How to Prevent PayPal Chargebacks (As a Merchant)

Having used PayPal to accept payments, I prepared to prevent claims and disputes. And my strategies worked.

I’ll provide tips and examples of ways to prevent chargebacks (which happen outside of PayPal), claims, and disputes.

Let’s prevent some chargebacks.

Key Takeaways

• Chargebacks are separate from PayPal’s claims and dispute processes.
• To prevent issues, be transparent, reduce fraud, and ensure timely shipping.
• Streamers have limited options to fight chargebacks, disputes, and claims.
• PayPal protects against chargebacks from unauthorized transactions and unreceived items.
• Losing disputes leads to fees, bad reputation, and account holds.

Can You Avoid Chargebacks With PayPal?

Yes, you can avoid chargebacks by implementing preventative measures.

Avoiding PayPal Chargebacks as a Merchant

PayPal has various categories for their claims and dispute processes, which aren’t chargebacks. Thus, I’ll cover ways to prevent those in separate sections.

The actual chargeback process takes place outside of PayPal. However, I’ll weave in ways you reduce chargebacks through PayPal itself. Because they do offer some tools to help merchants.

Preventing Chargebacks

The following are measures you can take to prevent chargebacks in general. We cover more methods in-depth in a separate guide.

1. Respond to Pre-chargeback Alerts ASAP

Pre-chargeback alerts from PayPal notify merchants of likely chargeback transactions. This allows merchants to address issues with buyers before formal disputes arise.

Address these within 20 hours for the best results [1]. PayPal does give you 10 days to respond, but the sooner you respond, the more likely you are to prevent a chargeback.

We partner with alert providers (RDR, CDRN, Ethoca) to help fight disputes early. Our integrations with processors (e.g., Stripe and PayPal) make this process easier for merchants.

See how we can help.

Summary: Respond to pre-chargeback alerts within 20 hours.

2. Optimize Your Return & Cancellation Policy

More than 81% of surveyed customers believe that chargebacks are easier to deal with than refunds [2].

That means you should make your cancellation and return policy better by implementing the following:

• State return and cancellation window, refund conditions, and any restocking fees upfront.some text
  • Use clear, specific language for terms.
• Offer a reasonable return window, like 30 days.
• Provide various refund options: store credit, exchange, or full refund.
• Simplify the return process with prepaid labels or clear return instructions.

Now, you’ll need to make it easy to find. Place it in areas the customer will easily see, like near the “Add to Cart” button, on the checkout page, and / or on their order confirmation emails.

Image from YouCanBookMe.

Summary: Create a cancellation and return policy that’s easy to find and read.

3. Suggest Using the Dispute Resolution Center

Your customer may say in a customer service conversation that they will file a chargeback with their bank or credit card issuer. Try to convince them to open a dispute in the PayPal Resolution Center instead.

This will allow you and the customer to work things out without getting the bank or PayPal involved. If the customer doesn’t like your response to the dispute, they may escalate to a claim (through PayPal) instead of a chargeback.

Although PayPal often favors buyers, it’s better than dealing with banks and card networks.

4. Confirm Orders Before Shipping

Confirming orders verifies addresses, billing, and product availability before shipping.

This step minimizes errors that could lead to incorrect shipments or delays, which are common reasons for chargebacks.

5. Pay Attention to Patterns

Pay attention to buying patterns or information such as:

• Multiple orders from one customer using different cards or addresses signal unusual activity.
• Review large purchases made with new accounts.
• Mismatched billing and shipping addresses may indicate fraud.
• Document suspicious claims. Gather evidence to support chargeback cases.

By identifying these red flags, you can assess the risk level of a transaction and take appropriate action. Such as requesting additional verification or canceling suspicious orders.

Fraud scoring software will automate this process. Or…

Businesses with high transaction volumes should hire a chargeback analyst. Analysts identify patterns and mitigate risks, safeguarding your business.

Summary: Watch for weird orders or info, like lots of orders from the same person or different addresses.

6. Use Extra Security When Shipping to High-Risk Countries

Shipping to high-risk countries involves elevated risks of fraud, including chargebacks.

To mitigate these risks, you can implement additional security measures:

• PayPal suggests delaying shipping by 24 – 48 hours for payment verification.
• Require a signature upon delivery to confirm receipt.
• Buy shipping insurance for product loss or damage coverage.
• Consider limiting high-value shipments to regions with fraud history.

Now, what are “high-risk” countries?

Data suggests that Brazil (3.48% chargeback rate) and Mexico (2.81%) have the highest chargeback rates among all countries [3]. I don’t know when they gathered this data, though the article was published in 2023.

7. Use Clear Business Descriptors

Clear business descriptors on billing statements help customers recognize the purchase they made. Reducing confusion and the likelihood of chargebacks.

