Around the holidays, for-profit companies see an opportunity to do something charitable, even though they’re not technically registered non-profit organizations. The concept reminds me of college. I was in my university’s marching band, and we frequently traveled as a group to performances. At the end of the trips, someone on the bus collected money from everyone else to give to the drivers to thank them for their time and for getting us to the destinations alive.

PayPal is one of the many companies that makes collecting cash from many people easier.

If I were to decide to collect money from people all around the country to give to a non-profit organization all of us supported in one transaction, I might choose to simplify the collection process by setting up a website where people could transfer money online from their bank accounts or pay with credit cards. PayPal is the most popular tool for these transactions. Unfortunately, PayPal’s policies are confusing, poorly written, and inconsistently enforced.

Regretsy, a website that brings attention to odd items available on the shop Etsy, created a gift exchange program to help 200 kids receive Christmas presents this year. Families applied to be recipients, and Regretsy verified that those who made the list of gift recipients were truly needy. After publicizing the plan, Regretsy raised enough money not only for toys for the kids, but for cash gifts for the families. This was made possible by PayPal, and the company collected its usual fees on every transaction.

Regretsy used the PayPal account to buy some of the gifts, transactions on which PayPal collected its usual fees. The PayPal account also contained money for other purposes, but PayPal froze every cent in Regretsy’s account a few days ago. Hellen Killer, the operator of Regretsy wasn’t able to get anywhere with a customer service representative. You can read her side of story here. The representative claimed only non-profit organization can use the “Donate” button, but that is incorrect, and it is one of the few clear items in PayPal’s terms. PayPal insisted that Regretsy return the gifts it bought for the 200 families (while keeping at least a portion of the transaction fees) and return the contributions it received (while keeping at least a portion of the transaction fees). Apparently this became a charitable endeavor for PayPal rather than for the 200 families.

After outcry from the internet and significant proof that PayPal did not follow their own policies, Anuj Nayar, PayPal’s Director of Communications, announced that they were following federal regulations that govern all payment processors, released the funds, and is making its own contribution to the cause. This was done without an apology for PayPal’s misapplication of policy, stubbornness of the customer service representative who refused to allow Hellen to speak with anyone with better knowledge of the situation, or the inconvenience it caused.

Operating a payment processing business like PayPal is a risky endeavor, but this is not the only story about the company freezing an account without good reason. The website SomethingAwful raised money following hurricane Katrina and faced similar issues dealing with PayPal, documented here.

Here is how these issues could be avoided, other than simply choosing a payment processor other than PayPal.

In a perfect world, anyone who wanted to create a charitable project of any scale could create a registered non-profit entity and legitimize the endeavors. Unfortunately — or perhaps fortunately, to prevent fraud — creating and registering up a non-profit organization is not that easy. It’s a long process, and if your initiative is in response to an event like hurricane Katrina, getting the proper paperwork together, consulting with lawyers, assembling a board of directors, and raising the significant financial requirements would take away from resources you need to just collect money from others and give it to deserving recipients.

The next best option for an outfit like Regretsy or an individual with a big idea is to partner with an existing non-profit whose mission statement matches the mission of the project. A partnership would be much more practical for short-term projects like Regretsy’s initiative. All money could flow directly from the donor to a non-profit organization, through the group’s own collection methods, to the recipients. This way, the paper trail uses an already-established process, and the contributions are tax-deductible for the donors.

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