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PayPal Refund Scams: How to Deal With & Avoid Them

Key takeaways

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PayPal Refund Scams: How to Deal With & Avoid Them

PayPal refund scams are when a “customer” will overpay for a transaction, request a refund, and get free money through a different account. Because this is typically done with stolen payment information.
Author
Theodore Covey
Category
Fraud
Date posted
July 4, 2024
Time to read
8
minutes

Learn how to prevent your business from becoming a victim of this scam.

When accepting payments through PayPal, I’ve prepared myself for most scams. Because scams have cost businesses billions [1].

This guide will help you avoid overpayment scams and help you save money you could otherwise use to grow your business.

Let’s stop some scams.

Key Takeaways

  • Do not refund overpaid transactions; cancel them instead.
  • Refund scams are a form of third-party fraud.
  • These types of scams could lead to fraud-related chargebacks.
  • If you’ve been a victim, contact your bank to see if they can reverse the transaction.
  • Ensure you notify PayPal of the scam.

What to Do if You’re a Victim of a PayPal Scam

You might be here because you’ve already fallen victim to a scam. We need to help you first.

If you’re just learning how to prevent different types of scams, skip this section.

If someone overpaid for a transaction and you haven’t refunded it, cancel it immediately. From there, report the suspicious transaction to PayPal. Click report a problem, then select the problematic transaction.

Don’t delete your conversation logs with the customer. Take screenshots of the conversation with the customers and send those as evidence if PayPal asks you to.

If you refunded the transaction, contact your bank immediately. They could cancel the transaction on their end, which could prevent more damage from happening during a chargeback.

From there, you could report your situation to the Federal Trade Commission (FTC) if you’re in the US. They won’t do anything about your particular case. However, “being aware” of this type of scam can help combat it in the long-term.

Screenshot from the FTC (US)

If you’re outside the United States, report the scam to whatever government body is the equivalent of the US FTC.

The true cardholder will likely notice the fraudulent transaction on their account. As the payment information the scammer used is likely stolen. And they’ll want their money back.

To do this, they’ll start a claim or a dispute in PayPal or a chargeback outside of PayPal. If they do a claim or dispute, consider this a blessing and immediately refund them. Because you don’t want it to escalate to a chargeback (aka dispute).

The more fraudulent chargebacks you have, the more likely a card network will place you in their fraud monitoring programs, resulting in copious fees and the potential loss of your ability to accept their cards.

Summary: If you've been scammed, report the transaction to PayPal and contact your bank. Report the scam to the government, as this helps prevent future scams.

What Are PayPal Refund Scams & How Do They Work?

A PayPal refund scam (AKA an overpayment scam) is a type of fraud in which a scammer sends you more money than the agreed price for an item or service and asks you to refund the difference. Think of it as a form of wire fraud.

And it’s an example of true fraud.

Here's how it usually works:

  1. The scammer contacts you, usually through an online marketplace, expressing interest in buying your item or service.
  2. They agree to the price and send a PayPal payment that is intentionally higher than the amount due.
  3. You receive the payment and notice it's more than expected.
  4. The scammer contacts you, claiming they accidentally overpaid and asks you to return the difference, often providing a plausible excuse (e.g., they mistyped the amount, the extra was for shipping, etc.).

Let’s say you refund the customer, who turns out to be a fraudster.

The legitimate cardholder will notice the overpayment and open a dispute on PayPal, or worse, initiate a chargeback. Now, you’ll need to pay the actual account holder back for the amount lost.

If they skipped the dispute process and went straight to their bank or card network, the institution will likely slap you with a chargeback fee. Then, the chargeback will contribute to your chargeback threshold.

And merchants will lose more than 90% of fraud-related chargeback cases.

Now you have these expenses for a single transaction:

  • Labor to process order.
  • Refund the overpayment to the fake customer.
  • Chargeback reversal of overpaid amount to customer’s account.
  • Dispute fee (if done through PayPal) or chargeback fee.
  • Labor put toward the chargeback and/or dispute cases.

Don’t panic. There are red flags that can help you detect these scams.

Summary: In a PayPal overpayment scam, the scammer sends you more money than the purchase price and then asks for the extra back.

Red Flags to Watch Out For

Here’s what to keep an eye out for:

  • Urgency: They’ll pressure you to quickly refund them.
  • Overpayment: Customer overpaid for an item.
  • Vague conversations: Tons of grammatical errors, rambling, and odd choice of words.

PayPal has had a 47% increase in scams and fraudulent reports since 2019, which is why you should be careful [2].

The above list mostly explains what you should know. But we’ll dive further into each flag.

1. Urgency

Scammers create urgency in PayPal refund scams to pressure victims into acting quickly without thinking. They might claim the overpayment was a dire mistake, a time-sensitive gift, or needed for an emergency.

