Kickstarter Needs to Step Up to Fraudsters

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Our Kickstarter project is getting scammed.  As was widely reported last week on The Verge (full article), a Kickstarter backer named “Encik Farhan” is attempting to rip off over 100 Kickstarter projects — and ours is among them.

Earlier this year we raised nearly $200K for Poppy on Kickstarter. After shipping out our precious, one-of-a-kind, extremely-expensive original factory prototype (it’s the very unit that’s featured in our Kickstarter video), we got a $5000 chargeback from Mr. Farhan. Did he receive it? The post office says yes.

Here’s how chargebacks are supposed to work:

- A buyer asks their credit card company to remove a charge from their credit card statement

- The credit card company asks the buyer to provide an explanation about why they are disputing the charge

- The payment processor, in this case Amazon Payments, asks the merchant (Kickstarter project) if they’d like to fight the chargeback, and if they have any evidence (such as shipping confirmation or other details).

- A decision is made and charges are reversed (or not) accordingly.

The two most common reasons for chargebacks are (1) stolen credit cards and (2) the buyer believes the seller did not fulfill their end of the bargain.

The worrisome thing about this case has to do with how chargeback’s work and the incentives in place for fraudsters, credit card companies and Kickstarter itself.

It seems unlikely that “Encik Farhan” used a stolen credit card. In our case and many of the other 100 projects affected, the card was charged and money was transferred to our account months ago.  If the card was stolen, then it would have been reported as such long ago, and we would not have been asked for permission to join in a charge-back dispute just days ago.

We most certainly fulfilled our end of the bargain (and have provided outstanding supporting evidence).  Yet we feel uneasy about our chances of ever seeing our money. For one, the credit card companies, Kickstarter and Amazon most certainly have covered themselves via the fine print in their respective Terms of Services.  But beyond that, it has to do with the basic incentive of each party.

The credit card company knows they are unlikely to ever collect on those fraudulent charges. How likely is it that  ”Encik Farhan” will actually pay his credit card bill, which is certainly runs into tens of thousands of dollars. Merchants in such cases are more likely to have to eat the chargebacks and related fees because they need the credit card companies. They have almost no leverage.

Amazon payments is sandwiched between the credit card company, the fraudster, Kickstarter and the project owners, but likely to claim no responsibility — much as Amazon.com proper has no responsibility for papercuts caused by paper purchased on their site.

Kickstarter’s incentives are mixed. On the one hand, no doubt they don’t want to take responsibility. On the other hand, the Kickstarter community is particularly vulnerable to this kind of attack. New and relatively naive sellers use crowdfunding to get enough funding to bootstrap a project. Mutual trust is crucial to make this system work. A high-profile scam like this both undermines that trust and advertises how easy it is to perpetrate a scam like this. Certainly no marketplace is immune to chargebacks — fraudulent or otherwise.

With this case affecting so many outstanding Kickstarter projects all at once, they may have no choice but to act — or else they’re essentially saying it’s open season: it sends the message that their fragile community is an easy target for this sort of chargeback fraud.

Farhan’s chargeback on Alex Heberling’s project, The Hues, represents nearly 25% of the total funds raised, and yet she says, “I asked [Kickstarter] for help on how to best appeal the dispute, but I didn’t get a whole lot of advice, just a suggestion to check out Amazon Payments’ FAQ on the subject.”

Ouch.

Crowdfunding is a relatively new phenomenon, and this case is certainly testing the marketplace.  Since we started planning our campaign nearly a year ago, we’ve started to hear from more and more people in the crowdfunding community who are considering Kickstarter alternatives such as Selfstarter, where projects may have better control over communications, web analytics and yes, even fraud prevention. How Kickstarter handles this case will help determine whether their community grows and thrives, or whether this is just another reason to reconsider Kickstarter.

In our view, Kickstarter is at a crossroads and will need to step up to this fraud.  They can not simply pass the buck to the credit card companies, Amazon Payments or hide behind the various Terms of Services.

Whatever happens, life will go on for Poppy in spite of the $5000 fraudulent chargeback. We were funded well beyond our goal and will not let this loss jeopardize our project.

But it stings to think that there are other creators who’ve been hit by this for which the money has already been spent and for which an unexpected loss — months after collecting the money — could risk being able to fulfill to legitimate backers or could even jeopardize the well-being of the project creators.  It also feels like this case has exposed a fundamental vulnerability for project creators.

Kickstarter says they are investigating and sent an email to those affected stating, “we won’t let a single bad apple harm the goodwill of our incredible community.” We shall see if that ultimately leads to advice like “please check out Amazon Payments’ FAQ” or something more meaningful.

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2 comments
spatz999
spatz999

The fact that you are liable for chargebacks is certainly in the fine print of the agreement you signed with Kickstarter. This is the same risk that any merchant faces when selling online. For the fees that Kickstarter charges you they should take responsibility for the loss.

You should have the money by now so let Kickstarter come asking for it. I wouldn't volunteer paying them back.

plaxant
plaxant

Yet one more reason anyone selling anything on the internet should be using bitcoins....