Pre-orders are scams according to Paypal
xenonauts.com
xenonauts.com
However, it's important to note that they hold the risk on these transactions. If the business goes under before pre-orders can be fulfilled, and the business doesn't have the funds to take care of all the chargebacks this event will cause, guess who pays out? PayPal. This scenario is the exception to be sure, but it happens with enough frequency that PayPal must implement some form of risk mitigation.
There could be other factors in play here, as well. Does the business have a poor history with other processors? Do the founders have poor credit? Maybe not, but maybe so. It's difficult to arrive at a concrete conclusion from this post. That being said, it's a possibility that PayPal has not assessed risk appropriately in this case. We simply can't tell.
Where PayPal could make situations like this better is by providing clear expectations up front as to how they assess risk, and what not to do with your account ahead of time. They could provide reasonable support to work with the merchant and get additional metrics / a better feel for the account. They could provide the above context to merchants when this happens. The best merchant account providers do this. PayPal fails spectacularly at the above, which is enough for businesses to strongly consider alternatives.
And yet, companies still use them.
I can understand customers using them... The customer almost never gets screwed, that I've seen... But anyone with a balance is taking a risk that it'll be seized. And if they feel like it, you won't get the money back.
Google and Amazon now both offer excellent payment systems and I've never heard these horror stories about them. So why don't people switch?
* >1% monthly volume chargeback rate
* >1% monthly volume refund rate
* too many payment disputes
* violating the terms of service (including what types of products may not be sold through PayPal)
* selling products or services with known high chargeback rates
* a sudden increase in processing volume
* a sale an order of magnitude larger than your average ticket
* accepting payment too far in advance of shipping a product or providing a service
I'm sure there's also some program in there looking at interactions between accounts to find strange patterns, but that's not usually what trips people up unless they're actually laundering money or factoring. It's always the obvious stuff.
I'll give the same answer I give whenever this question comes up - I stick with PayPal because of the instant access to the money from transactions via the PayPal debit card. Since I sell physical products, this gives me a lot of flexibility in terms re-ordering inventory, moreso than the "deposit to your account once per week/in a couple of business days" policies of other options.
That said, I'm no fool; I sweep my money out of PayPal ASAP and I have an Amazon Payments account ready to go in the event PayPal screws with my account, but as long as things are working with PayPal, I'm going to stay with PayPal (until something better comes along).
Like http://www.swipe.com ?
Do they offer instant access to transactional cash?
Also this look s like programmer-type offering (I'm not a programmer). Do they offer a bit of HTML I can drop into my website to process the transaction?
Heh, yep. Total brain fart.
I'm not sure about the HTML stuff, but I thought that they do have a js drop-in that should require minimal coding.
Don't quote me on that, but at the very least, it's not as nasty as Paypal seems to be.
For consumers PayPal has a easy verification process and from that point on it works everywhere instantly. I also see a lot of advertising from PayPal, so the regular people trust them i think. They know what they are doing, they put more effort behind it than other ones.
Google has a marketing budget for Chrome and look how well it does. I never heard from Amazon payments, so the same situation here. They both could do more if they want to be a real competitor.
It seems to me that they're incredibly consistent and care about their customers exactly as much as any other merchant account provider. This exact story with a game developer taking preorders then having PayPal problems has played out a half dozen times on Hacker News alone; in reality it happens regularly. It would happen if these developers applied for a merchant account and said they were taking long-term preorders on the application too.
The only problem with PayPal is that merchants don't expect PayPal to act like every other processor, and have no experience dealing with the risk/underwriting departments of banks to realize that what they're doing would be a problem anywhere.
As far as why businesses still use PayPal? Nobody else operates in as many countries. Nobody else has over 200 million members already signed up and trusting the payment process. Few MOTO merchant accounts actually beat the fees PayPal charges, especially once you have >$10,000/mo in volume, when you actually add up all the transaction fees. And few gateways are as easy to implement or built into as many other ecommerce products.
It makes no sense from a business standpoint not to use PayPal (which in 2011 does not mean sending someone to paypal.com to pay if they want to pay on site). They're cheaperc, more reliable, allow you to accept all major credit and debit cards, bank transfers, eChecks, payments from 200+ million members' balances, and pay you your funds immediately. If you're that worried about having a problem, have a backup in place to switch to and don't hold a PayPal balance -- risk free.
You would think the HN community would look at PayPal and see a success story to be shared and celebrated. They were the only significant 3rd party payment processor to make it through the dot com bubble. There have been many attempts. They all went out of business due to fraud. PayPal was bleeding over $10 million a month to chargebacks and fraud at one point. They created the software and systems to make a global 3rd party payment platform possible and survived. Now they make possible an enormous amount of ecommerce for tens of millions of people that would not be able to accept payments any other way.