Phrases like "urgent," "immediate refund," or "ASAP" are common.

They may also threaten to cancel the order or leave negative feedback if it is not refunded promptly. However, if they go with the threats of cancellation, you should call their bluff. Because they don’t actually want you to cancel the transaction.

They wouldn’t get anything out of it.

This pressure tactic aims to exploit your fear and goodwill, making you less likely to question the situation and more willing to send the refund.

2. Overpayment

In no normal transaction should anyone overpay for an item. If anyone overpays (and I will repeat this), cancel the transaction.

3. Vague Conversations

Scammers often use overly polite language like "kindly" and "Hello, dear" to disarm victims and create a false sense of trust. Moreover, it’s typical language used outside of the US, UK, Australia, etc. Hinting that the buyer is likely outside these countries.

While that in itself doesn’t automatically mark this as a scam, combining it with the other red flags means this transaction is most likely a scam.

Also, look for obvious grammatical and spelling mistakes. However, as scammers gain more access to software like ChatGPT, their grammar will improve. Making it harder to spot a scammer.

Ways to Stop PayPal Refund Scams

Aside from paying attention to the red flags above, here’s what else you can do to stop refund scams:

  • If you think there’s a scam, report it to PayPal immediately.some text
    • Provide them with all relevant information, including messages and transaction details.
  • Let the buyer know that you’ll cancel the order (ASAP) then cancel the order. If they question your choice, refer them to your store’s policy.
  • State in your terms of use that you do not refund overpayments.some text
    • This gives you an easy way out when canceling overpaid orders.
  • Cancel an overpaid transaction ASAP. If you cannot cancel it on your end, see if your bank can reverse the transaction before it goes through.

If you’ve already been a victim of a refund scam, refer to the first section of this post to learn what steps to take.

Other Types of Scams & How to Avoid Them

Here are some other scams you should know about to avoid losing money (as a merchant).

1. Prepaid Label Scams

A prepaid shipping label scam involves a buyer sending you a shipping label they claim to have purchased at a discount. They might even tell you they get a special rate due to their business or connections.

This is a trick to manipulate the shipping process.

Here’s how it works:

  • The buyer sends you a prepaid shipping label and asks you to use it for the order.
  • You use the label to ship the item.
  • The scammer, having control of the label, changes the delivery address to a different location, often a PO box or an untraceable address.
  • The buyer claims they didn't receive the item and initiates a chargeback or dispute through PayPal. Since you didn't ship to the right address, you lost the item and the payment.

And since you didn’t ship to an address on the Transaction Details page, you won’t be eligible for protection under PayPal’s Seller Protection Policy [3].

These transactions are also usually conducted by fraudsters who use stolen payment information. And do you know what that means? Chargebacks, disputes, and claims will follow.

Here’s how to avoid this scam:

  • Always create your own shipping labels using PayPal's shipping tools or your preferred carrier.
  • Only send the product to the address shown on the Transaction Details page.
  • If a buyer insists on using their label or offers unusual shipping arrangements, it's a red flag.

If you suspect a prepaid shipping label scam, report it to PayPal. Otherwise, if something feels off, cancel the transaction.

It’s better to deal with negative feedback than to risk a fraudulent chargeback, dispute, or claim. All of which could have long-lasting effects on your ability to process payments.

Summary: Buyers may try to trick you into using their shipping labels. Never use a label given to you by the buyer; create your own instead.

2. Package Rerouting Scams

This scam involves a buyer intentionally providing an incorrect or fake shipping address.

Once the package is en route, they contact the shipping company and have it redirected to their actual location. This leaves the seller unable to prove delivery to the original address. The buyer can then falsely claim non-delivery and request a refund through PayPal.

Here’s how to avoid this scam:

  • Before shipping, double-check the address provided by the buyer.some text
    • If it seems suspicious or incomplete, confirm it with them directly.
  • Require a signature when your package reaches the intended recipient.
  • Purchase shipping insurance for expensive items to protect yourself in case of fraudulent claims.
  • Keep records of all communication with the buyer.

If you suspect a package rerouting scam, report it to PayPal immediately.

Summary: A scammer buys something but gives a fake address, then changes it while the package is being shipped. Sellers can stay safe by double-checking addresses and getting signatures at delivery.

Wrapping Up

If you encounter any fishy behavior on PayPal, cancel the order immediately (if possible). Afterward, report the suspicious activity to PayPal. Doing this may hurt you in the short term, but it’ll help protect you from disputes, claims, and chargebacks.

You’ll need additional protection from chargebacks. We can help by providing you with alerts for transactions that could lead to chargebacks. Learn more now.

Sources

Theodore Covey
Educator
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