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PayPal Chargeback Guide for Merchants for 2024

Key takeaways

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PayPal Chargeback Guide for Merchants for 2024

This guide explains PayPal's chargeback process for merchants. We'll cover what chargebacks are, how they work on PayPal, and how you can avoid them. Keep reading to learn more.
Author
Theodore Covey
Category
Business
Date posted
July 4, 2024
Time to read
17
minutes

As a merchant, I know chargebacks can be a hassle. That's why I wrote this guide to help you understand them and protect your business.

This guide is to simplify every process to help you avoid losing money for no reason.

Let’s dive in.

Key Takeaways

  • Chargebacks happen outside of PayPal.
  • Disputes and claims processes happen in PayPal.
  • They charge $20 for chargebacks.
  • They’ll charge a $8.00 or $16 dispute fee.
  • Disputes happen between the seller and the shopper.
  • PayPal mediates claims and judges whether a seller needs to refund a shopper.

How Are PayPal Chargebacks Different?

PayPal doesn't handle chargebacks.

Instead, they have two ways to resolve problems: disputes and claims. Disputes let the buyer and seller try to fix things themselves. If that doesn't work, a claim gets PayPal involved to help decide.

Chargebacks (AKA disputes) happen outside of PayPal, but they still cost you a $20 fee. PayPal will help by giving the buyer's bank information about the transaction.

Summary: PayPal handles claims and disputes. Banks deal with chargebacks.

Advanced Chargeback Management Platform

ACM lets you manage many chargebacks at once. It also allows more control over your money by eliminating automatic holds on disputed funds.

Source: PayPal (PDF)

If your business processes a large number of chargebacks, ACM might be a good fit for you.

Summary: PayPal's Advanced Chargeback Management helps big online stores resolve payment disputes.

Fee Structures

PayPal has these fees as of 2024 [1]:

  • Standard Dispute Fee ($8.00): Customer disputes a transaction.
  • High Volume Dispute Fee ($16): Customer disputes a transaction, and your dispute rate is too high.
  • Chargeback Fee ($20): Customer initiates a chargeback with their bank.
  • Pre-arbitration Fee ($16): You dispute pre-arbs (pre-arbitration) [2].

They’ll apply these fees in the original currency of your transaction.

You'll get a dispute fee when a buyer files a dispute for a transaction processed through PayPal. This fee covers PayPal's costs for managing the dispute resolution process.

There’s also the Risk Factor Fee. PayPal may also add up to 5% to the transaction fee if a merchant receives a high number of the following:

  • Chargebacks
  • Reversals
  • Claims
  • Customer complaints

For example, if you have many customer complaints, PayPal will see you as a higher risk.

You’ll see a chargeback fee when a buyer disputes a transaction made with a card through PayPal but does not use their PayPal account or guest checkout. It's a settlement fee for these card transaction chargebacks.

PayPal won’t charge you a dispute and chargeback fee for the same transaction.

Summary: Merchants get dispute fees for disputes processed through PayPal. Chargeback fees apply to transactions made without a PayPal account.

Types of Disputes & Claims on PayPal

PayPal has 3 different types of dispute or claims types that a customer can file:

  • Item Not Received: The customer didn’t receive the item they bought.
  • Not as Described: The item received wasn’t as advertised.
  • Unauthorized Transaction: Transaction that the account holder didn’t make.

These aren’t the same as chargebacks. I’ll talk about the above claims types and the different types of chargeback types you’ll encounter.

Item Not Received

Item Not Received (INR) is a complaint filed by a buyer who didn't receive a purchased item within the expected timeframe.

Think of it like this:

A shopper ordered a device online and paid through PayPal. Days turn into weeks, and their package still hasn't arrived. They check the tracking, but it's stuck or shows no updates. That's when they’d open an INR dispute on PayPal, saying, "Hey, I paid for this, but it's nowhere to be found."

Not as Described

Significantly Not as Described (SNAD) is a complaint by a buyer when the received item differs from the seller's description.

For instance…

A customer ordered a new phone online, but when it arrived, it was a different model — older, cheaper, and with less features.

The description said it was brand new, but theirs looked used with scratches and wear. In this case, the shopper would open an SNAD dispute on PayPal.