Instead we see the occasional "horror story" that would likely happen whether the developer was using PayPal or anyone else, and a PayPal Sucks website that's accumulated barely 2000 threads in over a decade (what fraction of a fraction of a percent of PayPal users is that?), and certain vocal people pile on the "why would anyone ever use PayPal" bandwagon...
Paypal isn't perfect, but the biggest reason why so many people are upset with it is because there isn't a suitable substitute.
Not so. We were processing millions of transactions for virtual goods (streaming ppv) before, during, and after the bubble, and balanced among multiple processors to handle the spikes. We didn't have to change any out, and were using several of the largest.
Granted, some of the best, like Payflow, got gobbled by Verisign then Paypal, but the APIs generally stayed the same, and are still worth using today.
But today you also have cheaper options by going up the food chain, like direct to FDMS.
Some people think they can collect hundreds of thounsands of euros by just providing an email and a name to Paypal. Then they wonder when their funds get freezed (see minecraft) and then thy complain that they have to provide ID to get their funds released.
Every time I log in to google.com/checkout, I have to go click a stupid little logo in the upper right that's not labelled as anything except a gear, then choose 'my sales' to see my sales. It always treats me as a consumer first, and merchant second.
Secondly, even though I've told google checkout explicitly that I sell digital goods, it constantly shows "not yet shipped" on every single one of my orders. I'm explicitly setting "digital-content" flags on the request, but it's seemingly ignored.
Thirdly, Google Checkout routinely - as in >50% of the time in my experience - holds payments for 15 minutes for 'fraud check'. In my case, I'm delivering digital goods, but I'm not going to tell people to wait for 15 minutes, so I have to trust that the request will go through. I get a few problems per month with that, but there's no setting in google checkout to say "please don't take 15 minutes to process payments".
For people doing physical goods sales, it's probably OK. It's far from perfect for digital sales.
3 processors told me they couldn't work with me at all. A couple said I'd need to go to underwriting, and I'd pay a higher fee.
I asked why, and was told "possibility for chargebacks is high". I then said something like "why can a company like Expedia charge me for a ticket 11 months in advance for $2000, but you won't let me sell a ticket to a conference 3 months in advance?". "Companies like Expedia have millions in reserve to cover chargebacks" was the answer I got.
I could have received a merchant account through any of those companies by lying about the nature of what I was selling, but had they found out, my account may have been suspended or I may have had a certain amount subject to reserve holding.
I don't see the behaviour of paypal as all that different to most other processors, except that most people don't tell paypal ahead of time what they'll be selling.
I have a merchant account through BoA - got to meet with a real person who answered questions, asked me some, pushed things through underwriting, and it all went OK, but I still run nearly everything through paypal and google checkout right now still - both paypal and google checkout have pretty strong name recognition and people are generally comfortable with them so far.
We were able to get our product off the ground right away with Stripe (we were in their beta before they opened up to all). It's extremely quick to implement, their APIs are well-documented, and I doubt they'd prove bothersome like PayPal is being here. In my experiences, their support actually responds quickly and goes above and beyond to help.
If someone from Xenonauts is reading this: let me know if you need any help implementing Stripe if you decide to go that route. You can tweet me at @michaelschade or drop me a note at hn [-at: @-] mschade [-dot: .-] me and I'll provide whatever advice I can. I'll also see about sending this suggestion through their site in case they're not HN readers.
Edit: found their email and sent through there too. Hopefully they can get the issue resolved–I feel bad for them not being able to accept orders right now, that must be a really upsetting position to be in.
Any ideas?
Edit: You can asked to be notified when your specific country is available: https://stripe.com/global
Charging someone before you have actually "delivered" the good is a completely different level of risk than charging someone for something you've already delivered. The supplier might not ship, the manufacturer might not ship, or you could be outright scamming people.
This is not a defense of PayPal, but just explaining why money processors do not typically allow you to get your money for pre-orders. There's a huge risk that it blows up in their faces.
If not, it seems like you could go even further and bundle something small but tangible with each sale. For a game pre-order, maybe access to a demo or access to private forums?
I would think that you could negotiate this with a merchant bank. For instance service companies often take deposits and kickstarter clearly charges before shipment. But in both cases they probably have agreement from their processor for their business model. I think having to post reserves is one such model for when you are doing riskier transactions.
But don't think that merchant bank won't cut you off if you violate the terms of your agreement.
However in practice merchant banks seem very lax compared to PayPal.
There are plenty of horror stories around pre-orders on PayPal. I'm not sure how Stripe handles this specifically, but they may be a good alternative: https://stripe.com/ (we use and love them).
There are actually good reasons why merchant accounts work the way that they do, and Stripe doesn't provide any argument for why they don't: until they do, I can't imagine trusting them for anything important at my business.
