5 Ways to Protect Your Business from PayPal Chargeback Fraud

With the increase in chargeback and friendly fraud, businesses are finding themselves at risk when they accept legitimate online payments. Often, PayPal is the payment method of choice because of its longstanding reputation as a secure way to buy and sell products and services online. 

And PayPal is busier than ever. PayPal processed a whopping $1.6 trillion of annualized total payment volume (TPV) in the third quarter of 2023 and has over 430 million active consumer and merchant accounts. PayPal’s usage continues to climb. It’s accepted at 82.8% of the online retailers ranked in Digital Commerce 360’s Top 1000. 

Unfortunately, every increase in volume comes with a downside: Thieves are increasingly using PayPal to make fraudulent chargebacks and claims.

The typical scenario? A fraudster places an order online and pays via PayPal — using either a credit card or a PayPal account — and then turns around and files a dispute, either with the card issuer (resulting in a chargeback) or with PayPal’s Resolution Center (resulting in a dispute and claim). All too often, the fraudster gets their money back while keeping the item, leaving the seller high and dry. What’s worse, losing a claim under PayPal’s Purchase Protection Program may affect your company’s reputation and ability to conduct future transactions via PayPal.

To understand how to keep this from happening, it’s important to first understand how chargebacks and claims work.

The Difference Between PayPal Chargebacks and PayPal Claims

Although they look similar, credit card chargebacks and PayPal claims have a key difference: who resolves the dispute.

Credit Card Chargebacks

When cardholders dispute questionable PayPal credit card transactions with their credit card issuer, the issuer notifies PayPal and requests a response. PayPal then follows these three steps in the chargeback process:in the chargeback process:

  1. PayPal notifies businesses that a customer has filed a chargeback and adds a notification in the online Resolution Center.
  2. PayPal asks businesses to provide evidence to respond to the chargeback. The required proof varies based on the transaction but often includes things like proof of shipment of delivery or communication between the business and customer. Businesses must upload and submit all documentation within 10 days of being notified of the chargeback.
  3. PayPal helps the business submit the evidence to the credit card issuer, who reviews it and makes their decision.

If the cardholder isn’t determined to be responsible, the issuer processes a chargeback — reversing the transferred funds, debiting the business’s account for the amount of the sale plus a $20 PayPal chargeback fee, and not refunding seller fees.

If the credit card company rules in favor of the business, the buyer will be charged for the transaction, and the funds will be returned to the business’s account.

PayPal Claims

A customer disputes a transaction with PayPal by first opening a dispute through PayPal’s online Resolution Center and trying to resolve the issue with you, the business. 

If that fails, within 20 days of opening a dispute, the customer can escalate the dispute to a claim for PayPal to investigate. If PayPal reverses the transaction and returns the funds to the customer, you’re responsible for the full amount and may be out the merchandise as well.

To defend yourself against a claim, you may need to provide PayPal transaction information, like:

  • Proof of delivery, like a third-party shipping receipt, tracking number or signature confirmation.
  • Proof you delivered a replacement or issued a refund if the buyer received their order but there was a problem with it.
  • Other proof to show that services were provided, like a signed contract.

Many businesses feel that PayPal resolutions tend to favor the purchaser — even in fraudulent transactions. And if a purchaser files and wins a fraudulent claim, the fraudster often gets away with both the product and the money. 

But you do have the opportunity to appeal the claim if you can prove:

  • You received the returned item from the buyer, but it wasn’t in the same condition as when the buyer first received it.
  • You received just an empty box — no item was returned at all.
  • The wrong item was returned to you.

Regardless of whether you’re on the receiving end of a PayPal chargeback or claim, when you consider the costs of fees, transaction amounts, and lost product, the cost to you can quickly add up. What steps should companies take when they learn that they are subject to a chargeback? First and foremost, determine whether a chargeback dispute even makes business sense.

Criteria for Chargeback Disputes

Some businesses see chargebacks as the cost of doing business. They don’t think filing a dispute is worth the effort, as long as their chargeback rate is under the 1% threshold. But that’s not the case for small and midsize businesses. 

Too many chargebacks can be the downfall of a business dependent on every revenue dollar. That’s why those companies need to have criteria that make it worth expending the time, energy and resources needed to fight a chargeback. 