Unauthorized Transaction

It's a purchase made using a user’s PayPal account without their permission. This happens if someone else gets access to their login information.

This is third-party fraud (aka true fraud).

Dispute / Claims Types Aren’t the Same as Chargeback Types

If you’re unlucky enough to have the situation escalate to a chargeback, it’ll happen because of one of these reasons:

  1. Friendly Fraud (Chargeback Fraud): Claims a transaction was fraud, despite making it and receiving the product.some text
    1. e.g. A shopper buys a pair of shoes online and receives them but later claims they never ordered them to get a refund.
  2. True Fraud: When a fraudster uses stolen / lost payment information to buy somethingsome text
    1. e.g. A thief steals someone's credit card number and uses it to buy electronics online.
  3. Merchant Error: When a seller makes a mistake, such as billing the wrong amount.some text
    1. e.g. A customer orders a blue shirt, but the merchant ships a red one.

The actual reason for the chargeback will vary by reason code. These codes vary by the card network provider. For instance, Visa will have different reason codes for chargebacks than Mastercard.

Time Limits for Merchants & Customers

  • File a Chargeback (Customer):some text
  • File a Dispute (Customer): some text
    • Item Not Received transactions: 180 days after you paid for the order.
    • Not as Described transactions: Whichever of the following is sooner:some text
      • Within 30 days of the delivery date.
      • Within 180 days of paying for your order.
  • Escalate a Dispute to a Claim (Both parties): 20 days.
  • Respond to a Dispute (Merchant): 10 days
  • Appeal a Claim: 10 days after the claim is closed.
  • Respond to Pre-Chargeback Alerts: 20 hours (recommended); otherwise, 10 days.

The time a customer has to file a chargeback will vary by the card provider. Since this process happens outside of PayPal.

PayPal Chargeback Threshold

  • Dispute Threshold: Dispute ratio is 1.5%+ AND more than 100 sales transactions in the previous 3 months.

There’s the High Volume Dispute fee, a penalty charged to merchants with a high rate of customer disputes. It replaces typical dispute fees.

There are a couple of exceptions when PayPal won’t charge you this fee [3]:

  • Inquiries not escalated to a claim.
  • Buyer filed the claim directly with PayPal as an Unauthorized Transaction.

Merchants hit with the High Volume Dispute fee must submit a plan detailing causes, actions, and improvement timelines.

PayPal will also place limitations on your account.

In addition to limits from breaking the dispute threshold, they could limit you if:

1. You suddenly begin selling a new type of product. This applies to higher-end items. For instance, if you’re a website that sells souvenirs, then start selling luxury purses.

2. There’s a sudden surge in sales volumes. That’s not ideal for holidays like Black Friday. Or if you were to have new products that turn out to be trendy.

3. If you’re traveling abroad without setting up a Travel Profile. This profile tells them that you’re leaving the country and you are the person logging into your account.

Summary: PayPal's High Volume Dispute fee encourages good service and reduces disputes.

PayPal Dispute & Chargeback Process

Buyers and sellers will handle claims and disputes through PayPal’s Resolution Center. This is also where you both will upload evidence and send it to PayPal if your situation escalates to a claim.

At any point, the customer can start a chargeback. This is a different process that varies by card provider and bank. PayPal's only role in a chargeback is to pass information to the customer’s bank.

I’ll explain how each of these processes works throughout the following sections.

1. Disputes

  • How Long Disputes Last: 20 days
  • Penalties:some text
    • Dispute Fee: $8.00
    • High Volume Dispute Fee: $16

The shopper can open a dispute in the Resolution Center if they receive an incorrect item or none at all. Enabling both parties to resolve the issue through communication.

It's a way to talk things out before involving PayPal.

Keeping everything in this process is ideal. It doesn’t involve PayPal or any financial institutions.

If you and the consumer reach an agreement and close the dispute case, customers can’t have it reopened. Nor can they escalate it to a claim [4].

What happens if you both can’t reach an agreement?

Summary: When shoppers get the wrong item or nothing, they can open a dispute. This lets the shopper and the seller talk it out and try to fix things without getting PayPal involved.

2. Claims Process

  • How Long Claims Typically Last: 30 days
  • Penalties: Forced refund.

If you and the buyer can't resolve the dispute, either party can escalate it to a claim. The person issuing the claim asks PayPal to step in and make a decision.

