Tag: patreon

My theory: Patreon doesn’t want to be a money services business

tldr: Patreon is changing their fee structure, in part, because the batching of pledge payments from one patron to multiple creators and the use of Patreon balance to pay pledges without processing an external payment requires “holding funds in a balance that can then be redistributed” and makes them look like a money transmitter money services business, which makes them subject to additional regulation.

Also, if you want to follow my stream of consciousness thoughts on this, see this twitter thread.

Updated 9-Dec-2017 9:35 PST: Fixed a few typos.

Updated 11-Dec-2017 10:00 PST: At least one person has indicated Patreon might be using Stripe Connect and that would obviate any concerns with Patreon being a money services business. Sure, they could be using Stripe Connect. As far as I know that hasn’t been confirmed by anyone (let me know if you know otherwise). For the MSB issue to be of no concern, Patreon would also have to be using the equivalent service for PayPal transactions and they would have to be operating in compliance with both of those services. 

Patreon, a crowd-funding platform focused on serving creators of online content such as web comics, digital artists, writers, musicians, podcasters, etc., announced a new fee structure this week.

Many who use the service, creators (those who make content) and patrons (those who support creators with financial contributions) alike, are very upset about the new fee structure. Search Twitter for “Patreon” and you’ll see the feedback is overwhelmingly negative. It’s particularly so from creators who are supported by many small ($1-5) pledges as well as the patrons who support them with these pledges.

The reason for this stems from the specific changes, which I’ll review briefly.

Patreon’s current fee structure

According to their documentation, Patreon’s current fee structure is as follows:

  1. 5% platform fee: Patreon takes a 5% of each pledge from the creator’s share after the pledge payment is successfully processed. The fee for a $1 pledge is $0.05. For a $5 pledge it’s $0.25.
  2. Payment processing fees (variable): Patreon takes a variable amount from the creator’s share to cover payment processing fees incurred from processing pledge payments. More on this in a moment.
  3. Payout fees: Patreon collects a fee anytime creators move money from their Patreon balance to their bank or PayPal account. For US customers, the fee is $0.25 for every transfer done via Stripe and for PayPal it’s $0.25 or 1% of the amount transferred capped at $20 USD per deposit. Non-US customers have different rates (see the documentation for those).
  4. Value-added tax (VAT): If the patron is subject to VAT, then Patreon collects the appropriate amount from the patron and does all the required paperwork. See this post to read more about how Patreon handles VAT.

Now, back to the way Patreon has been processing pledge payments and assessing the fees associated with that.

There are two fee structures for pledge payments depending on whether the payment processor is Stripe or PayPal:

  • Stripe charges 1.9% + $0.30 per transaction.
  • PayPal charges 5% + $0.05 per transaction.

So, a $1 pledge payment processed via Stripe would have a fee of $0.32 ($.019 rounded up to $0.02 + $0.30) and a $15 pledge payment would have a fee of $0.59 ($.285 rounded up to $0.29 + $0.30).

And for PayPal, a $1 pledge payment would have a fee of $0.10 ($.05 + $0.05) and a $15 pledge payment would have a fee of $0.80 ($.75 + $0.05).

You can see that under both these fee structures the lower the dollar amount of the pledge, the greater effective percentage (of the pledge) the fee is, with PayPal being the better deal for very small pledges like $1.

The payment processing rates imposed by Patreon are rather standard across the industry. Processing very small payments is relatively expensive pretty much no matter who use use. Though, some platform are able to negotiate better rates for micro-payments, depending on their circumstances.

Ah, but, Patreon has been offsetting the true cost of these micro-payments through batching. Currently, until the new pricing policy goes into effect later this month, patrons supporting multiple creators are currently being charged once for all of their pledges, regardless of how many creators those pledges go to. Because they are charged once, a payment processing fee is assessed just once rather than per pledge.

So, a patron supporting 10 creators with a $1 pledge each is charged $10 at once and the associated payment processing fee is $0.49 for Stripe ($0.19 + $0.30) and $0.55 for PayPal ($0.50 + $0.05). That payment processing fee is then split among those 10 creators, with each of them being assessed $0.049 each for Stripe and $0.055 for PayPal (or perhaps $0.05 and $0.06, I don’t know what rounding rules Patreon has been applying). After Patreon takes their 5% platform fee, each creator would realize $0.89 or $0.90 of that $1 pledge in their Patreon balance.

There is one exception to this batching under the current fee structure, and that is for creators who have the charge-up-front (CUF) feature available to them and enabled. With charge-up-front, the patron is charged their pledge amount right when the make the pledge and a payment processing fee is assess on that lone payment. After the initial CUF payment, the patron is charged on the first of the month, with all their pledges to creators batched and processed as one payment.

Patreon’s new fee structure

Patreon’s new fee structure, according to their announcement and documentation, only makes changes to the way fees are assessed on pledge payment processing (#2 from the list above). But the changes are rather significant, particularly for those patrons and creators related through low-dollar pledges.

Here’s what’s changing about the way pledge payment processing fees are assessed:

  1. There is now one fee structure for payments processed via Stripe or PayPal and it’s 2.9% + $0.35.
  2. The patron not the creator will be assessed the payment processing fee.
  3. Pledge payments are no longer batched. They will be processed individually, each incurring a separate processing fee.
  4. You can no longer use your Patreon balance to make pledge payments to avoid the per-pledge processing fee.

