By: Susan Payton April 06, 2017 Topic: Customer Service

When you run an ecommerce store, you should expect a certain amount of returns. Therefore, it’s wise to factor returns into your budget. Typically about .10-.30% of your sales (products only; not services or digital items) will result in chargebacks, often in the form of a PayPal chargeback. Some will be genuine returns, while others will be fraudulent.

When you manage a PayPal dispute, claim, and chargeback on PayPal, it will be fairly straightforward. It is in your favor to comply with the the PayPal chargeback policy. Failing to do so can put a freeze on your revenue or get your account shut down.

Let’s look at each of these components individually. With all of this in mind, you may now be wondering, ‘how do PayPal chargebacks work?’ This handy guide will take you through the various scenarios with chargebacks and PayPal that you might encounter in your ecommerce business.

How do PayPal Chargebacks Work?: Dealing with a PayPal Dispute

If a customer has a concern with an order, such as receiving the wrong product, she can open a PayPal dispute. This is your opportunity to work out the PayPal dispute with the customer before PayPal does.

There are a variety of reasons why a customer might file a PayPal dispute. Here, we’ve got great email templates you can use to deal with many situations without manually writing emails for each.

The buyer will describe the issue in the PayPal Resolution Center.  Fortunately, you have the opportunity to respond to that message. In fact, you have 20 days to do so. Until this issue is rectified, funds from that transaction will be on hold.

Let’s say a customer says that the product shipped looks different than expected. You can argue that point until you’re blue in the face, but what good will it do you?

Ask for a photo of the product so you can understand his claim.  Maybe he says the product arrived in a different color or size than shown. This is where having ample product photos on your site comes in handy.

If the product does vary wildly from what your site shows, your best option is to apologize (remember, the customer is always right!). Next, refund the purchase once the customer ships it back to you.

Assuming you solve the problem, the customer can then close the PayPal dispute. Note that it will close automatically after 20 days. Ideally, this is the best outcome: to handle the concern via PayPal dispute between you and the customer. Once PayPal gets involved, things get a little stickier.

PayPal dispute

Note: It’s easy to let emotions take over during a PayPal dispute (or later, if it escalates to a claim). You may be sure that the customer is trying to pull the wool over your eyes. Don’t respond to the PayPal dispute when you’re angry. Keep the big picture in mind. Even if this customer is being fraudulent in filing a dispute, isn’t it better to rectify it quickly before he leaves you negative feedback or gets your PayPal account shut down?

How do PayPal Chargebacks Work?: PayPal Chargeback Policy – For Disputes That Turn Into Claims

In the event that your customer doesn’t feel like you resolved the dispute, she can escalate it to a claim within the 20 day window when the dispute is open. At this point, PayPal steps in, investigates the situation, and makes a decision either in your favor or in the buyer’s.

PayPal will entertain both sides of the story, so be sure to give a detailed account of everything that happened from initial purchase to dispute.

Note: This is where keeping meticulous customer records comes in handy. Use Shopify’s Orders Timeline to track orders and keep notes so you can refer back to them, should you end up dealing with a PayPal claim.

Additionally, the more information you have about an order, the easier it will be to work with PayPal to resolve a claim. PayPal values tracking codes, photos of packaged products with the shipping label, and anything else that proves you shipped exactly what you promised.

Don’t forget to read the PayPal chargeback policy to better understand the fine details.

paypal chargeback policy

How do PayPal Chargebacks Work?: Responding to a PayPal Chargeback

Yet another pitfall you have to worry about when selling online is the PayPal chargeback. While most customers who use PayPal to make a purchase with you will process their complaint through a PayPal dispute or claim, some may go to their credit card company to file a chargeback.

According to the PayPal chargeback policy, the reasons for a PayPal chargeback are similar to what they are for a dispute or claim: the product is damaged, different than expected, or never received. Additionally, if a credit card is used in a fraudulent transaction, the cardholder may request a chargeback.

Once the customer requests a PayPal chargeback from the bank or credit card company, that company determines whether it’s valid. If the purchase meets the PayPal Seller Protection requirements, you may have some protection, depending on the PayPal chargeback claim.

Once you get notification of the chargeback on PayPal, you can review the charges and determine whether they were warranted based on the PayPal chargeback policy. If not, you can make a case to the bank or credit card company as to why the PayPal chargeback was unwarranted. Just as with PayPal claims, they will assess both sides of the story and determine whether to proceed with the chargeback.

PayPal will hold the funds related to the chargeback on PayPal until you resolve the issue. It may take months for the card issuer to make a decision on the chargeback. Once you resolve the issue appropriately and you win the dispute, PayPal will release the funds to you.

PayPal chargeback

Note: A PayPal chargeback costs you money. Be sure to take a look at the PayPal chargeback policy to learn more information. From the fee you’ll pay for each one to the loss of revenue while PayPal holds the funds, waiting for resolution, they can seriously dampen your ecommerce business. Make sure your website explains exactly what customers should expect so there is no miscommunication, and respond promptly to any disputes so you avoid having to deal with chargebacks.

How do PayPal Chargebacks Work?: Countering Fraud

It’s sad but true, fraud is part of the ecommerce game. Merchants lose just over 1% of revenue to fraudulent PayPal chargebacks and claims. Fortunately, Shopify offers an automated system for identifying fraudulent orders called Risk Analysis.

With Risk Analysis, flagging will occur on orders that meet certain fraudulent criteria. It will highlight areas of concern. It’s up to you to review these orders to determine whether or not they are actually fraudulent.

While much of what you’ll deal with in terms of disputes, claims, and chargebacks will be legitimate, it’s good to be aware that fraud happens. These tips can help minimize your risk of fraudulent transactions.

Pay attention to where you’re shipping. While it’s fine to ship internationally, do be aware of the high-risk countries for ecommerce fraud. Take extra precaution to ensure these are legitimate purchases.

Look out for multiple purchases from the same PayPal account. Sometimes fraudsters try to make multiple small purchases to fly under the radar. Be diligent about who’s buying from you and look for odd activity, like multiple orders within a short timeframe.

Pick up on weird email addresses. Sure, you shouldn’t judge if a customer has the email address hottie235@hotmail.com, but if the email address sends a red flag, pay attention. It might include one with lots of numbers and letters (no actual words or names), or one that bounces.

Be concerned about a change of address request. If a customer asks to change the shipping address after making the purchase, hesitate before doing so. This is often evidence of fraud.

Thankfully, the PayPal Chargeback Policy clearly clarifies everything you need to know about claims, disputes, and chargebacks. There are times, however, when you’ll have to handle these things firsthand, so having a process in place for doing so can streamline your ability to deal effectively with these issues when they occur. Now that you’ve read this post, you’re one step closer to putting together a fool proof protocol for handling PayPal chargebacks no matter what the scenario. Knowledge is power, so feel free to have a look around our blog for more helpful tips and tricks for improving your ecommerce business.

Have you had a chance to take a look at the PayPal chargeback policy? How have you dealt with a chargeback on PayPal? Share in the comments below!