Due to the number of inquiries we continue to receive about PayPal, I wanted to post this response from an older thread in a more visible location.
I haven't said much specific about our ordeal with PayPal since I had held out hope that we could work out an agreement with them but it doesn't look like that is going to happen, so I figure I might as well share our experience to clear up confusion about the issue and perhaps benefit other people / companies.
PayPal seems to be rather inconsistent in the way they deal with different companies and in the information they provide about what is or is not acceptable. I know of a couple companies who have used PayPal during alpha, beta, and even for pre-orders significantly in advance of releasing anything, similar to us, without incident. However, very shortly after we began using PayPal for pre-orders they froze our account due to "suspicious activity". Apparently making money is suspicious. When we inquired about it they said they would do a review of the account and determine a course of action. The result of the review was that they felt our business model was too risky, closed our account, and held our funds for 6 months.
Why was our account reviewed in the first place? I can't say for certain but I don't think it was the result of anyone reporting us. We've never had an unhappy customer to my knowledge. I think their system just automatically flags accounts for review based on certain activity like volume of transactions or when you attempt to increase the limits on how much money you can transfer out of your PayPal account per month. Our sales volume had suddenly spiked during the end of Jan / early Feb and we were doing quite a lot of pre-orders for a couple days until they froze our account. At that same time I applied to raise our transfer limit since it starts out at something ridiculously low like $500 / month, so maybe that triggered it. They make it very easy to get started using PayPal and then, once you're already using their service and generating a significant revenue, they decide whether they like your business or not.
At the time of the review, their stated issue was that they do not support the pre-sale of an item more than 20 days from shipping and that they believed our business model posed too great a risk for charge-backs. I said that I didn't understand what the risk was given that our pre-order, at that time, was quite clearly presented as a means of contributing to the project. A PayPal representative said that he believed people either wouldn't read that or wouldn't understand it and then would be upset when they didn't receive a finished, playable game soon after their purchase.
There was a similar story about the Minecraft developer, Markus Persson's funds being frozen by PayPal as well but I think he was finally able to work out some sort of deal with them perhaps due to the publicity he got over the matter. I think his circumstances may have also been somewhat different since he did have a playable alpha available for people at the time.
Whatever the case, I recently attempted to talk with PayPal again since they finally released our funds and we've never had a single charge-back in all this time. I thought with that spotless record, they might be willing to work out some sort of deal with us perhaps where they held a certain percentage of our funds in reserve to further mitigate the charge-back risk.
As is evidenced by the fact that we still cannot accept payment through PayPal, that conversation, unfortunately, did not go well. They said our business model is too high risk for them because we do not ship a physical product to people that PayPal can verify through postal tracking when claims arise. I brought up the fact that other companies engage in the sale of virtual goods in exactly the same manner using PayPal, at which point she said they could investigate those companies if I wanted. I obviously declined not wanting anyone else to feel the wrath of PayPal. I then pursued a different approach asking what we could do to change our business model to make it more amenable to PayPal. I was told there was nothing we could do. I even suggested we could start shipping a physical product to people. I got the same answer, there was nothing we could do. I didn't understand that since I felt like we had only ever been engaged in fair and honest business and were willing to make significant changes to appease them. After a little more back and forth, I finally got to the bottom of it - the representative told me once they made the decision to close an account, it was their company policy to never reinstate it.
So, while engaging in honest business with fans who want to support our game, following a model similar to other small companies we know that use PayPal, our account was closed and we are now permanently banned from ever using PayPal for all time.
My intention is not to discourage other people / businesses from using PayPal but merely to suggest that they should make the decision with open eyes and carefully consider how and when, in the course of their business, to use the service. As we have discovered, even with the best intentions, it isn't difficult to end up on the wrong side of PayPal and suffer irrevocable consequences. I think the best suggestion is to not use the PayPal for pre-orders and at least wait until you have an alpha to give people.
Uhh yeah, so we're exploring other payment options. We think we've found a suitable alternative but I've just been so busy with development that I haven't had time to take the next step. We'll have other forms of payment up before we go alpha though.