Right to a refund and charge backs

Another clear difference between a pre-order or sale transaction and a crowdfunding transaction is the right to a refund if the product is unwanted or doesn’t meet the original description. Only some project creators actually offer a refund based on quality or defects; the majority of project creators are silent on this issue.

Based on online retailing experience, a backer may expect to be to ask a project creator for a monetary refund in the period of the end of the funding campaign and before the product ships. Additionally, if there are valid reasons to request a refund or return the reward, the backer should enjoy this option as well. But this is not always the case.

Key takeaways

  • There are no refunds available from Kickstarter, as the service provided was fulfilled.
  • Refunds from project creators are only available if the project creator cannot or will not fulfill the rewards, and then only if he can afford to process the refunds.
  • It is not clear how backers can determine if the project creator cannot or will not fulfill the rewards, unless the project creator specifically states this in an update.
  • Backers have resorted to claiming charge backs from bank or credit card companies to dispute the pledge taken their account.
  • Some payment processors, such as PayPal, explicitly disallow charge backs for crowdfunding.

Refund from Kickstarter

There is no recourse for a refund from Kickstarter, because the service they provided was fulfilled.

As per Kickstarter’s terms and conditions:

Kickstarter does not offer refunds.”

Suppose you pledged $40. Of the $40, $2 is Kickstarter fees and $1.20 Amazon Payment fees. If you were to request a refund, you would be limited to a maximum of $36.40.

A backer can not claim a refund for Kickstarter fees from the project creator, as the project creator is not liable for this portion of the pledge.

Refund from project creators

There are three key terms listed in Kickstarter’s terms and conditions as relating to refunds that backers should be aware off:

1) “A Project Creator is not required to grant a Backer’s request for a refund unless the Project Creator is unable or unwilling to fulfill the reward.

This implies four points:

  1. The project creator may or may not fulfill the request for a refund;
  2. If the project creator cannot or will not fulfill the reward, he is required to fulfill the request for a refund;
  3. But the project creator may not be in a position to fulfill the reward, especially if he has spent all the money;
  4. It is not clear how a backer can easily determine if a project creator is unable or unwilling to fulfill the reward, unless a project creator specifically states this in an update.

The right of refund adds another risk to the crowdfunding process, and, as per most other aspects of the crowdfunding process, the backer has the highest probability of loss and value of loss.

2) “Project Creators may cancel or refund a Backer’s pledge at any time and for any reason, and if they do so, are not required to fulfill the reward.”

Notice here that the project creator can either:

  • “cancel”, which I assume means that if a backer’s pledge is cancelled, all money is returned to the backer, but this is not described in the clause;
  • “refund” a backer, although this clause doesn’t state if it is to the full amount of the pledge or the pledge less service fees or any token amount that the project creator states he can afford.

Because the term and condition states that the project creator can initiate a refund without full explanation as to the value of the refund, the backer faces yet another risk, namely the potential to incur a monetary loss as from an action instigated by the project creator.

3) “Kickstarter reserves the right to cancel a pledge at any time and for any reason.”

If Kickstarter cancels the pledge before the project funds and the campaign ends, then there is no cost or impact on the backer.

If Kickstarter cancels the pledge after the project funds, or cancels the pledge after the campaign ends (successfully funded), then it is not clear from this term and condition whether there is a refund made to the backer, and what the amount of this refund would be, for example pledge less 5% service fees.

Charge backs

As an alternative measure, in the event that project creators cannot and will not fulfill a refund request, backers have requested charge back from their banks or credit card companies. A charge back is a claim for a disputed transaction on your card.

Crowdfund Insider explains the charge back as follows:

A chargeback occurs when a credit card holder contacts his bank or credit card company to dispute a charge on his account. Common reasons for chargebacks include:

  • The cardholder does not recognize the charge or recipient on the statement.
  • The cardholder did not receive the product or service.
  • The cardholder was unsatisfied with product or service.
  • The cardholder’s credit card was stolen or used without their permission.

There are two takeaways:

i) the charge back process highlights that the underlying transaction in a crowdfunded transaction is a sale and all parties have to fulfill their obligations under the sale contract;

ii) backers have recourse for refunds via the payment processing party in the crowdfunding transaction.

I am not clear on the timeline within which a backer would need to request a charge back. I am also not clear whether all payment processing companies have the same rules and regulations relating to charge backs. In the case of WePay, they forcibly remove funds from the project creator’s account in order to process the refund.

Read more about charge backs on Amazon Payments’ FAQ.

If the funds from the crowdfunding campaign is processed via PayPal, there is no recourse to charge backs if the project creator has stated that the campaign is crowdfunding and not a form of preselling. As from PayPal’s statement on crowdfunding and charge backs:

“Together with the crowdfunding sites, we identify if campaigns are strictly fundraising or preselling merchandise. We enable their campaigns without interrupting payments under the condition that the campaign owner is explicit and transparent to their contributors that there is no guarantee of delivery regarding the rewards being offered upon contribution.”

In conclusion

Because the underlying transaction in a rewards-based crowdfunding transaction is a sale, the backer should enjoy the rights and responsibilities that are attached to this type of contract. Project creators cannot shirk out out their duties to fulfill the contract! It is re-assuring that one of the intermediaries in the crowdfunding transaction is heavily regulated, especially as this offers security and a refund recourse to backers!