PayPal trouble delays project

If you have been following the project on IRC (Freenode #neo900) or on talk.maemo.org, you will already have read that we are having problems with payments made through PayPal.

We have now collected some more information, and we would like to give you a comprehensive update on the situation, and how it affects progress of the project.

What happened

PayPal established a "reserve" on the account of Neo900 UG, preventing the project from using the balance of currently EUR 37'934, which at the time of writing represents more than two thirds of the liquid assets of the project.

While communication with PayPal has been polite, we were given the impression that our funds would be liberated within a reasonable amount of time, and we provided PayPal with the information they requested at various points in the dialog, PayPal have not removed the blockage and have not even clearly indicated as to when they would be willing to do so.

Timeline

In June, PayPal surprisingly blocked withdrawals from the account of Neo900 UG. The explanation we received was that PayPal needed Neo900 UG to provide various pieces of information regarding its business, and that the block would be lifted once we provided this information. Incoming payments were still possible.

Since some banks occasionally block accounts while waiting for routine paperwork, we were not overly alarmed at that time.

Towards the end of July, PayPal also blocked incoming payments. Given that we were at the time busy preparing for and then attending CCCamp2015, it took a few weeks before we could provide all the requested material, which we did at the end of August.

A few days later, PayPal allowed incoming payments again, but also informed us that they would establish a "rolling reserve" on the account, with details to follow in the following days.

We interpreted this to mean that incoming payments would be held for some days or weeks, to ensure their validity. This still sounded somewhat reasonable.

The next shoe dropped in September, when PayPal revealed the conditions of this reserve:

almost all of the existing balance in the account would be held for the reserve.

a percentage of all incoming payments would be held to further grow the reserve, until reaching a total amount of USD 200'000. (We had about EUR 40'000 in the account at that time, to spend mainly on advance purchases but also on on-going development.)

PayPal elected to set the percentage to withhold to 100%.

the conditions for releasing the reserve were not clearly spelled out, but there was an implied suggestion that funds entering the reserve might be released after remaining there for 180 days.

Considering that the project operates with minimum margins, just having most of its assets frozen for an unknown amount of time would be disastrous.

PayPal wrote that such a reserve was normal for "card sales", suggesting some confusion on their end.

We were hopeful that these aggressive conditions were merely the result of a misunderstanding, and PayPal themselves suggested that the reserve could be lifted or at least improved once additional formalities are completed.

We continued to accept payments through PayPal during all this, expecting PayPal to act in good faith and to see a speedy resolution as something in their own interest. However, after several exchanges with PayPal failed to produce results, we decided to prevent further damage and removed payments through PayPal from our shop.

Payments made by wire transfer to the Neo900 UG bank account are not affected by all this.

Why are they doing this to us?

When blocking the account, PayPal indicated that they only needed additional information about the account owner (Neo900 UG) and that the blockade would be removed once the information was provided.

PayPal indeed did as promised, but replaced the blockade with the reserve. Once again, the message was that more information (the company's registration number) was needed to loosen the reserve. That loosening never happen, despite providing the information.

PayPal also suggested that our supporters may not be sufficiently aware of the crowdfunding nature of the project and the associated risks, which in turn would increase the risk of unhappy customers wanting their money back.

In further communication, there have been hints that the reserve may be loosened after a while, or that part of the funds could be released if we can present paid (!) invoices for project expenses, but we basically got the impression that PayPal are stalling, and are not interested in releasing the funds the project needs to proceed.

One may now think that PayPal are simply malicious. Some people who had experienced similar issues seem to have reached this conclusion. However, we eventually found (thanks to "ravelo" who pointed us to it) a much more plausible explanation: PayPal may simply be responding to the chargeback risk that comes with accepting credit cards. Unfortunately, PayPal choose to do this in a way that is extremely intransparent and harmful.

Why did we use PayPal at all?

Neo900 UG initially only accepted payments through wire transfer. However, after many supporters asked for a means to pay by credit card, due to wire transfers being difficult and expensive for them, we looked for a way to accommodate these wishes.

Directly accepting credit card payments is known to be difficult, especially for a small start-up like Neo900 UG, but PayPal quickly emerged as a supposedly friendly option.

