PayPal to Drop Purchase Protection for Crowdfunding Projects

PayPal to Drop Purchase Protection for Crowdfunding Projects
Image credit: Jeff Chiu — AP

Grow Your Business, Not Your Inbox

Stay informed and join our daily newsletter now!
2 min read
This story originally appeared on Fortune Magazine

Effective June 25, PayPal will drop Purchase Protection coverage for backers of crowdfunded projects, the Verge reports. The move comes as awareness of the risks of crowdfunding grows, but while less protection may sound like a bad thing for platforms like Kickstarter, the change may actually help prevent a repeat of some recent frustrating episodes.

Last year, Kickstarter funded a University of Pennsylvania study that found 9 percent of projects on the platform failed to deliver rewards. They also commissioned reporter Mark Harris to do a deep dive into one of the most high-profile failed projects, the Zano drone. More recently, the Coolest Cooler project ran out of cash before delivering its product to all backers.

But while failed projects frustrate everyone, the Zano case shows how PayPal’s Purchase Protection actually added to the heartache. As Harris reported, Torquing Group, the creator of the Zano, did ship a few hundred of the drones before entering liquidation in failure. But they went to backers who pledged directly through Torquing’s website using PayPal, not to Kickstarter backers.

The reason was PayPal’s policy of holding pre-order payments until a product is delivered, to back up its Purchase Protection service. That means that projects offering add-ons or preorders outside of Kickstarter found themselves financially pressured to send products to those customers first.

That understandably enraged many who pledged through Kickstarter -- which, importantly, does not allow PayPal payments, and expects backers to shoulder all the risk for failed projects.

PayPal’s new policy might help avoid similar foulups in the future, by releasing funds to projects more quickly, and making it easier for projects to serve early Kickstarter backers first. If that leads to higher overall satisfaction for Kickstarter funders, it would be a boon to the crowdfunding model at a moment when it’s starting to show cracks.

More from Entrepreneur
Our Franchise Advisors will guide you through the entire franchising process, for FREE!
  1. Book a one-on-one session with a Franchise Advisor
  2. Take a survey about your needs & goals
  3. Find your ideal franchise
  4. Learn about that franchise
  5. Meet the franchisor
  6. Receive the best business resources
Entrepreneur Insider members enjoy exclusive access to business resources for just $5/mo:
  • Premium articles, videos, and webinars
  • An ad-free experience
  • A weekly newsletter
  • A 1-year Entrepreneur magazine subscription delivered directly to you
Make sure you’re covered for physical injuries or property damage that occur at work by
  • Providing us with basic information about your business
  • Verifying details about your business with one of our specialists
  • Speaking with an agent who is specifically suited to insure your business

Latest on Entrepreneur