(That last item #4 is not made clear in any of Patreon’s announcements, but it’s been confirmed by Patreon staff. Update 8-Dec-17 16:02 PST: I just noticed the Patreon rep said this is “likely” which isn’t the same as definite, but nevertheless I think it will come to pass.)

There are two main reasons so many folks are upset about this new fee structure: a) It gives creators no option to absorb the cost of the payment processing, which many of them would prefer to do, and b) it makes low-dollar pledges much more expensive compared to the old fee structure.

How much more expensive? If you’re a patron supporting supporting 10 creators with a $1 pledge each you will now be charged $0.38 for each of those 10 pledges, bringing  your total monthly spend to $13.80. This is a 31-32% increase from the old fee structure where your monthly spend would have been $10.48 for Stripe and $10.55 for PayPal.

(Patrons subject to VAT will incur an even highly monthly cost.)

Creators, on the other hand, will realize $0.95 of each of those $1 pledges in their Patreon balances because now only the Patreon platform fee of 5% will be taken from their share.

Why did they do it?

The main reasons Patreon gives for the change in their announcement is to provide creators with a predictable, stable monthly income, and to allow creators to take home as much of their earnings as possible.

In order to do this, they explain, they need to move from processing pledges on a fixed, 1st of the month, monthly schedule, to processing payments still monthly, but on the anniversary of when the pledge was first made.

Here are the two diagrams they provided to illustrate this:

Okay, I can follow Patreon’s thinking here. But there is an issue I think they are specifically not speaking to here.

Implied in Patreon’s reasoning and in the diagrams above is a move away from the concept of stored value, of an internal Patreon ledger than can be used to redistribute money amongst patrons and creators.

At this point you’re probably asking, “Christie, what are you talking about, isn’t the whole point of Patreon to “redistribute money” from patrons to creators?” Well, yes, it is. But the phrases stored value and redistribute money have specific meaning and consequences in the financial regulatory world. Business engaging in certain kinds of activities are considered Money Services Businesses (MSBs) and are subject to additional laws and regulations. PayPal and Stripe are money services business. Kickstarter and IndieGoGo are not. In the United States, MSBs are required to register with the Dept of the Treasury and are overseen by the Financial Crimes Enforcement Network (FinCEN). One type of MSB is a money transmitter and I believe this is specifically what Patreon is trying to avoid having to be classified as (and therefore subject to additional cost and regulation).

Here I’m going to stop and express my gratitude and appreciation for the folks at Gratipay. Without their commitment to transparency and communication about how their business work(s/ed) I likely would not know any of what I’m about to explain. Thank you!

As soon as I realized that Patreon’s changes included unbatching payments, I recalled the issue Gratipay encountered when they were shopping for a new payment processor. They had trouble finding a payment processor that would work with them under their existing business model because they looked too much like a money transmitter:

The crux of the problem is the stored value: holding funds in a balance that can then be redistributed, in our opinion, qualifies as money transmission, which we cannot support.

Gratipay wrote extensively about this issue, so if you’re curious to learn more, start with this blog post and follow the links from there.

In the case of Patreon, both batching of pledge payments from one patron to multiple creators and the use of your Patreon balance to pay pledges without processing an external payment requires “holding funds in a balance that can then be redistributed.”

So, that’s what I think is going on here. Now, I’m not an expert in this area and I’m not familiar enough with the regulations regarding financial businesses to assert my theory with 100% confidence, so take what I say with a grain of salt. (If you are knowledgeable in this area and have insight you’re willing to share, please get in touch!) But this explanation makes more sense to me than most others I’ve heard. And, it’s quite common for venture-backed startups to operate in a regulatory grey-area (intentionally or not) in order to build an audience and then get to a point where they either need to change the regulations (what Uber is trying to do) or come in line with them. It’s the latter point I think Patreon has come to.

What Patreon should have done

I think Patreon probably made the right call for their business with regard to the move away from stored value via the unbatching of pledge payments. I can’t say for certain if they made the right decision to put the burden of the additional payment processing on patrons and to deprioritize patron-creator relationships built upon small pledges. That’s their call, unfortunately. (See this post for details indicating it was very much a deliberate choice to prioritize larger pledges and lucrative creators.)

Could they have negotiated with their payment processors to offer a better rate for small transactions? Maybe. Kickstarter offers 5% + $0.05 for pledges $10 or less. But then again, Kickstarter doesn’t offer PayPal and Patreon does. That kind of rate negotiation may not be possible without an exclusive arrangement or other circumstances that don’t apply to Patreon.

You could argue that Patreon’s true mistake was in subsidizing the true cost of micro-payments with a business model they couldn’t (or were unwilling) to sustain in the long-term. People flocked to Patreon because no one else was offering this model and it turns out there’s a reason for that.

That’s why I think, given how banks and credit card associations work, it will be hard for folks to find an alternative to Patreon that offers the exact same features to brought them to the platform. Drip, a competing platform from Kickstarter currently in private beta, might be able to offer a better rate on micro-payments, especially since Kickstarter does. But if you were relying on the availability of PayPal, Drip isn’t going to work for you without compromise.

Further reading

My friend and colleague Audrey wrote her own take on Patreon, more from the point of view of creator. Check it out and let me know if you’ve come across other points of view you appreciated and I’ll update the post with them.