Companies should definitely dispute a chargeback in the following situations:

  • They’re confident the transaction was legitimate and want to put a stop to customers who take advantage of them. About 86% of chargebacks are deemed fraudulent, and 40% of customers who file one fraudulent chargeback will file another within 90 days.
  • They have compelling evidence to refute the chargeback.
  • They’ve already refunded the purchase. This is where a customer is committing chargeback fraud — an increasingly common problem in the post-pandemic era.
  • The cost of disputing the chargeback is less than the chargeback-related costs. For example, if a company is nearing the point where they might be put on a monitoring program and incur more fees, it’s worth it to dispute almost every chargeback.

Once the decision to dispute a chargeback has been made, it’s time to dive into the reason for the chargeback.

For every chargeback, a card issuer assigns a reason code that clearly describes why the customer is challenging the transaction. Some reason codes are more frequently abused than others, which can contribute to data analysis about fraud trends and activity by revealing patterns like:

  • Which transactions have the potential to affect their revenue?
  • Which codes their product or service line tends to trigger most frequently?
  • Which chargebacks are happening more regularly?
  • When chargebacks typically take place the most?

Identifying these patterns assists businesses in preventing and defending against future chargebacks.

How to Defend Yourself Against a Chargeback or PayPal Claim

When businesses dispute chargebacks and PayPal claims, the key is to do it the correct way. Remember, you have only 10 days to respond, so make sure to include everything you can to prove the validity of the transaction, including:

  • Proof that the customer was on your website, whether it’s using the customer’s IP address, a CVV match or their billing address. 
  • If you have the customer’s IP address, you can track where on your site they visited to prove their intent was to make a purchase.
  • Proof that the product or service was delivered or accessed. For physical delivery, a signature is one of the most compelling pieces of evidence. For digital goods and services, proof of customer log in or download is equally convincing.
  • Evidence of a repeat offender, such as a data log showing a history of chargebacks and chargeback attempts by the same person or to the same address.
  • A summary of all evidence in a clear, concise rebuttal letter. 

One way businesses can dispute chargebacks is to use social media to their advantage. There are customers who will commit chargeback fraud and then brag about it on social media. Do a little digging to see if the customer in question has posted on social media wearing, using or reviewing the item(s) in question. Submit screenshots of those posts or recorded videos and make sure to include the timestamp for accuracy. 

What to Do About PayPal Chargeback Fraud

To protect your business from PayPal chargeback fraud, follow these five suggestions:

  1. Meet seller protection requirements.
  2. Avoid risky transactions.
  3. Minimize “Unauthorized transaction” claims.
  4. Reduce “Item not received” claims.
  5. Avoid “Significantly not as described” claims.

Let’s examine these in more detail. 


1. Meet Seller Protection Requirements

Follow the requirements that PayPal has set for its Seller Protection Program. This program is designed to increase sellers’ confidence by protecting online sales; helping prevent fraud; and minimizing claims, chargebacks, and reversals. In certain situations, the program also lets businesses retain the full purchase amount and waives any related chargeback fees paid (for debit and credit card transactions).


2. Avoid Risky Transactions

Businesses should be wary of conducting high-risk transactions (such as selling high-tech equipment or investing in crowdfunding platforms) through PayPal, as not every transaction is protected. For example, PayPal has eliminated its purchase protection for gift cards, which means that fraudsters could purchase a business’s gift cards using PayPal and file a claim against the transaction. And because gift card transactions are no longer covered, businesses have no recourse.


3. Minimize “Unauthorized Transaction” Claims

Unauthorized transaction” disputes often arise when customers believe their PayPal accounts have been used without their permission. Customers have 60 days from the date a suspect transaction appeared on a statement to report the transaction to PayPal.

PayPal suggests businesses avoid this pitfall by:

  • Implementing extra security measures when shipping orders to high-risk countries and locations
  • Clearly communicating the business name that customers can expect to see on PayPal invoices. This helps prevent claims stemming from confusion over a DBA or parent company name that may appear on a credit card statement. Using the website name can be a good way for customers to recognize the transaction.
  • Contacting customers and confirming order information before you ship items.
  • Meeting or exceeding proof of delivery requirements, including providing documentation from a shipping company that shows the date of delivery, “delivered” status and a delivery address that matches the address on the transaction details.
  • Questioning an order that has multiple requests for the same item.
  • Investigating customers using suspicious email addresses, like rtos89qu$$pq@hotmail.com.

