Crowdfunding and Payments
16 September 2013
I came across an interesting story
last week about a conflict between PayPal and an augmented reality glasses startup that’s raising money on crowdfunding site Indiegogo. The story highlighted the risks and challenges that payments companies face when dealing with areas where regulation is struggling to keep up with the pace of innovation; a topic we discussed in our report earlier this year, Managing Digital Payments Risks: A Regulatory Perspective
. Crowdfunding, basically an investment activity, is growing and increasingly popular, yet remains largely unregulated. To complicate matters further, it’s inherently cross-border, which means either coordination of regulatory efforts across countries or the need to operate across many different frameworks. Of course, there are many different risks in crowdfunding. In addition to risks related to individual projects (“what if the company dissappeared with the funds?”), you also have platform risks, such as, (“what if the crowdfunding platform funds «strange» projects?”) Crowdfunding also demands some unique functionality from payment processors – for example, many platforms require projects to achieve their funding requirements completely; if the project doesn’t raise all the funds it asked for, all the pledges made have to be refunded. All these things make it difficult for payment processors to support crowdfunding platforms. While no one likes their funds frozen, it is understandable that payment providers can be cautious as they thread these uncharted waters. PayPal says it's in the "midst of overhauling our policies in this space
." Some processors prefer to stay away from crowdfunding altogether; at least PayPal is prepared to "roll up the sleeves" and take on the challenges.