Sarah Elizabeth
PayPal is currently one of the largest online digital payment platforms, with 360 million active customer accounts and 20 million active merchant accounts. It’s not only considered safe by customers, thanks to its two-layer authentication, it’s also loved by merchants because of its ease of use and reasonable transaction costs.
But that doesn’t mean every transaction is a successful one.
Sometimes, unhappy customers want to reverse a PayPal transaction. They can do so through credit card issuer or their bank, or they can file a PayPal dispute or a PayPal chargeback. Any of these options can mean substantial merchant losses in terms of time, product, revenue and reputation. It’s important, therefore, for merchants to understand how PayPal refunds work, so they can plan ahead to minimize their risks.
You can listen to the audio version of the article by clicking on the player below.
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 merchant 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 merchant doesn’t respond, the claim closes automatically in the customer’s favor, and PayPal issues a full refund.
- If the merchant 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 merchant 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.
Merchants 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 merchant’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 be in good faith, if the customer's bank account was used without their permission, or if the item didn't receive (or was charged twice). Or in some cases, the customer may be trying to commit fraud. Either way, merchants 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 Merchants 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, merchants face an uphill battle. Chargebacks, bank reversals, and PayPal claims and disputes tend to favor the buyer, even when the merchant 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 merchant is hit with fees, penalties, and damage to their merchant account and reputation.
Therefore, it’s up to merchants 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, 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
As ecommerce continues to experience record growth, PayPal is staying on top of trends and making itself indispensable to today's shoppers—which is all the more reason for merchants to get familiar with PayPal's consumer protections and how they can be used to protect legitimate customers...or empower fraudulent ones.
Even merchants who do everything right may occasionally find themselves on the receiving end of a credit card chargeback or PayPal claim. But that doesn’t mean they also have to be on the losing end.
With friendly fraud and chargeback fraud on the rise, it’s important for merchants to understand how they can prevent these expensive payment reversals. For many sellers, that means working with a trusted professional who understands the latest fraud prevention and chargeback trends and can offer PayPal chargeback protection strategies.
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.