If fraud is suspected, buyers can escalate to a claim without disputing a transaction.

PayPal's decision depends on the information both sides provide.

They review all the details, like:

  • What the buyer and seller say.
  • Any messages between them.
  • Any evidence both parties submit.

This evidence could include photos, tracking information, or communication records. We’ll talk about specific evidence in a bit.

If PayPal decides in the buyer's favor, the seller must issue a refund.

If they side with the seller, they close the claim, and the payment stays with the seller. I can't find statistics on how often PayPal favors merchants.

PayPal’s decisions on claims cases are usually final. Though, sellers and shoppers can appeal their decision 10 days after the case closes.

Here's an example...

They could reverse the decision and reimburse you if the customer sends back the wrong item.

Summary: PayPal acts like a judge if a buyer and seller can't agree, using evidence to decide who's right.

3. Chargeback Process

  • How Long Chargebacks Last: 75 – 120 days
  • Fees:some text
    • Chargeback Fee: $20
    • Pre-Arbitration Fee (“Optional”): $16
  • Parties Involved:some text
    • PayPal: Acquirer
    • Customer’s bank: Issuing bank or issuer
    • Customer
    • Merchant

This process could vary by situation, but in general, here’s how it’ll proceed:

  1. Customer contacts their bank or credit card issuer, not PayPal.
  2. The issuer reviews the customer's claim and gathers evidence.
  3. If the bank decides to proceed, they notify PayPal, which then withdraws the disputed funds from the seller's account.
  4. PayPal informs the seller about the chargeback.
  5. Seller submits evidence to challenge the chargeback.
  6. The issuer reviews the evidence and makes the decision on the chargeback.some text
    1. PayPal has limited influence on this decision.
  7. If the card issuer rules in the seller's favor, the funds go back to their PayPal account. If not, the chargeback stands.

Let’s say you won the chargeback. Congratulations. But it may not be over.

If the bank rules in your favor, the customer could challenge the chargeback results. Resulting in pre-arbitration (aka pre-arb or second chargeback). You can accept this and pay an extra $16 to PayPal if you have additional evidence.

Otherwise, it’s best to accept the second chargeback. According to PayPal [2], merchants don’t often win these cases. However, they didn’t specify a percentage.

Whether you can arbitrate (fight) a result that favors the customer depends on the card provider. You’ll need to look into each card provider’s chargeback policy to learn more.

Summary: A chargeback happens when a shopper asks their bank to reverse a payment, not through PayPal. Sellers may try to get the money back with proof, but the bank has the final word.

What Are PayPal Chargebacks?

  • Chargeback Fee: $20
  • How Long The Dispute Process Lasts: 75+ days

A PayPal chargeback happens when a shopper disputes a transaction with their bank or card issuer. This could result in the issuer reversing the payment. It differs from a PayPal dispute or claim, handled within PayPal.

PayPal represents the seller in chargeback disputes. They gather evidence then submit it to the customer's bank. And they don't decide the winner.

Summary: Chargebacks are forced reversals of transactions.

Are Refunds the Same as Chargebacks?

Refunds and chargebacks differ in initiation and impact on sellers.

Refunds:

  • Who starts it: The seller
  • Process: The merchant returns the funds to the buyer's account
  • Costs: Transaction processing fee and the order’s lost value

Chargebacks:

  • Who starts it: The shopper, through their issuer (bank or card network)
  • Process: The issuer investigates the dispute and decides whether to reverse the transaction
  • Costs: Chargeback fees and potential to lose access to card processors
Summary: Refunds are voluntary. Chargebacks are forced reversals initiated by buyers and handled by banks.

How Fair Is PayPal With Chargebacks Toward the Seller?

While PayPal deals with payments, it has no final say in chargeback disputes. The card network (e.g., American Express) decides the winner based on evidence from the buyer and seller.

The outcome for the seller can vary depending on the network involved. Some networks may have a more buyer-friendly stance. Making it harder for sellers to win disputes.

PayPal has more control over claims filed within its own claims system.

They usually side in favor of the buyer.

Unless the seller can provide compelling evidence to the contrary. Evidence could include delivery proof, tracking info, or communication records showing item receipt.

