Like you said, they have limited personnel allocated to customer service, and they aren’t invested in keeping individual people as customers.
      Great advice about using separate bank accounts!

  11. Hello Jamey.

    You might be the first person to get the entire story correct in a journalistic capacity. So congrats Jamey.

    I want to remind everyone unless the platform is set up for dealing with pre-orders any of the organizations that collect money by credit card have similiar problems. You are just far more likely to hear about it when Paypal does it since they are involved in a lot more business than the others.

    As a footnote they released the funds about a month ago directly to my personal checking with no preamble, warning, or any other communication. As of today my account is still locked and I need to use other people’s paypals to pay for things.

    Be careful everyone!

    1. Patrick: Thanks for chiming in! Your original post was very helpful. I’m glad to hear they released the funds, but I can imagine it’s frustrating that they still have your account locked. That makes me want to use them less and less.

  12. Yeah, had this happen to friends in the tech industry as well, where PayPal without warning just froze and reserved money. In this case, it was not even pre-orders, it was a successful product launch that went viral and quickly built up funds. In this case, my friends ended up having to take a bank loan to cover some of the cost they accrued in delivering all these products, as the payment was locked in PayPal.

    So to me, this is not the first time I’ve heard recommendations to avoid PayPal if you’re selling. I think with this story, I’ll stay even further away from it.

  13. – Paypal will not allow a same person to have several accounts, even business+private.
    – There are settings in paypal that allow them to draw for your bank, womething you must approve at paypal and at the bank. You can cancel it at both level, ignore all the warnings that you will not be able to automatically top up your PP account from the bank or you will be limited by the amount actually on the PP account – our purpose- , and be OK.
    – It’s good policy to do daily transfers from your PP account to the bank, or to trasnfer as soon as there are 2-5k on the PP account.
    – PP is not a bank. in some countries, it was forced by law to adhere to bank standards and regulations, but not everywhere
    – Stripe is a fantastic alternative ;-)

    1. ehanuise: Thanks for sharing! Though I know for sure that PayPal will let the same person have several accounts–I’ve had a both a personal and business account with them for years.

    2. Actually yes, they do. And if you have two bank accounts and emails, they don’t even have a way of telling you are the same person.
      The main thing to understand is what ticks off Paypal:
      – large money transfers
      – repeated chargebacks
      – a flurry of activity after nothing happening for a long time.
      – people initiating complaints

      With the usual e-commerce solutions Paypal is one alternative and should not be relied on solely. That being said, it is great for the customer, because (and this is the simple logic of their workflow): whoever complains first, gets the “ticket” in support. It is “guilty unless proven innocent” and has little to do with consumer vs retailer. It simply is a rarer case, that you see the retailer complaining about a consumer.

      Dropping Paypal is also not an option because many people use it and it is a convenience issue. We tried switching to Stripe for our online orders on my video game company and saw a drop of 15%+ of customers – just use Paypal with care, as all the other posts have advised.

      1. Interesting that you saw a drop when you turned PP off. That was my initial concern (twice) but have seen no drop (twice). I guess it depends on the demographic/market but for us, it seemed people were using their cards through PP (rather than using PP account credit), as turning it off and giving an alternate card processor gave the same option at the end of the day.

        Interestingly though, when we ran Stripe and PP side by side, it was a 60/40 split to Stripe’s favour.

        1. That is good to know – I suspect that you are right about demographics – we found that the drop resulted mainly from people in South America, Asia and Eastern Europe, so that was a significant amount in our case (and I suspect we skewed a little younger being a video game). But you are right – the majority use PayPal via credit cards, not as accounts.

  14. In our main business, we had used PayPal as a funds gateway since 2004. Over that time we transacted ten’s of thousands of dollars – I’d have it as a guess 100k+. In that time we had two instances where the customers used the claims system against us. The first time, we had done everything according to the local fair trading laws, and then some (because we like to keep customers happy) and everything that PP asked. Despite this, PayPal went against all applicable laws and refunded the customer in full, despite the fact that the customer decided to refuse the returned package and we gave PayPal all the evidence – leaving us with a bespoke made product we did not know what to do with.

    The second case, this year, saw the customer either give the incorrect address or not accept the package (or was unable to do so for whatever reason). This time PP did not even ask us for supporting evidence and sided with the customer and pulled the funds from our bank account. When questioned, the response we were given was ‘we need evidence you sent the package (which we provided), so you should take photos of the shipping labels’….!!!

    In both cases PayPal blankly ignored any and all evidence (and in the first case local fair trading laws), sided with the customer and refunded their money. Our history of over a decade of faultless transaction accounted for zip.

    We made the call and dumped PP, permanently (to no ill effect on sales), and run everything through Stripe, which behaves like a payment gateway should. PP is one of the most expensive payment gateways going these days and offers seller nothing as protection.Their claims system works only for the buyer, regardless of the circumstances. If people or clients ask, we say stay away and use something like tripe instead, depending on the platform your site’s running on, using it (or similar) is no more difficult than hooking into PP.

    Happy to use PP as peer to peer but for serious business, never – you’re mad to.

    1. We got dinged with a stolen credit from Israel. I got a charge for 20 dollars from it and I called Paypal to complain since I have 0 control over the situation they agreed to to absorb the charge (which was actually 120 according to them). Their service is handling the credit card I don’t understand what why I was responsible.

      I am pretty sure the investigation that lead to my account getting frozen was due to 1 or 2 charge backs which we happily authorized. Oh well they ended up eating hundreds in charge backs once the KS started.

  15. Another anecdote about using PayPal: I had all of my PayPal pre-orders on the first printing of Gloomhaven frozen. I managed to barely make ends meet by convincing them to release a small amount of money to start shipping, and then continue to release the money in chunks as I fulfilled specific regions. Now, they would have preferred, of course, that I had just sent them a single shipping spreadsheet at the end as proof when everything was completed, and I don’t know if I just randomly found nice operators that were willing to work with me, but I basically was able to get them to release money as I needed it to ensure that everything got shipped.

    I was told what was happening wasn’t normal, and I would definitely not depend on this strategy going forward, but if you happen to be currently caught in PayPal’s web, maybe you can try this method if you happen to run across a nice operator.

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