Include your business name, phone number, or website URL in the descriptor.

For example, instead of a vague descriptor like "Online Purchase," use something like "ABC Store 123-456-7890."

8. Provide Contact Information & Wait Times

Offer clear contact details for quick customer inquiries, preventing potential chargebacks. This open communication can help resolve issues before they escalate into chargebacks.

Providing estimated wait times for customer service responses manages expectations and reduces frustration. Preventing customers from filing a chargeback due to perceived inaction.

Unauthorized Transactions (Claims & Disputes)

Unauthorized PayPal transactions occur when payments are made without permission. Reasons include compromised accounts, stolen cards, or phishing scams.

PayPal will cover some transactions under their Seller Protection. However, these steps will help you take further action.

1. Pay Attention to Suspicious Behavior

Customers may use software to spoof their identity or unusual contact information when making purchases.

Pay attention to and consider marking transactions of fraud if you encounter the following:

• Email Addresses: Look out for disposable emails or aliases.
• Phone Numbers: Verify using a third-party or call the customer.
• Shipping Addresses:some text
  • Beware of money mules and freight forwarders.
  • Be cautious of vacant properties and PO boxes.

Delay shipment for 24 to 48 hours if transactions include this information to verify with the customer.

2. Deal With Overpayments Immediately

Customers may overpay transactions and ask you to reverse the transaction via a wire transfer. This is a scam.

Don’t refund the transaction via wire transfer; return the money through PayPal.

From there, warn PayPal that there is a potential scam transaction.

3. Other Behaviors to Watch Out For

Reconsider processing transactions with the following red flags:

• Fraudsters request overnight shipping to evade detection.
• New customers make unusually large or high-demand orders.
• Abnormal order frequency noted.
• Small, frequent orders may mask fraudulent activity.
• Address changes post-payment may indicate fraud.

PayPal also says that orders are suspicious at unusual times of the day. However, that order could have come from a legitimate customer in a different time zone who was ordering from their home.

In this case, confirm the transaction with them.

Summary: Look for big, unusual, or too many orders. These could be signs of scammers trying to trick you. 

Item Not Received

The "Item Not Received" (INR) category in PayPal disputes and claims is used when a buyer reports that they paid for an item but never received it.

We’ll cover ways to help prevent these types of claims from happening to you.

1. Provide Shipping Insurance

Shipping insurance safeguards merchants if packages are lost or damaged. It's vital for fragile or pricey items, minimizing replacement costs.

It also includes tracking and delivery confirmation services.

This allows the seller and the buyer to monitor the package's progress and verify its delivery status.

For an INR claim, sellers should share tracking info to prevent chargebacks. Doing so helps you avoid chargebacks.

Some shipping insurers offer extras like signature confirmation. Boosting delivery proof and fraud protection.

2. Ensure You Choose a Trustworthy Dropshipping Supplier

For dropshipping merchants, a dependable supplier means swift order fulfillment and accurate tracking. A subpar supplier leads to delays or failed deliveries.

When selecting a dropshipping supplier, prioritize the following:

• Utilizes robust inventory management.
• Ensures fast order processing and shipping.
• Provides accurate order tracking.
• Emphasizes quality control to reduce defects.
• Communicates responsively and transparently.

A reliable dropshipping partner streamlines fulfillment, reduces errors, and enhances satisfaction.

Summary: Stores should seek suppliers handling products and shipping well with open communication.

3. Get Signature Confirmation

The recipient's signature acts as a legally binding acknowledgment of receipt. Making it difficult for them to falsely claim non-delivery.

PayPal recommends that merchants purchase signature confirmation for orders of $750 or more [4]. As this additional layer of protection can strengthen their case in the event of an INR dispute.

Despite the extra cost, the savings from avoided chargebacks make it worth it for high-value transactions.

4. Be Transparent With Delivery Dates

Communicate estimated delivery times on product pages, during checkout, and in confirmation emails. Consider offering a range of shipping options with varying delivery times.

Be transparent about shipping delays, offer discounts or free shipping. Provide frequent tracking updates for customer reassurance.

5. Out of Stock? Let Customers Know & Refund Them

This transparency manages customer expectations and avoids disappointment caused by unexpected delays. Or, instead of just issuing a refund, you can offer alternatives to retain the customer's business.

These include:

• Suggesting a similar product: Offer a comparable item that's in stock and might meet the customer's needs.
• Providing a discount or coupon: Incentivize the customer to wait for the out-of-stock item to become available.
• Offering a pre-order option: If the item is restocked soon, customers can pre-order it to secure their purchase.

iHerb does a great job with their page designs by letting the customer know the item’s out of stock and when it’ll be back. From there, they allow the customers to enter their email for notifications.