4. Reduce “Item Not Received” Claims

Fraudsters may claim that an order wasn’t received and subsequently initiate a dispute with their credit card issuer or through PayPal.

Ways to avoid these types of claims include:

  • Providing clear delivery dates so customers know when to expect their items.
  • Updating customers when an order has shipped and has been delivered.
  • Not using a buyer’s shipping service or prepaid shipping label.
  • Purchasing shipping insurance to cover fragile or expensive items.
  • Requiring a signature upon delivery.
  • Meeting or exceeding the proof of delivery requirements.

5. Avoid “Significantly Not as Described” Claims

When fraudsters claim the item received wasn’t the item ordered (whether or not that’s actually true), they may file “significantly not as described” claims. Because this type of sale is ineligible for PayPal’s Seller Protection Program, it’s important for businesses to minimize these claims by:

  • Including thorough product descriptions, including measurements, defects and damage
  • Including product photos from multiple angles
  • Shipping items promptly and providing tracking information
  • Answering customer questions promptly and completely
  • Meeting the proof of delivery requirements
  • Posting customer service contact methods, working hours and response times

Implementing a Comprehensive Fraud Protection Strategy

You may still find yourself having to pay a credit card chargeback or PayPal claim, even after carefully following PayPal chargeback and dispute prevention strategies. 

Chargebacks and PayPal claims and disputes tend to favor the buyer, even when the business offers strong evidence to support their position. Worse, when these chargebacks are fraudulent, the buyer often gets away with the product and the money, while the business is hit with fees, penalties, and damage to their business account and reputation.

Therefore, it’s up to businesses to protect themselves against chargebacks. 

With fraud on the rise, you want an end-to-end strategy that combines chargeback prevention, dispute and management to give your business the best chance of reducing chargebacks and earning back revenue lost to any chargebacks that do occur. 

Whether you choose ClearSale Chargeback Protection, ClearSale Chargeback Guarantee, or ClearSale End-to-End Chargeback Management services, you’ll have confidence knowing the most comprehensive ecommerce fraud protection solution is working to safeguard your sales, your revenue and your customer relationships.

Chargeback Protection: With this coverage, businesses recoup a portion of any losses due to fraudulent transactions. We provide the full breadth of our ecommerce fraud prevention services to ensure all fraudulent orders are blocked and don’t result in chargebacks. 

However, we don’t directly reimburse you for any chargebacks that may occur, and the discounts we provide are not intended to fully cover any chargeback losses. For 100% reimbursement, we recommend our next level of protection.

Chargeback Guarantee: ClearSale provides 100% coverage for any fraud-related chargebacks you incur. If we approve a transaction that turns out to be fraudulent and results in a chargeback, we’ll pay the entire amount of the chargeback. 

This gives you the confidence that we’re actively reviewing every order to block fraudulent orders and prevent chargebacks. You also gain peace of mind knowing that if a fraudulent order does slip through, your bottom line is still safe.

ClearSale End-to-End Chargeback Management: In our highest level of protection, ClearSale and ChargebackOps work together to deliver a powerhouse chargeback management solution that augments in-house fraud prevention teams to dispute and resolve chargebacks and reduce losses. 

ChargebackOps educates in-house teams and guides them through the chargeback investigation and response process. Specifically, Chargeback Ops:

  • Helps fraud analyst teams understand reason codes related to chargebacks
  • Conducts data audits and gathers compelling evidence that proves whether the customer received the products purchased
  • Drafts timely responses to banks and card issuers

There are real benefits to working with an expert in chargebacks like ChargebackOps that’s aware of the latest fraud prevention and chargeback trends. In fact, the sheer volume of chargebacks they’ve disputed and managed gives them the experience to truly understand how chargebacks impact ecommerce businesses.

When we say end-to-end, we mean it. Our complete Chargeback Management solution saves businesses from having to manage multiple service providers. ClearSale’s protection coordinates the entire process from initial transaction to chargeback reversal, allowing you to focus on other aspects of your business.

Contact one of ClearSale’s experienced analysts today to select a comprehensive fraud protection strategy that will help you grow ecommerce sales safely.