Sarah Elizabeth
PayPal is currently one of the largest online digital payment platforms, with over 430 million active consumer and merchant accounts and 35 million active business accounts. It’s not only considered safe by customers, thanks to its two-layer authentication, but it’s also loved by businesses because of its ease of use and reasonable transaction costs.
But that doesn’t mean every transaction is a successful one.
Sometimes, unhappy customers reverse a PayPal transaction before money has been withdrawn from the customer’s account or request a refund once the transaction is settled. Merchants should facilitate these options as they demonstrate a commitment to customer satisfaction. Better to lose one sale than a future customer.
The worst-case scenario is when a customer files a dispute on a completed transaction. They can do so through the credit card issuer or their bank, or they can file a PayPal dispute or a PayPal chargeback.
Chargebacks can mean substantial business losses in terms of time, product, revenue and reputation. It’s important, therefore, for businesses to understand how PayPal reversals and refunds work, so they can plan ahead to avoid chargebacks and minimize their risks.
Why Reversals Are Preferable to Chargebacks
On a yearly basis, chargebacks cost online businesses around $125 billion. That translates to a loss of $240 for every $100 lost in chargebacks.
Here’s how that breaks down:
Credit card processing fees
Every time an issuer rules in favor of the buyer, it charges back to the seller the wholesale cost of the transaction plus the processor’s rate markup – plus the business loses the processing fees associated with the transaction.
Acquiring bank fees
The issuer also assesses a chargeback fee – ranging from $20-$100 – to cover the costs incurred during the chargeback process. As the seller’s chargeback risk increases, so does the chargeback fee. Note: even if the seller wins the chargeback dispute, they still have to pay the chargeback fee.
Operational expenses
The operational costs associated with a chargeback can pile up quickly. Chargebacks aren’t processed and dispositioned in a matter of a few days – it can be six weeks to six months before a decision is made. In that time, businesses are out the value of the merchandise, the labor costs associated with order fulfillment and shipping, and the reallocation of staff to collect evidence and respond to the issuer.
Chargeback monitoring programs
When a business crosses the chargeback ratio threshold – usually 1% – it risks being placed in a chargeback monitoring program and being labeled as “high risk.” The result is significantly higher fees for every chargeback and an arduous process to graduate out of the program. Often, businesses must dedicate additional resources to reduce their chargeback rate, which adds more expense.
Instead of running the risk of having a high chargeback rate for PayPal purchases, make it simple for customers to receive refunds.
How Customers Can Initiate PayPal Refunds
Customers generally have four options to initiate a PayPal refund. Each option is a little different, including the time frames and who’s responsible for settling the dispute. The specific approach used will depend on how the initial purchase was funded.
Option 1: PayPal Dispute
If a buyer has a problem with a transaction, they can first try to work it out directly with the seller, without PayPal’s involvement, by opening a dispute in PayPal’s Resolution Center.
Note: If a customer opens a dispute and files a chargeback, PayPal automatically closes the dispute, leaving only the credit card chargeback to proceed.
There are two reasons a buyer might file a PayPal dispute:
- Item Not Received. The buyer claims the item they ordered and paid for never arrived.
- Significantly Not as Described. The buyer claims the item received differs significantly from the item the seller described (e.g., a dress was described as like-new condition but arrived with holes and stains).
After a customer initiates a dispute, the customer and the seller have 20 days to resolve the issue.
The seller doesn’t incur any fees or penalties during the dispute; however, the seller’s funds might be temporarily unavailable while a dispute is in process. This hold will be released if the PayPal dispute is settled in the seller’s favor.
Option 2: PayPal Claim
If the buyer and seller can’t agree to a solution within the 20-day dispute period, either party can escalate the dispute to a claim, asking for a refund or payment reversal. Buyers can also immediately file a claim (without first filing a dispute) if their account has been fraudulently used for a transaction.
After a claim is opened, the business has 10 days to respond by submitting all evidence that supports their position. This evidence can include items like proof of delivery, proof of replacement or refund, or a signed contract.
- If the business doesn’t respond, the claim closes automatically in the customer’s favor, and PayPal issues a full refund.
- If the business does respond, PayPal reviews all submitted evidence and decides on the complaint. Although the review process generally takes 30 days, complex claims may take longer.
While no fee is associated with PayPal claims, PayPal may place a temporary hold on funds while the claim is open. If PayPal rules in favor of and returns the funds to the customer, the business is responsible for the full amount and may also be out the merchandise.
Option 3: Credit Card Chargeback
Some customers may opt to not file a dispute with PayPal about a questionable credit card transaction and instead file a chargeback directly with their credit card issuer. In this case, the customer asks the card issuer to reverse a completed transaction and issue a refund.
Customers may file chargebacks because the item wasn’t received, the item was significantly not as described, or the transaction was unauthorized.