How to Prevent PayPal Chargebacks, Claims, & Disputes

Chargebacks occur outside PayPal, but prevention steps apply across processors and networks.

We have more in-depth tips in a separate guide, but here are some general tips:

  • Use Address Verification Service (AVS) to help verify the billing address provided by the customer.
  • Require CVV codes to add another layer of security to your transactions.some text
    • It’s the 3-digit code on the back of credit cards
  • Provide easy returns and refunds, and exceed expectations to reduce dissatisfaction.
  • Be wary of sudden spikes in orders from a single customer or credit card.some text
    • This could be a sign of fraud.
  • Keep your e-commerce platform and other relevant software updated.
  • Train your team to recognize suspicious activity and follow proper procedures for handling orders.
  • Analyze chargeback data to find areas for improvement in your fraud prevention strategies.
  • Some services offer alerts for potential chargebacks, allowing you to resolve issues before they escalate.
  • Use 3D Secure to add a layer of authentication for online transactions, reducing the risk of unauthorized card use.

And since PayPal has various claims and dispute categories, you’ll need preventative measures for those as well…

Significantly Not as Described (SNAD):

  • Provide detailed product descriptions that are accurate. Include materials, dimensions, and any flaws.
  • Use high-resolution photos from multiple angles, showing details and potential imperfections.
  • Clearly communicate any potential issues or limitations of the product beforehand.

Item Not Received (INR):

  • Ship items with a reputable carrier and provide tracking information to customers.
  • Consider requiring signature confirmation for high-value orders.
  • Use a reliable dropshipping supplier with inventory management and tracking capabilities.
  • Communicate expected delivery dates and offer alternatives if an item is out of stock.

Unauthorized Transactions:

  • Check for suspicious behavior, such as unusual email addresses.
  • Never refund overpayments via wire transfer.
  • Be cautious of rushed shipping requests, large orders from new customers, or abnormal order patterns.
  • Report potential scams to PayPal.
Summary: Checking addresses and credit card security codes can prevent chargebacks. Also, be sure to offer great customer service and monitor the number of orders being made.

How Would I Fight & Win PayPal Chargebacks, Disputes, & Claims?

Winning disputes and claims on PayPal requires a proactive approach and compelling evidence. Here's how merchants can increase their chances of success:

  • Address disputes promptly to avoid customer frustration.
  • Compile all documentation: proof of delivery, communication, and supporting evidence.
  • State your case clearly, focusing on facts without emotion.
  • Propose reasonable solutions: refund, replacement, or store credit.
  • If the claim is denied, appeal through PayPal's Resolution Center with new evidence.

How about fighting chargebacks?

Winning requires understanding the card network requirements and tailoring your response accordingly.

Depending on the card network, you can dispute the chargeback reason, challenge validity, or provide more evidence.

Your odds of winning chargebacks in general is 30% [5]. Then merchants win 43.82% of friendly fraud chargebacks. However, they’ll only win 9.27% of third-party fraud chargebacks.

Summary: Quickly respond to PayPal issues and have strong proof ready. Knowing card rules helps fight chargebacks, but winning is hard.

Appealing to a Claim

PayPal also has an appeal process, which allows you to potentially convince PayPal to reverse its decision and refund your money. This applies to claims, not chargebacks.

Here are some examples where you could try an appeal:

  • If the buyer claims they didn't receive an item, verify delivery with tracking or signature.
  • If a consumer claims a transaction was fraud, prove buyer authorized purchase with IP or purchase history.

You’d appeal a claim by following these pages:

PayPal account dashboard > Resolution Center > Closed Cases > Case details > Appeal.

Protection Tools That PayPal Offers

PayPal offers seller protection against chargebacks, though it's complex. These sections detail their transaction protection programs for sellers and customers.

You can't use Chargeback Protection and Fraud Protection Advanced simultaneously. Otherwise, PayPal will turn off Chargeback Protection [6].

1. Chargeback Protection

  • Chargeback Protection: 0.40% per transaction
  • Effortless Chargeback Protection: 0.60% per transaction

PayPal's Chargeback Protection shields against fees from these chargeback types:

  • Unauthorized Transactions
  • Item Not Received

They’ll charge you a percentage of the transaction amount to use this service.