I mean, they are almost sketchy when it comes to talking about "when bad things happen"; example: when chargebacks happen (and they do happen: I get one every couple days), can I easily (as in: no human interaction) tie it to an individual payment? The only mentions on their entire website about chargebacks are in the painfully informal FAQ/pricing (that it costs $15), and in their terms of service (which indicates that the $15 doesn't include mediation, which I'm pretty certain PayPal's $20 does).
The first thing I think, of course, is "they charge more, duh": if you do any kind of volume at all, or are involved in small transactions, they are a /lot/ more expensive than PayPal: I'd easily be paying them hundreds of thousands of dollars a year for the privilege of not spending a few hours on the phone negotiating a merchant account.
(For those not looking at their pricing, their fixed fee is PayPal's worst case fee; PayPal discounts 1-2% from that for volume, and supports a fundamentally better fee schedule for payments under $12: 5.0%+$0.05 vs. 2.9%+$0.30. Unless you are handling small numbers of transactions all over $12, Stripe is going to burn you on fees.)
However, when I think through "where does the risk of credit fraud mostly occur", I'd imagine it would be reasonable sized transactions (trying to launder tons of money $1 at a time will get noticed pretty quickly), and I'd imagine the merchant fraud is mostly small volume (as if you actually have a functional business, you are able to easily able to cover the risks).
So yeah: I just don't get it... is the Stripe 7 day hold enough? (PayPal doesn't have any hold for most businesses.) I certainly wouldn't touch it over PayPal if the only reason is "PayPal seems overly cautious": Stripe simply seems to be "asking for it".
(And this is just looking at normal chargebacks: pre-orders are a whole different ballgame, and if Stripe doesn't have a policy forbidding them then they will probably be out of business, seemingly out of nowhere, in a few months.)
Said sketchiness ensued when I presented Stripe with a simple chargeback scenario, one which could result in disaster for a small startup.
About how they handle chargebacks, I honestly can't comment on that part since I haven't had to deal with that. However, re: mediation, based solely on my past experiences with their excellent support team, I do believe they have the developers' interests at heart too and would work with that accordingly. Again, I haven't dealt with it personally though, so I can't guarantee that and comment reliably on how they truly would act in such a situation.
Edit: their TOS does mention that they may help you with mediation, but also reserve the right to charge a fee for it.
First off, we have more detail about the chargeback procedure at https://stripe.com/help/chargebacks. (The short answer to your question about whether or not you can tie a chargeback to an individual charge without human interaction is "yes".) We don't currently link to this page in the FAQ, but we should; we'll get that fixed.
To your more general question as to how we (and our fraud policies) differ from standard merchant accounts: there's no simple answer. There are a couple of things probably worth pointing out, though:
- First off, we should acknowledge that in this particular situation, it's extremely unlikely that Xenonauts is a scam. There are certainly valid questions around "how tractable is it to distinguish such non-scams from actual scams", but the fact remains: in this specific case, what has happened is a bad outcome for the world. Legitimate, trustworthy individuals are being prevented from getting paid.
- Secondly, we're not as radically different as you might think. We use many of the same fraud screening measures that traditional merchant account providers do. We work directly with the same banks and processors. We've worked with the same consultants. It's not the case that merchant account providers use a bevy of effective fraud screening measures which we have now discarded. In reality, most of our friction-elimination is in the removal of information requirements with weak fraud signaling value, and the fixing of senselessly inefficient processes. (You don't fax forms to Stripe.) There is not much fraud screening a traditional merchant account provider does that we can't do. (And there's certainly plenty that we do that they don't do.)
- While PayPal is definitely sometimes cheaper, this is the case more rarely than you might think. PayPal has a lot of fine print that has a bearing on the overall cost.
We're acutely aware of the challenges of online payment processing. Stripe has actually been handling production transactions for over 18 months. Peter and Elon, two of PayPal's founders, are investors. (Trust me; they remain viscerally aware of just how bad it can get.)
None of this is -- or can be -- a proof of how Stripe is invulnerable to fraud. And, of course, we're not. But I can assure you that we get it. We're not oblivious to the challenges, the mechanisms used by others, and their successes and failings.
Happy to discuss more over email: I'm patrick@stripe.com.
Really, though: why is there no mention at all of chargebacks on the API definition page? PayPal's APIs in this regard are not perfect (I've actually filed some bugs against a few of the more horrendous corner cases recently), but at least they document how chargebacks work, providing an API-driven, machine-automatable process for the entire dispute, reversal, and chargeback set of features.
2) Correct, Xenonauts is not a "scam", it is simply a "bad investment": I used to be in the game development business (http://www.cocommand.com/), and most of these projects don't ever actually happen; of those that do, most do not succeed.
To be clear, my wording surrounding "scam" was not about this situation in particular: it is that allowing pre-orders like this is asking for a giant scam to be perpetrated, as described by some of the other posters here on HN; you just accept a ton of payments, "spend" it all, and walk away: you don't have the money anymore, so it will be very difficult for PayPal to get it back. That said, even without "scams", this is still a serious "risk".
