On Wednesday, PayPal announced that it would be working with crowdfunding platforms to stop unnecessary freezes of project funds. The policy change involves identifying crowdfunding campaigns early on and expediting payment to those that have made their obligations to campaign donors transparent.

PayPal doesn't have the greatest track record when it comes to transferring funds to donor-based projects. And problems came to a head in September 2013 when the company froze the assets or limited the accounts of three high-profile fundraisers within the span of two weeks. PayPal's uncooperative responses to the account holders set off a flurry of bad press.

Wild demands

Initially, PayPal froze $45,000 in funds that were raised by indie e-mail client developer Mailpile, citing the potential for fraud. PayPal told Mailpile that those funds would remain frozen “for a full year or until they have a verifiable 1.0 release of their product.” Mailpile's other option was to send PayPal "an itemized budget and your development goal dates" for the project. None of those demands seemed justified to Mailpile's Iceland-based developers.

PayPal did the same thing again to two game development projects within two weeks. Fighting game Yatagarasu Attack on Cataclysm raised $118,243 and Red Thread Games' Dreamfall Chapters: The Longest Journey raised $1.5 million. PayPal told Yatagarasu developers that it would keep up to half of the developers' money frozen until after the game's release—obviously defeating the point of the crowdsourced funding. Red Thread faced similar news.

In all of these instances, PayPal reversed the account limitations within hours or days. But for campaigners, having to harness the outrage of the Internet is a difficult way to get customer service to pay attention to you.

So what's new?

In our interview with PayPal back in September, it was difficult to get a detailed run-down of how exactly the new policies would work. Broadly though, PayPal is promising to work with a number of crowdfunding sites (it named FundRazr specifically) to make sure that people soliciting donations tell their donors that, in case the product isn't delivered after the funds are used, the funds collected are considered investments rather than pre-sales. Ideally, this type of disclaimer would appear on a crowdfunder's project page, and its presence would signal to PayPal not to put any limits on that customer’s account.

PayPal Chief Risk Officer Tomer Barel explained the company’s reasoning in a blog post today:

Many crowdfunding sites allow their campaign owners to pull money out before they have reached the final goal in order to begin creating and funding the concept, a process that often begins even while the crowdfunding process using PayPal is continuing. If it is not made clear that there is no guarantee of product delivery, this can cause regulatory and risk issues (and upset customers) when the final goal isn’t reached.

PayPal, in short, wants to make sure that it isn’t left owing an irate backer a refund if a crowdfunded project fails.

Anuj Nayar, PayPal's senior director of global initiatives, told Ars over the phone today that “as crowdfunding has become a little more mainstream than the core edge cases, a couple of things have very much come to light: the early crowdfunding backers understood that crowdfunding is very different from regular e-commerce, it's very much an investment.” Nayar also explained that PayPal wants backers to know that there are risks, and you might not get a product from the people you backed.

In his blog post, Barel wrote that going forward, PayPal will aim to “engage crowdfunding campaign owners early on to clearly understand their campaign goals and help them ensure their campaigns are compliant with our policies and government regulations." The payments company says it will "enable [crowdfunded] campaigns without interrupting payments under the condition that the campaign owner is explicit and transparent to their contributors that there is no guarantee of delivery regarding the rewards being offered upon contribution.”

In the event that those conditions haven’t been met, Nayar told Ars that PayPal will work with project leaders to try to find a solution. If they “haven’t followed those directions, PayPal will try working with them to course-correct to make sure that they get their money.” He also stressed that the extra attention given to transferring raised funds would not come at an extra price to PayPal's customers.

Although the outrage was palpable last summer, Nayar expressed that PayPal’s priority was to make funds available to the rightful owner. After September's meltdown, “Tomer Barel said [to the risk management team] ‘you guys are personally responsible for making sure this doesn't happen again.’” To PayPal’s credit, nothing quite so large-scale has.

In theory, PayPal doesn’t have a reason not to make crowdfunding payments in light of Kickstarter’s recent news of a billion dollars in pledges and new crowdfunding platforms springing up all over the place. “I'm a big fan of crowdfunding,” Nayar told Ars. “I've bought—no, I've invested a lot of money in different products, but I understand the difference between the two.”