Yesterday, we ran a story about how global payment processing company Paypal froze $45,000 of funds pledged to Mailpile, a company attempting to build a more secure, self-hosted set of e-mail tools. The article generated no small amount of vitriol against Paypal, not the least of which came from the fact that this wasn't the first time the company had stepped in and frozen the funds belonging to a legitimate crowdfunding campaign.

Several hours after the story went live, Paypal released the funds pledged to Mailpile with an accompanying statement saying in part that they "never want to get in the way of innovation, but as a global payments company we must ensure the payments flowing through our system around the world are in compliance with laws and regulations. We understand that the way in which we are complying to these rules can be frustrating in some cases, and we've made significant changes in North America to adapt to the unique needs of crowd funding campaigns."

Paypal offered to talk with Ars about their response to the Mailpile incident, and so yesterday afternoon I found myself on the phone with Anuj Nayar, Paypal's Senior Director of Global Initiatives. Nayar was quick to point out that Paypal is aware of the problems and is working to change them. A common refrain after each question was that Paypal wants to stay out of the way and not insert itself as a roadblock in the crowdfunding process.

With that in mind, then, how can folks avoid falling into the same frozen funds situation as Mailpile?

Promises, promises

It's a simple question, but the answer took quite some time to get to. Nayar started off by emphasizing that Paypal is currently undergoing sweeping changes at the behest of their new president, David Marcus. Nayar referred repeatedly to a recent blog post by Marcus, wherein Marcus acknowledges that Paypal has problems with perception and with adequate responses to customers' problems. The blog post came up several times during the call; Nayar wanted to emphasize firmly that Paypal is aware, at every level including the executive, that they have missed the mark and that they are changing.

That's certainly good, but it doesn't seem like the directive from Marcus' level had fully flowed down to the customer service level when the incident in question occurred; Marcus made his post on August 28, and Mailpile's funds were frozen on August 31. "I totally understand how frustrating and difficult it is when this happens," Nayar said. "One incorrect call on this is one too many, and that's very much the message we want to be pushing forward. The idea of crowdfunding is relatively new, and...Paypal has to manage the risk model and also the regulatory and compliance issues in every market in which we operate," Nayar explained. Paypal's "customer" in the broadest sense here is Indiegogo, but Paypal must also manage regulatory and compliance issues for Indiegogo's customers, and according to Nayar, "that is sometimes where issues come in."

Nayar was unable to go deeper into those specific issues, nor was he able to discuss exactly what about the Mailpile campaign twigged Paypal's problem detectors, due to Paypal's privacy rules. But that still left the question unanswered: what can folks do to avoid their crowdfunding money being frozen by Paypal?

"We're working very diligently with some of these crowdfunding organizers to work out the system," he clarified. "Right now, I'd love to be able to say that tomorrow we're going to be issuing new guidelines, but it's more complicated than that—it really is dependent on where people are located. We have to remain in compliance around the rules depending on which market both the crowdfunding organizer is, and also their customers. If it was an easy problem," he finished, "we would have fixed it already!"

You want what now?

According to Mailpile, Paypal had asked for "an itemized budget" and their "developmental goal dates" in order to release the funds; I asked Nayar if that was the SOP response and what redress a customer has in Mailpile's situation.

"I would love to have a straightfoward discussion about this, but I cannot talk about any one specific case due to our privacy rules...but I can talk about this in general. The very essence of what Paypal is about is connecting buyers and sellers," he explained. "Paypal as a business does not want to get into the way. We are not in the business of evaluating business plans—that's not what's going to be happening at all. We are working with the crowdfunding sites to work out the best approach to ensure that fewer dolphins get caught in the net, but we still catch all the sharks."

He elaborated on this metaphor by noting that generally among the first group of people to try out any new development in the online payments world are folks attempting to game the system. "It is so sad to us," he said by way of example, "that there are a bunch of fake sites that come up encouraging folks to send money, and they're just not real."

Nayar also emphasized that Paypal is successful far more often than not in singling out fraudsters or folks attempting to scam money from consumers; the times they aren't successful, though, tend to draw widespread media attention (like the firestorm generated when Paypal froze SomethingAwful's Katrina donation).

"The problem with crowdfunding is that sometimes it hits triggers," Nayar said, "where we haven't worked out what the triggers for good or bad are. And we are dedicated to making this right." The problem, Nayar noted, was that when money flows in a global fashion—like in the Mailpile campaign, with world-wide donors sending money to an Icelandic company—the amount of regulatory compliance attached to those transactions quickly spikes to extreme levels. "We have to stay in compliance with all that stuff—it's the key to keeping the Paypal ecosystem safe, but we don't always just catch the people who are doing wrong. We're dedicated to getting that down to zero errors."

Good words, and definitely in line with the president's message, but those words don't really provide redress. Mailpile ended up coming out on top because their story was picked up by a number of media outlets, including Ars; if not for that kind of attention, would they still have to submit their business plan or forfeit their donations? Who, really, should they call? Paypal?

"If they don't get validation from calling the [crowdfunding] provider, it should absolutely be us," Nayar responded. "I know in this particular case that Mailpile did not get satisfaction from that. I understand that....there is a continuing education process going on across the company for the 7,000 people we have working on the phone around the world. We are educating them to know how to deal with these kinds of things effectively. That is something we are absolutely, 100 percent dedicated to getting fixed."

Again, good words, but still not quite cutting to the heart of the matter. Was Paypal's response to Mailpile an accurate reflection of Paypal policy? And if you don't happen to have your story written up in the news, what's a legitimate, non-fraud customer supposed to do?

The heart of the matter

Nayar didn't have a ready answer that could be easily communicated, so I shortened the question: does he consider Paypal's response to Mailpile's situation—the request to provide a business plan—a valid and proper response that reflects Paypal policies? Nayar took a moment to frame the answer in such a way that didn't get into the details of this specific case and explained again that when dealing with complex and shifting international financial regulations, sometimes false positives creep through. "It's not an ideal answer, I very much understand that," Nayar finished.

We'd been talking for quite some time, and I wanted to at least close the conversation with the understanding that Paypal's actions with Mailpile were not the best way to have handled things. "So, the response to this particular incident," I said, "is not what you guys would consider exemplary, and this is not how Paypal wants to treat crowdfunding going forward—asking for business plans or detailed budgets is not the optimal way to redress a situation like that, and you guys realize that. Do you think that's a fair assessment?" I asked Nayar.

"That is a very fair assessment," he replied, adding that he wanted to re-emphasize that there is awareness at the top of Paypal that changes need to be made and that those changes are being pushed with alacrity. "We know we are not there yet, but we are absolutely committed to getting it fixed," he said as we ended the call.

Update: This morning, the Mailpile team posted an update noting that since unfreezing the donations, Paypal has donated $1000 to the Mailpile Indiegogo campaign.