Remember, this game is not done: the website claims that they are raising money for the development. In essence, they are using pre-orders like Kickstarter. Even worse, their backup plan if they fail is that the money will be refundable if they haven't finished by 2012, despite being clear that they intend to spend the money before then (and we are not talking chump change: they have done $54k in presales).
If Stripe is willing to accept clients like this, that means that they are willing to foot the risk for these kinds of companies: in essence, you are acting as a financing option, akin to someone getting a credit card and taking out their entire credit line in cash. Even if most projects like this succeed (incredibly unlikely), your 2.9%+$0.30 margin is not high enough to deal with these companies going belly up.
This is why PayPal is actually /correct/ for not allowing these sorts of deals to early stage companies (ones that don't have enough money in the bank, or other assets, to cover any possible risks). I went through their underwriting, and it made me feel happy that they were covering their asses: /I can trust them/.
So, I guess what I'm asking here, is: why is it a good thing for my payment processer to be helping early stage startups do debt-backed financing? You say "trustworthy individuals are being prevented from being paid", but whether they are trustworthy or not is irrelevant to whether they are a "reasonable risk": would a bank finance this? Probably not.
3) I would actually love to know what these fine print situations are (I run tons of money through them, and have for years: as far as I know I understand all of their fees ;P); mind going over a few of them here?
So far there have been no surprises: 1% extra for cross-border transactions, 2% overhead on currency conversions, $20 chargebacks, and 2.9%+$0.30 with a discount on volume (I am down to 2.2%+$0.30 currently). I normally am doing micropayments, at 5.0%+$0.05, which is much lower for the large number of $1 transactions I am involved with.
The one thing I can imagine is (as Stripe doesn't mention it at all), that your international payments (including currency conversion) might have a lower (or even no) overhead, but the majority of those fees are actually paid "on the other end", and the remainder end up being swamped by the discount to 2.2% (and, in my particular case, are orders of magnitude less than the micropayments difference).
On that note, however, if you are doing US transactions, Amazon Flexible Payments is amazing: the fees are, again, worst case, the Stripe fees, but they automatically select the payment bracket that makes the most sense for the transaction at hand; they can scale transactions down to fractions of a cent.
More importantly, with Amazon Flexible Payments, they charge you a different amount of money depending on how the money was transferred: their risk profile is different for credit cards, bank transfers, and account-to-account movement, and they expose this directly to you, decreasing the costs for less risky transactions.
(Of course, unlike PayPal and Stripe, Flexible Payments isn't quite as integrated a solution: they do not support things like card-present transactions, for example, and require all purchases to go through their payment flow.)
That's what they don't like about pre-orders; you are putting off your business risk on them. Credit card companies disallow pre-charging cards when goods have not yet shipped for the exact same reason.
If you have a lot of cash on hand, have great credit, extensive positive history with other processors, etc., it will be easier for you to get going. Rather than being shut down like this author's business though, some merchant account providers may tell you they need to keep a rolling reserve of 5-10% with them for a period of time.
http://www.reddit.com/r/reddit.com/comments/l4q2y/please_hel...
The Paypal related discussion is here: http://news.ycombinator.com/item?id=3087322
It would be superstition if I've done it without seeing the problems other people have. Those two articles, actually describe real experiences. Experience defeats anything else.
I choose to believe those two articles, and not because I read them on here, because they are not the only bad experiences I have heard regarding PayPal. In fact I have never heard a good review of their service.
I allege that what Paypal is doing here (holding funds over 10 days) is illegal.
In order to do what Paypal does in the USA, you need licensure. They point out that they are not a bank. Indeed, they aren't: in many states they are classified as a money transmitter. In 8 states, they have no license to operate.#1
What is this money transmitter stuff? In essence, the law in all the locales I have checked (I have not gone through every one), indicate only a short holding period (5-15 days) and only allow holding of money of a known crime.
So indeed what they do is absolutely fraudulent. In other words, if you have a patent troll corporation with many lawyers, target Paypal for their illegal behavior.
PayPal has disintermediated anti-competitive banking laws, providing millions with low-cost quasi-banking. They should be celebrated, not attacked.
And considering what is taught in business school, is to quantify risk. If you trigger the unknown red flags, which software makers and other starting businesses tend to do, you risk losing access to your money for at least 180 days (up to forever).
How do you quantify that kind of risk?
California, re 1841: http://www.leginfo.ca.gov/cgi-bin/displaycode?section=fin...
And they are not even licensed to _operate_ in my state of Indiana.
IC 28-8-4-20 (a) A person may not engage in the business of money transmission without a license required by this chapter. # hence all Paypal business in Indiana is illegal.