You could also choose Effortless Chargeback Protection. Here’s how they’re different:

Summary: Chargeback Protection prevents merchants from incurring chargeback fees on some chargebacks.

2. Seller Protection

  • Limits on Transactions: None

PayPal's Chargeback Protection guards against fees from specific chargeback types.

Here’s what it covers:

  • Unauthorized Transactions
  • Item Not Received (INR) Claims

The eligibility requirements:

  • Seller's primary address must be in the United States.
  • The item must be tangible (with some exceptions).
  • Business must ship the item to the address on the Transaction Details page.
  • Merchant must respond to PayPal's requests for documentation.
  • Vendor must provide valid proof of shipment or delivery.

And some of its many exclusions [7]:

  • Certain items like real estate, vehicles, financial products, and NFTs (with some exceptions).
  • Transactions involving gambling, donations, payments to government bodies, etc.
  • Items not as described, INR claims filed with card issuers, and more.
Summary: PayPal's Seller Protection covers unauthorized transactions, items not received, and certain chargebacks.

3. Purchase Protection

  • Cost for Buyer Protection: $0
  • Coverage: Up to $20,000

This program is for shoppers, but you (as a merchant) should know about it. That way, you can anticipate what will happen during some disputes.

PayPal Buyer Protection is a free program that applies to eligible purchases made through PayPal. It offers a full refund, including shipping costs, if a customer doesn’t receive their item or if it differs from your description.

To qualify, a purchase must be eligible. The buyer must file a dispute within 180 days. If unresolved, it escalates to a claim.

From there, PayPal will investigate and decide based on the evidence. If the claim is approved, the shopper will receive a full refund. However, they’ll have to return the item — unless it’s counterfeit.

Covered items include most tangible goods and some digital goods.

Exclusions include:

  • Real estate
  • Vehicles
  • Financial products
  • Gambling
  • Payments to government agencies
  • Accurately described items
  • And more
Summary: PayPal Buyer Protection is a free program for buyers who experience problems with their purchases. If an item is not received or as described, PayPal may refund the buyer's money.

4. Fraud Protection

Cost:

  • Basic Package: Free
  • Advanced Package: $10/mo
  • Buyer Authentication +: $10/mo

PayPal has built-in fraud protection to help you determine whether a transaction is legitimate. The basic package is free and doesn’t require you to sign up for it.

Fraud Protection Advanced analyzes various factors associated with a transaction, including:

  • Buyer Information: Location, purchase history, account age, and behavior patterns.
  • Transaction Details: Amount, shipping address, device used, and payment method.
  • Merchant-Specific Data: Past transaction history, product types, and average order value.

This analysis assigns a fraud score per transaction for merchant decisions. It resembles standard fraud-scoring tools. Basic Package offers fixed risk rules without detailed risk data.

Buyer Authentication refers to the implementation of 3D Secure (3DS) protocols. It adds a layer of security to online transactions by requiring buyers to verify their identity before completing a purchase.

PayPal's 3D Secure redirects buyers to their card issuer for extra authentication using a one-time password.

For fees, add $0.05 per transaction for Advanced or $0.10 for Buyer Authentication + package.

Summary: PayPal gives free tools to stop scams, with stronger options costing extra. Their premium tools check a lot of details, like who's buying and what they're buying, to help stores decide if a sale is real.

How Chargebacks Affect Businesses

With PayPal, chargebacks won’t affect businesses.

But they will with particular card networks. For instance, if you’re stuck in Visa’s Dispute Monitoring Program for more than 12 months, they could suspend your access to their cards.

Having a high claim rate on PayPal could affect you, though. For instance, if your claim rate is too high, they’ll [8]:

  • Review your account
  • Limit what you can do
  • Hold funds for up to 21 days: For instance, they could hold 10% of your daily transaction volume until you reach a balance of $10,000

Having too many disputes on your account will result in High Volume ($16) or Standard Dispute Fees ($8.00).

Finishing Up

Despite the chargeback process happening outside of PayPal, they’ll still get money from you through a chargeback or dispute fee.

It’s preferable to deal with a claim or a dispute through PayPal because chargebacks can do much more damage to your business.

That’s why you should want to prevent chargebacks. We can also help with our chargeback alerts. Learn how they can help.

Sources

Theodore Covey
Educator
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