As someone who shops from iHerb, I appreciate the email updates. Though, they often change the “back in stock” date.

Not as Described

PayPal uses the "Significantly Not As Described" (SNAD) category for disputes. It applies when buyers get items that don't match the seller's listing description or images.

This could mean the item is damaged, defective, counterfeit, or missing essential components.

SNAD does not apply to minor discrepancies or subjective preferences.

With that in mind, we’ll go over ways to prevent claims and disputes in this category.

1. Be Transparent About Defects

Customers informed of potential flaws are less likely to feel misled upon receiving the item. Reducing dispute likelihood.

Here are ways you can be transparent about product defects without deterring customers:

• Include a section in your product description mentioning any known defects or imperfections.
• Supplement the description with high-resolution photos showing the defect from multiple angles.some text
  • This visual representation gives customers a realistic expectation of the product's condition.
• If the defect is significant, consider offering a discount to compensate for the imperfection.
• While being upfront about defects, emphasize the product's positive aspects and unique features. 

This screenshot doesn’t emphasize anything about defects, but it helps set customer expectations:

Screenshot from Away Travel.

Away visualizes the suitcase’s size, how many outfits it’ll fit, then they provide a list of airlines this is compatible with. That way, customers can’t claim that the vendor didn’t warn them the luggage wouldn’t fit on particular airlines.

2. Predict Potential Issues

This involves anticipating confusion or mismatched expectations and clarifying product details before shipping.

Let's say that you have a clothing item that's known to run small. Add a note about sizing in the product description or email the buyer for size confirmation

Or, if a product has unique features that may not be obvious from photos, you could create a detailed video demonstration.

This helps set realistic expectations about the product’s condition.

3. Be Thorough With Pictures & Descriptions

Based on what I did with my store, here are examples of how to optimize your product description:

• Include details like dimensions, materials, weight, and any unique features.
• Mention any imperfections, wear, or tear to manage expectations.
• Don't oversell the product or use misleading language.
• Ensure your writing is understandable by a 6th grader and doesn’t have jargon.
• Review and update descriptions as needed.

Again, Away Luggage does an excellent job making their product descriptions easy to read:

It’s in list form, the sentences are short, and there’s no jargon.

Now, you’ll need to make your product photos better with these tips:

• Multiple angles: Take from various angles to show the product fully.
• Close-ups: Include close-ups to showcase details and textures.
• Lighting: Use natural lighting or well-lit environments for accurate color representation.
• Scale: Provide a reference point, like a ruler or common object, to indicate size.
• Show flaws: If applicable, include photos of any imperfections or damage.

4. Don’t Be Vague When Answering Questions

Don’t provide vague answers to legitimate questions that customers have about transactions. I’ve dealt with many websites that write a lot of stuff about a product that doesn’t actually provide useful information.

The same goes for customer service interactions I’ve had.

Here’s a good example: A customer asks, “I'm not sure if this product is compatible with my device,” and the service staff replies, “It should be.”

They should reply with a response that’s more helpful, like this:

“To confirm compatibility, please provide me with the model number of your device. I'll check our database and let you know if this product is a good fit. Or refer to the compatibility chart on our website or product manual for more information.”

Though customers can’t file a dispute, claim, or chargeback for lousy customer service, it’ll encourage them to find an excuse to do so.

Is There Anything Different You’d Do as a Streamer?

PayPal’s Seller Protection does not cover donations.

As a streamer, there’s not much you can do to protect yourself from disputes, claims, or chargebacks. That’s bad if there’s a donor who made multiple small donations, got frustrated, then disputed all those tips.

You may have heard of StreamElements. The software will deal with all chargebacks and cover chargeback fees for all disputes on transactions of SE.Pay. Their chargeback protection doesn’t extend to PayPal.

However, if you’re adamant about sticking to PayPal, here are some options.

1. Clear Communication

Ensure you place a statement that clearly states that tips are voluntary. Moreover, you need to state that you don’t provide services or goods in exchange for such tips.

This might deter some disputes.

In disputes, if a "product not as described," send a disclaimer screenshot to PayPal or the bank.

Moreover, do not label the money you receive as “donations.” Label them as “tips.” 

Because donations are for non-profit organizations. Do you see how this could become awkward when filling out taxes? This could also save you from awkward discussions with PayPal during arbitration.

Also, including a statement like “tips are non-refundable” could help you during an investigation as well. It may not prevent disputes. But it may prevent you from receiving fees for claims and chargebacks.

Summary: State that tips are voluntary and not tied to any service to avoid problems. This protects you from losing money if someone complains later.

