Xenonauts Pre-Order PayPal Account Locked

A week ago last Thursday, Goldhawk Interactive posted an announcement saying their PayPal had been locked, and they had no access to the funds in it. They disabled the pre-order page in response to this, to prevent funneling even more money into an account they can’t access.

As it turns out, PayPal didn’t just lock their account—they closed it! In accordance with PayPal policy, this means they can and will retain the funds in the account for 180 days. The announcement stated there’s about $4,100 sitting in that account, a payment of $2,000 that was in progress before the account closed, and that the loss of this money isn’t “terminal” to the project. Goldhawk has made about $54,000 on about 1,900 preorders through PayPal. About $50,000 has been cashed out already, and most of it has funneled back into the project. The remaining portion sits in their corporate bank account, and they wager that will be enough to finish the project.

Unfortunately, this does mean that special features that were intended to be added, such as a new UI, may not make it into the initial release. The Xenonauts team is looking into alternative sources for payment transactions, but Google Checkout has the same terms, and their site module doesn’t interface with Amazon Marketplace. Thankfully, it turned out that the $2,000 payment cleared.

PayPal is rather notorious for this policy and has even had a class-action lawsuit brought against them once before for unfairly freezing their customer’s accounts. There’s even a website dedicated to those who have been wronged by the payment transaction giant. The section of the user agreement that is cited for all cases is the following:

We contacted the Xenonauts Project Lead Christopher England about the matter, and he responded with the following:

Nothing’s been formally resolved yet, although hopefully we’ll have pre-orders back in the next week or so with a different service… I’ve not heard anything more from PayPal, but that’s life—we should be moving on to bigger and better things anyway so hopefully there won’t be any lasting repercussions.

This is not the first time this has happened to a developer. As recently as last year, Notch mentioned on his blog that $750,000 worth of money generated by Minecraft was locked into a PayPal account that had been limited. That wasn’t the first time, either. Notch had also blogged about getting his PayPal account unlocked the previous year as well! This brings up a point, though: Most often, accounts are locked for the vague reason of “suspicious activity.” If the account is closed, the funds are generally held to “prevent chargebacks.”

In the case of one developer who wishes to remain anonymous, PayPal’s overt concern with chargebacks changed a single fraudulent user into a huge ordeal. Generally, when an account is hit with chargebacks, PayPal’s first reaction is to limit the account and start investigating. In this developer’s case, a user made payments over the course of a six-month timeframe. Afterwards, they disputed the payments via PayPal’s resolution center, filed chargeback claims with their credit card company—an action which violates the Paypal terms—and then notified the developer of the claims. PayPal put twenty-one transactions on hold while investigating the account of the claimant.

This developer immediately refunded everything they could, but unfortunately, transactions over two months old cannot be refunded via normal means. As such, they contacted PayPal as soon as possible, but at the same time, fourteen chargebacks were made due to the claimant contacting their credit card company. Unfortunately, the majority of those fourteen chargebacks had already been refunded by the developer, resulting in the claimant double-dipping.

For the transactions that could not be refunded via the normal means, a PayPal rep told the developer to refund them via separate payments. This was done, but PayPal then refused this as enough to substantiate proof of refund. Additionally, they refused to fight the chargebacks, deeming them a lost cause. Soon after, PayPal concluded their investigation: They found no traces of unauthorized activity on the claimant’s account and closed all disputes “in favor” of the developer. However, the transactions had already been refunded, and the damage done.

Approximately one week later, the developer found their account limited for an unknown reason. Contact from a PayPal rep requested a large variety of paperwork to verify legitimacy of the account holder. After not being satisfied with the documentation supplied, the representative demanded to speak on the phone, at which point the developer requested the account be blocked. It was at this time that PayPal noted the limitation was based on the numerous chargebacks. Their solution to this was to mark the account as high-risk, keep $600 permanently in reserve, and make certain 10% of all new transactions are kept in the account for a four-month period.

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Analysis: PayPal is unreasonable. Personally, I’ve had funds in my account frozen when I sold something expensive (e.g. a Wii for like $450 when they were hard to come by) on eBay. In my case, I was lucky because I was able to verify my credentials and have my account unfrozen in seventy-two hours. Most people are not that lucky. Oftentimes, PayPal will mark your account as high-risk or close your account. In these cases, you’re either stuck with money in your account that you can’t remove, or stuck waiting 180 days to get your rightfully owned money.

Six months is a very long time in terms of online banking and payments. The worst part about this is that their reasons for limiting or closing your account may be beyond your control. Credit card transactions are a nightmare because fraudulent transactions involving them are common, and you can’t have police who buy things from you. That means if you’re running an online store using PayPal as your payment provider, you will always run the risk of having your account closed. If you make an exceptionally large amount of money at any point in time, expect your account to at least be frozen or limited. Oftentimes, PayPal will label you too high-risk instead and simply close your account. They also can close your account for inactivity, and if they want to, they can return any money in your account from which it came. This happened when Something Awful held a fundraiser for Hurricane Katrina, raised $30,000 in nine hours, and then had their PayPal account closed with all money returned to the donors.

There are a number of other companies with similar services. Google Checkout is one, but as the Xenonauts team discovered, their terms are incredibly similar. Whether or not they enforce them as often as PayPal remains to be seen, but it’s better to not take the risk. In the case of Mojang, they’re still using PayPal, but employ Moneybookers as well. Unfortunately, PayPal is by far the most widely accepted and used online payment system. This means, no matter what gripes people have with it, most people still use it anyhow. What’s most interesting to me is that, by agreeing to their terms, you waive your right to use the chargeback system through your credit provider. Doing so is a direct violation of their Terms of Service and will get your account banned. The legality of this boggles my mind, and I have to wonder how many other services have done or considered doing this.

The bottom line is whether there are any good online payment services or not. Amazon has been pretty good to me, but their system is truly only designed for products, not services. Outside of that, many services have terms that closely shadow PayPal’s, so I’d be wary of them. However, the key piece of information to take away from this is that most online payment processing services are not FDIC-insured because they’re not banks. This means that a lot of the protections afforded to you by FDIC policies are not present, and your money is completely owned by the service you’re using.