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Comment by freejack | Hacker News Reader

Whoa there. Paypal loses nothing to fraud. Just like all the other middlemen, Visa, MC, etc., they shift their losses onto the merchants.

The way this works out is that Mailpile files an answer to Paypal's RFI, Paypal reviews it and says something like "There's a 90 day hold on funds deposited to your account until you can demonstrate that you aren't high risk", Mailpile complies and everyone walks away happy.

(Background: I'm a Paypal merchant and we're processing close to $30m/year through them. Over the years I've paid Paypal hundreds of thousands, if not millions of dollars, in chargeback fees, fraud fees, Visa fines, etc.)

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I think we're in substantial agreement as to Paypal desiring to shift losses due to fraud or non-performance onto the merchants. Since they desire to do this, they will not accede to Mailpile's desired world, where Mailpile gets 100% of the money on day 1 and then Paypal can seek recovery on day 120 or 365 if a chargeback comes in. Many HNers wish we lived in Mailpile's desired world 100% of the time regardless of merchant risk profile, but we don't, which was the general thrust of my comment.

In terms of predicting Paypal's disposition on this particular case, I think it's a little trickier than a 90 day rolling reserve, because the product doesn't exist and shipping is binary rather than mapping to the rolling window of binary events like a physical goods business. If they were selling trendy iPhone cases and had bitten off more orders than they could presently chew, then an X% rolling reserve for Y days would likely be sufficient to insulate against the risk of some orders not shipping. Software businesses can fail on day 91 in an explosive a fashion as they can on day 1, and it appears from the report of Paypal's communication that Paypal is aware of this and is disinclined to do a fractional rolling reserve absent shipping. One would assume that if they ship this business goes to fairly low-risk instantaneously [+] and a reserve is probably unnecessary at that point.

Ultimately that's up to Paypal rather than either of our guesses.

[+ Well, it would be low-risk with respect to new orders instantaneously after shipping. It might not be low-risk with respect to pre-orders for a while yet, as customers could suffer from buyer's remorse, be dissatisfied with the product as shipped, not remember the transaction, or engage in friendly fraud, at rates substantially higher than transactions with lower delay between purchase and delivery.]

yeah, I totally agree. My only nit was your claim that Paypal bears risk. Its true that their model comes with risk and they've built their business model in a way that they shift it to third parties as extensively and quickly as possible. Its a sore point with me in how Paypa, Visa, etc. operate. The merchant is rarely right.

They bear risk if the merchant has just registered a new account, and that's the only PayPal transaction for the foreseeable future. How should they go recovering the chargebacks if your company has already filed bankruptcy?

If you transact $30M/yr, it's a totally different situation. When PayPal shifts the chargebacks/fines on you, they KNOW that at any given time you will be processing enough money through them that they can seize part of it in case you are not paying the fines.

I have been gob-smacked by how, as a buyer, Ebay[1] took my side so readily in a dispute. It seemed they were ready to believe anything I said. I would hate to be on the other side of that.

[1] I know Ebay isn't exactly the same as PayPal, but one owns the other.

And due to such policies they now have a ton of fraudulent buyers.

I think you misread what patio11 wrote. As he correctly points out, "Paypal eats 100% of the risk if the merchant doesn't [stay in business]"

New companies fail before getting a product out the door all the time. It's a very real risk.

Nope, Paypal only eats the risk if they release funds. They rarely release funds on high risk accounts, at least not without retaining a rolling deposit.

That's what we like to call "the point"

And that's... exactly what's going on here, and what everyone is bitching so loudly about.

I'm not saying "don't bitch about paypal", I'm saying "paypal doesn't carry a lot of risk in the first place".

> I'm saying "paypal doesn't carry a lot of risk in the first place".

They do in the first place, which is why as an immediate second step, they protect themselves against that risk by keeping money in an escrow.

Am I missing something here? Things like IndieGoGo and KickStarter are inherently risky, but not for the payment processor, for the one doing the backing. If you back a project and it goes belly up or for whatever reason fails to deliver or under-delivers that is not "failure to provide service", that was the risk you took when you decided to back them. That money is gone, the horse has left the barn, you have no right to request a chargeback in that case. That's part of the reason why trying to weed out fraudulent campaigns is such an important thing for both IndieGoGo and Kickstarter, once the money has been paid out, unless you can pretty concretely show that the campaign was a deliberate fraud, you're out that money.

Unless your CC was stolen and used to back something without your knowledge I see no reason at all why a chargeback against a campaign should ever be granted (or maybe if the campaign is proven to be a fraud, but in that case I'd expect IndieGoGo or Kickstarter to eat that cost).

That's an interesting position, but do any credit card companies agree with it?

I don't know. I honestly don't really know how the chargeback system functions. I mean, what's to stop me from ordering for instance some hugely expensive item from say Amazon, waiting for it to show up, and then filing a chargeback on it? Does it make a difference if I go through say Paypal to do it? Is there anything stopping anyone from filing a fraudulent chargeback (which is essentially what a chargeback against a Kickstarter or IndieGoGo campaign would be)?

My experience has been that credit card companies act as an arbiter. They give the merchant an opportunity to respond to a chargeback... but they also charge you a fee just for handling it (or maybe the fee comes from the processor... I'm not sure). Too many chargebacks can also put you in a higher risk category which means higher fees for everything.

If you challenge a refund request, PayPal will ask you for additional information and then (at their discretion) fight the chargeback with the credit card company on your behalf. In my experience, this process is huge pain, but it usually works out OK.

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