2. Use Proprietary Digital Currencies & Gifted Subs Instead

This doesn’t apply to PayPal, but can help you dodge chargebacks.

Digital currencies like Twitch Bits and Twitch Subs can help prevent chargebacks. They help because they're not tied to the streamer and the platform would deal with the chargeback.

Let’s talk about how Bits work, first:

1. Viewers buy through Twitch.
2. Twitch takes a cut.
3. Viewers donate Bits to streamers.
4. Bits are non-refundable.
5. Twitch handles transaction fallout.

You earn less per tip/donation but avoid chargeback risks from users trolling.

Then, there’s the risk of fraudulent Bits.

Fraudsters use stolen payment info to buy bits, then Cheer them, as seen in 2021 when 40 were arrested in Turkey [5]. The best way to avoid bans from this is to report suspicious tips.

Then there are gifted subs.

They offer some protection because if a chargeback occurs on a gifted sub before it's paid out, Twitch will reverse the transaction. From there, they'll remove it from the streamer's earnings.

A chargeback after payout deducts from earnings, delaying future payouts until cleared.

While not ideal, Twitch bears the burden of the chargeback. Moreover, streamers don’t need to deal with the chargeback process or resulting fees.

Summary: Using Twitch Bits or gift subscriptions to pay streamers is a good idea because it protects from fraud. However, Twitch Bits and gift subscriptions can sometimes be used for illegal activities. 

General Information Regarding PayPal’s Chargeback Policy

• Chargeback Fee:some text
  • Dispute Fee ($8.00): When a customer disputes a transaction done through PayPal.
  • High Volume Dispute Fee ($16): When a customer disputes a transaction, and your dispute rate is too high.
  • Chargeback Fee ($20): When a customer initiates a chargeback with their bank.
• How Long Does the Chargeback Process Last?: 75+ days

A chargeback happens when a buyer disputes their transaction with their card issuer. This is outside of PayPal's resolution center.

Here's what happens when a chargeback is filed:

1. PayPal notifies seller of chargeback.
2. Holds disputed funds until resolved.
3. Seller submits evidence (e.g., tracking info, delivery proof).
4. PayPal represents seller, submits evidence.
5. Card issuer makes final decision.
6. Outcome:some text
   1. Seller wins: Funds released.
   2. Shopper wins: Funds returned, possible fee.

The chargeback process itself will vary by card provider and bank. Moreover, it’s handled outside of PayPal.

Summary: When buyers ask their bank to reverse a PayPal purchase, it's called a chargeback. This process takes over 2 months and may cost sellers extra fees.

How Does PayPal Decide Who Wins & Do They Side with the Seller?

There’s a huge difference between the claims and chargeback process. First, we’ll talk about claims, which is when PayPal is the arbiter.

PayPal will decide who wins a chargeback or a claim based on which party can provide the most convincing evidence.

They’ll review such evidence based on their policies. If the buyer's claim is valid, they may receive a full or partial refund. If the seller's case is stronger, the claim may be denied.

From my experience, PayPal often favors buyers in claims.

Now for chargebacks.

The customer’s bank (issuer) or the card network is who will decide the winner in chargebacks (aka disputes). Banks and card networks will often use the terms “chargebacks” and “disputes” interchangeably.

Anyway.

PayPal would be your acquirer, the party that gathers evidence and provides it to the issuer. Thus, you’ll need to provide the evidence that the issuer or card network (e.g., Visa) requires.

Summary: Claims are like arguments where PayPal is the judge, choosing who's right. Chargebacks are different: the buyer's bank decides, not PayPal.

Does PayPal Protect Sellers Against Chargebacks?

Yes, PayPal Chargeback Protection protects sellers against chargebacks in certain circumstances [6]. It covers unauthorized transactions and items not received but not not as described claims.

What Happens if I Lose a PayPal Dispute?

Here’s what’ll happen if you lose a chargeback, dispute, or claim case on PayPal:

• Refund full purchase price for funds lost.
• PayPal charges non-refundable chargeback fee.
• Losing disputes harms seller performance metrics.
• May restrict or suspend PayPal account.
• High dispute rate increases fees PayPal charges.

Summary: Losing disputes, chargebacks, or claims can lead to fees, account limits, and hurt seller performance.

Conclusion

Focus on fraud prevention, detailed products, and quality logistics to minimize chargebacks. Using our chargeback alerts tool will also help prevent chargebacks. Learn more about how we can help.

Sources

• [1] PayPal: How to respond to pre-chargeback alerts
• [2] Lithic: Chargeback management guide
• [3] Clearly Payments: Chargeback rate by country
• [4] PayPal: Help avoid chargebacks
• [5] Dexerto: Twitch streamer gets banned over Bits scam
• [6] PayPal: Seller Protection Program TOS