Knowledgebase: General
Crowdfunding and PayFast
Posted by Jonathan S on 31 Jan 2013 15:58

What is crowdfunding?

Crowdfunding describes the collective effort of a group of individuals to financially support the initiatives of other people or organisations.

Have a look at the Wikipedia page on Crowd Funding for a comprehensive and eloquent description of the practice.

Can I use PayFast to accept payments for a Crowdfunding site?

PayFast can be used to accept payment on a crowdfunding site but the fundamental principle applicable to all payments through PayFast is that all payment must be for "goods or services".

The only exception to this is where donations are accepted by a registered non profit organization (a registered NPO, section 21 company, not for profit trust etc.).

Generally speaking, crowdfunding sites are not run by registered NPO's, so they cannot simply accept donations, but neither can the "backer" receive nothing for supporting a crowdfunded project.

If you run as a for-profit website, then just ensure that the backer receives something for their money. This could be one of the products being developed, a t-shirt to do with the project or something similar.

If you are in fact planning to operate as a non-profit organisation, you can then accept donations which can be earmarked for a specific project where the backer/donor need not receive anything in return. This is commonly done by charities that may have a number of "projects" and you as a donor can choose which project you would like your donation used for. Much the same principle applies to running a crowdfunding website as a non-profit organisation.

And bear in mind, a non-profit organisation doesn't mean that the people running the organisation need not make any money. Non-profit organisations employ people, often at market related salaries, to run the organisation and meet the organisations goals. It just means that there aren't any shareholders who receive a share of the profits without being actively involved in the organisation.

What if a project doesn't meet its funding goal? Will the backers be refunded?

In developed markets where such crowdfunding sites have become popular, credit cards are the de-facto form of payment in use by the majority of the population. Normally what is done with crowd-funding sites is that you make a "pledge" which is secured by an authorisation (or "auth") on your credit card.

This authorisation "reserves" the money on a backer's card, but it doesn't yet deduct the funds from their account. This can be done at a later stage by the crowd-funding site that authorised the transaction and is known as "settlement".

Using credit cards, it is easy to authorise the pledge on the card and if the project meets its funding goal, the authorisation is then settled and the backer's card is charged. Conversely, if it doesn't meet its goal, the authorization will be cancelled or will simply lapse and the backer will not be charged.

This is very convenient for crowdfunding, but sadly, only works were all the backers have credit cards. In a developed market, this is true, but not in a developing one such as South Africa.

In South Africa, credit cards are only in use by about 10 - 15% of the population and online payments are pretty evenly split between credit cards and EFTs (via internet banking). An EFT does not have the concept of an auth or a settle like credit cards and once a payment is made, it is not reversible.

So if you want to start a crowd-funding site in a developing market like South Africa, you cannot base the business model solely on the use of credit cards and their auth and settle mechanism.

Our suggestion in this regard, is that you rather accept payments via a variety of mechanisms, chiefly by credit card and EFT, and manage refunding of payments as an internal business process, no matter what mechanism was used to pay. This obviously has a greater administrative impact, but is sadly needed in order to appeal to all South African internet users.

Another suggestion which you may want to investigate is where failed pledges are converted into "vouchers" or some form of credit within the crowdfunding system which can be used to back another project. Some backers would make use of this rather than requesting a refund thereby lessening the administration burden on the crowdfunding site.