PayPal announced this week it would stop offering customer protection services on online gambling transactions. The global payment processor announced the move with an updated terms and conditions page, a low-key way to announce a sweeping new policy.
Gambling payments were not the only category of transaction added to the new policy. Payments to crowdfunding websites will not receive customer protection. Neither will payment made on "anything purchased from or an amount paid to a government agency" -- a category which might be the biggest of all exceptions to the customer protection service policy.
No Safety Net for "Gambling or Gaming"
PayPal added the phrase that it was removing the financial safety net for financial transactions involving "gambling, gaming and/or any other activity with an entry fee and a prize."
The policy is expected to cover a number of different countries, including the United States, Canada, Brazil, and Japan. The new policies come into effect on June 25.
PayPal's Online Gambling History
Before 2003, PayPal was the biggest payment processor in the online gaming industry. When EBay bought PayPal, it voluntarily removed the company from the industry, because of the legal gray area that gaming transactions represented.
Those policies changed again in 2010, when PayPal began to accept payments to gambling sites in certain jurisdictions. To receive PayPal support, sites had to be fully licensed and legal in the area in which a PayPal payment was processed.
Effect on New Jersey Gaming
In 2015, PayPal announced it would support transactions in the New Jersey and Nevada online gambling industries, because those transactions fit the definition set down in 2010. The company's entry into the niche was lauded in the gaming media, because PayPal's trust factor and customer protection services were high.
The policy change is unlikely to affect the New Jersey or Nevada gaming markets, though. Because the operators are tied to Atlantic City and Las Vegas casinos, they are not likely to disappear with the customer's money, as they might if they were an offshore online site headquartered in the Caribbean or Central America.
Effect on Gaming Operators
The effect is likely to be negligible to gaming operators, too. Payment processing services like PayPal, Neteller, or Skrill are considered relatively low-risk for the online casinos, sportsbooks, and poker sites.
That is, they're considered to be a smaller risk than credit cards, because they don't carry the threat of a chargeback. Identity theft is less of an issue with such services, too.
Players in the regulated gaming market already have protections. Offshore operators continue to be a risk, but then, PayPal does not support the unregulated market. Players understand unregulated websites are a danger and maintain a "let the buyer beware" attitude when playing at a site which is working in the underground gaming economy -- or at least they should. Many sites are legitimate operators, but others have been notorious cheats.
Effect on Online Crowdfunding
The effect on crowdfunding is likely to be serious. People who make contributions to Kickstarter add provisional funds to a Kickstarter page, or at other crowdfunding sites like Indiegogo. In the past, PayPal would guarantee people's contributions to those funds.
After June 25, if the project ends without the funding reaching its goal, or if the project is simply a scam artist, then PayPal will not guarantee the contributions. If the funder does not receive their funds back in those situations, they are on the hook for the payment.
University Study on Crowdfunding
The University of Pennsylvania released a study recently which analyzed the crowdfunding industry. Penn's study showed that 9% of all crowdfunded projects fail to deliver on their promises.
When asked about the decision by the BBC, a spokesman for PayPal said, "This is consistent with the risks and uncertainties involved in contributing to crowdfunding campaigns, which do not guarantee a return for the investment made in these types of campaigns."
No real explanation was given for PayPal's decision to stop guaranteeing payments to governments. It might be that the sheer volume of a payments which might happen in an emergency are a danger to the company, though this was not stated by a company spokesman. All three decisions were announced in a new release of terms and conditions, so PayPal wanted the new policies to receive as little fanfare as possible.