Businesses have 10 days to respond to the chargeback, but the entire process can take 75 days or more. Once the card issuer has received all the documentation, the issuer (not PayPal) determines whether the customer is responsible for the charges. During this time, there may be a temporary hold on the transaction funds, which stays in place until the chargeback is resolved.
If the customer is found not responsible, the issuer will reverse the transferred funds, debiting the business’s account for the amount of the sale plus up to a $20 chargeback fee. Issuers do not refund seller fees.
Option 4: Bank Reversal
Often, PayPal transactions are funded by the buyer's bank account instead of — or in addition to — their credit card. In these cases, the customer may opt to reverse their PayPal transaction by filing a bank reversal (also known as an ACH return). These reversals may be in good faith, if the customer's bank account was used without their permission, or if the item wasn’t received (or was charged twice). Or in some cases, the customer may be trying to commit fraud. Either way, businesses can respond to bank reversals through PayPal's resolution center, and the bank determines the outcome of the reversal, usually within seven to 10 days.
What Businesses Can Do About PayPal Disputes
So...can PayPal chargebacks be avoided, or easily won?
As it turns out, when it comes to fighting a PayPal refund, businesses face an uphill battle. Chargebacks, bank reversals, 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, using strategies like these to prevent disputes from escalating (or even from occurring in the first place):
- Follow the requirements for PayPal’s Seller Protection Program, which is designed to protect online sales; minimize claims, chargebacks and reversals; and help prevent fraud.
- Avoid risky transactions that PayPal doesn’t cover under the Acceptable Use Policy, like selling gift cards or digital goods and services or investing in crowdfunding platforms.
- Clearly communicate the business name that customers can expect to see on PayPal invoices to avoid claims stemming from confusion over a DBA or parent company name that appears on credit card statements.
- Meet proof of delivery requirements, like providing documentation from a shipping company that shows the date of delivery.
- Include thorough product descriptions, including pictures from multiple angles, measurements, defects and damage. This can vastly reduce your "not-as-described" PayPal claims.
- Display contact information, like email addresses and phone numbers, prominently on web pages, order confirmations and email communication.
- Link to exchange and refund policies on each product page, and spell them out on checkout pages, order confirmations and emails.
Partner With a Chargeback Prevention Specialist
Building an ecommerce business is challenging enough without having to be an expert in chargeback processes. Sometimes it helps to have an expert in your corner that knows not only how to dispute chargebacks, but how to prevent them in the first place.
For example, the reason codes card issuers use to categorize chargebacks have brought some clarity to the process. Another rule automatically invalidates chargebacks from customers who file too often.
Our Chargeback Guarantee
If you’ve made it through this entire post (or even just skimmed to the bottom), you’ve learned that, while chargebacks plague most ecommerce businesses, they can be reduced. A robust fraud protection solution will thwart would-be scam artists and slash your chargeback rate to a manageable level.
When you work with ClearSale, you won’t have to pay for chargeback fraud at all. We have a global lens and large database that allows us to help clients eliminate fraud threats and prevent chargebacks, while approving more orders, faster. Here’s how we identify fraud trends as soon as they emerge and use those insights to make more accurate decisions:
Machine learning/AI
All orders are screened using artificial intelligence and machine learning to process transactions and fine-tune fraud models based on customer behavior. Each order is assigned a fraud score. Orders with a score that meets customer-specific thresholds are automatically approved. Orders with a score that makes them questionable or suspicious are flagged for further review.
Contextual fraud review
Our data scientists and fraud analysts perform secondary reviews of suspicious and questionable orders. They use their expertise and understanding of fraud trends — while sharing that information with the client’s team — to determine if a transaction is valid or not. And, if a company so chooses, our analysts can pleasantly and very diplomatically reach out directly to customers to confirm they made the purchase — all the while, training your team to do the same.
Interactive client dashboard
An interactive dashboard allows clients to review all orders and contribute to contextual review with information about VIP clients and orders that should be automatically approved in the future. Clients also utilize the dashboard to track chargebacks on approved orders, making it easier for ClearSale’s end-to-end chargeback management team to dispute and deliver a resolution.
Post-processing audit
Machine learning/AI can also be used post-processing to validate decisions and help find patterns to be aware of moving forward. For instance, our auditing program offers a safe test environment where we analyze random sets of declined transactions to see what would have happened if we had approved the orders. This enables us to measure the accuracy of our clients’ automated rules and fine-tune them as needed.
Chargeback management
Through our partnership with enterprise chargeback management service provider ChargebackOps, ClearSale offers full-scale chargeback management:
- Total Chargeback Protection allows businesses to recoup a portion of losses due to fraudulent transactions.
- Chargeback Guarantee reimburses the transaction amount plus the chargeback amount for any unauthorized transaction that’s approved.
- End-to-End Chargeback Management delivers comprehensive chargeback mitigation and resolution services, including team training, data audits and timely responses to issuers.
Contact ClearSale today to learn how our chargeback protection solution can bring security to your sales, increase revenue, and eliminate the financial and reputational costs of chargebacks.