While there had been reports in the past about similar incidents, PayPal have not received much bad press in the last years, and we felt that these issues must have been resolved since. What we did not understand at the time is that using PayPal would not solve the underlying problem inherent with accepting credit cards, and in fact make it worse.

PayPal proved to be very popular. For example, the project received in September almost 60% of the payments through PayPal.

Consequences

PayPal's aggressive blockade of most of the assets of Neo900 UG has the following consequences for the project:

to avoid throwing good money after bad, we no longer accept payments through PayPal in the shop. We continue to accept payments through wire transfer (SWIFT, SEPA).

If international wire transfers are expensive or difficult in your country, you may want to consider to use TransferWise, which may offer better conditions.

If international wire transfers are expensive or difficult in your country, you may want to consider to use TransferWise, which may offer better conditions. in order to avoid misunderstandings of the kind PayPal allege, we have also posted a summary of how this project is financed and we have made small changes to the terminology used to describe our project on neo900.org and in the shop.

since most of the liquid assets of Neo900 UG are blocked, we had to halt all advance purchases.

we had to suspend all technical work for the time being, to focus the remaining resources exclusively on restoring the financial viability of the project.

Communication with PayPal

Several supporters of our project have contacted PayPal to inquire about the status of their payment and to ask that it be passed to Neo900 UG.

The most common responses were:

PayPal assured all our customers that their payment went through and that it has been credited to the account of Neo900 UG.

While this is technically correct and we can see incoming payments in the list of transactions and the account balance, it is at the same time misleading in the sense that all this ends up being part of the reserve and we cannot withdraw and use it.

While this is technically correct and we can see incoming payments in the list of transactions and the account balance, it is at the same time misleading in the sense that all this ends up being part of the reserve and we cannot withdraw and use it. PayPal refuse to provide customers with any details about the state of payments that have been credited to the account of Neo900 UG, claiming privacy policies prevented them.

We therefore think it unlikely that payments that ended up in the reserve can be liberated through a dialog between our supporters and PayPal.

However, we believe that PayPal may change their risk assessment if enough customers assure them that they want payments to be liberated to Neo900 UG and that, if PayPal complies with this request, they will consider the transaction as successful and fully concluded, even if the project should fail to deliver or run into any other problems.

We believe that such statements from customers would give PayPal the assurance that, if chargebacks should occur regardless, they could counter and successfully challenge them.

How to fix it

We contracted a lawyer and had her send a letter demanding that PayPal release the funds. PayPal responded one month later basically reiterating their position and stating that the hostile blockade should not have surprised us, for their terms and conditions grant them sweeping liberties.

Furthermore, since PayPal so far has not provided clear indications of which payments are affected by the "freeze", and we cannot deduce this from the information available to us, we have asked PayPal to provide us with a list of the transactions affected. We are awaiting a response to this request.

To strengthen our case and to ease PayPal's worries, we would like to ask you, if you have made a payment to Neo900 UG since April 2015, to consider contacting PayPal on your own, assert that you understand the crowdfunding nature of this project, and request that your payment (which may or may not be affected by the freeze) be released.

For your convenience, we have prepared the following template:

Dear PayPal, regarding my transaction, ID <transaction>, the seller Neo900 UG (haftungsbeschraenkt), informed me that PayPal has frozen the funds in a "Reserve". To my knowledge, this is due to a misunderstanding whether this transaction constitutes a pre-sale or a crowdfunding payment. I hereby want to make clear that it is a payment for crowdfunding, and I fully understand the risks associated with that. So I would like to request PayPal to release 100% of the funds to the seller, upon which I would consider the transaction as successful and fully concluded. Thank you for your attention to this matter. I hope Neo900 UG will swiftly gain access to the funds to complete the project. Kind regards, <name>

In the above template, please fill in the following fields:

<transaction>: the ID of your PayPal transaction (e.g., 3UF390823E5159484)

<name>: your name

We are very sorry about this complication that delays project progress and unnecessarily molests our customers. We hope you nevertheless keep up with your incredible support and enthusiasm.

Thank you for your help!

– The Neo900 team

PayPal resumes: Neo900 sources again »

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The Neo900 project aims to provide a successor of N900 Nokia Internet Tablet™ device, with faster CPU, more RAM and LTE modem, basing efforts on an already existing, mature and stable free platform - the OpenPhoenux GTA04, following the spirit of freedom known from Openmoko devices.