A PayPal Chargeback: Is the Seller Protection Program Enough?
PayPal is one of the world’s largest and most recognizable payment companies. They boast over 203 million active accounts in 200 markets worldwide. Buyers and sellers trust Paypal because of its reputation for security and its user protection plans. That said, never forget that having customers buy through PayPal does not protect you from PayPal chargebacks.
PayPal Chargeback Vs. PayPal Dispute
In certain situations, PayPal offers what they call “Transaction Disputes,” which function much like credit card chargebacks. Both were designed as a fallback option consumers could use in the event of a refund disagreement with a merchant. Both can also cause financial headaches for merchants. And both are set up to side with the buyer by default. So what’s the difference?
It’s not as confusing as it sounds. Basically, PayPal provides more than one type of transaction: consumers can pay with PayPal ... or pay through PayPal using a credit card. Paying with PayPal involves either a linked bank account, or a balance held in the user’s PayPal Cash account. But a user could also choose to pay with a credit card, only using PayPal as an electronic wallet to provide an extra layer of transaction security.
In the case of the latter, a buyer with an unresolvable issue could file a chargeback, asking the issuing bank to intervene. When that happens, the bank withdraws funds from the merchant’s account and charges the merchant a fee. The customer gets an immediate refund, and unless the merchant steps up to dispute the chargeback, the case ends there.
If no credit card was used, of course, a PayPal chargeback isn’t possible. To protect these buyers, PayPal provides its own dispute resolution service. We explore both offerings in more detail below, starting with a closer look at PayPal chargebacks on credit card transactions.
Chargebacks Filed through PayPal
A PayPal transaction dispute is an internal matter between two PayPal users, and it’s handled by the company directly. A PayPal chargeback, on the other hand, involves parties outside the company, including banks, processors, and card schemes.
PayPal neither initiates nor handles chargebacks for transactions using a credit card, even when the payment itself goes through PayPal’s systems. In such cases, almost everything is in the hands of the issuing bank, including decisions on the validity of the claim. In this situation, PayPal operates as your processor. Thus, they will assist you in communicating with the bank and collecting information about the transaction, but that’s about as far as their involvement goes in regards to credit card chargebacks.
Still, that’s no small thing; disputing chargebacks is a complicated, time-intensive process. Having someone assisting you can be a lifesaver. Still, remember that PayPal can’t really file the dispute for you. Their representatives can only offer support; the bulk of the legwork will still fall on your shoulders.
PayPal Resolution Center
PayPal transactions that don’t involve a credit card, however, are a different story. When buyers and sellers can’t come to an agreement in those situations, PayPal can be asked to step in. According to the company's rules outlining how to chargeback on PayPal transactions, dissatisfied customers should first file a dispute through the company’s Resolution Center.
A PayPal Transaction Dispute is essentially a formal announcement that a problem exists. PayPal does this to more or less force the buyer into contacting the seller before things get completely out of hand. It’s a less confrontational way of ensuring the seller is in the loop; otherwise, buyers may bypass you altogether.
Still, at this stage, PayPal is only marginally involved. The company freezes any funds from the transaction and promises they won’t try to collect the disputed amount, but that’s about it. Their hope is that buyers and sellers will work things out among themselves. If that doesn’t happen, though, the dispute can be advanced into a formal claim by either party.
Escalating a dispute to a claim means PayPal steps in and takes a more active role. Similar in function to a credit card chargeback, claims give PayPal the authority to investigate the case through the PayPal Resolution Center. The company will likely contact you for specific information to support its claim: 3rd party shipping receipt, proof of delivery or download, or the like. They will also have the merchant fill out an affidavit (or file a police report, if applicable). A PayPal representative will review the case and determine an outcome; if they side with you, your business account will be reimbursed.
PayPal Chargeback Time Limits
Whether we’re talking about a PayPal chargeback or a PayPal dispute/claim, there are specific deadlines for each stage. For example, the buyer has up to 120 days to file a chargeback, and up to 180 days to file a PayPal dispute. This can prove frustrating, as you may have to reinvestigate a transaction months after believing it is settled.
After the initial filing, however, the timeframes get dramatically smaller. You have just 10 days to respond to a PayPal chargeback, and just seven for a dispute. Buyers have 20 days from the time they open a dispute to file a claim.
There are a wide range of other mandated time frames that vary according to the bank, card scheme, and/or reason code associated with the disputed transaction, too.
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PayPal Seller Protection against Chargebacks
It’s not all bad news, though. With PayPal, you might actually have a great ace in the hole. In the case of a credit card chargeback, the bank will automatically refund the money to the buyer. This happens regardless whether the transaction took place through PayPal or through a traditional processor.
PayPal, however, promotes the fact that it offers Seller Protection against chargebacks. This means, for eligible transactions, you’re covered for the full purchase amount, plus any chargeback fees for debit and credit card-funded transactions.
There are caveats, of course. For starters, the funds for the disputed transaction are likely to be unavailable for as long as it takes PayPal to review the customer complaint. You’re also expected to respond to all the PayPal’s inquiries within the allotted timeframes.
The biggest concern for merchants, though, is that word: “eligible.” Paypal Seller Protection covers “all eligible transactions,” but depending on your merchant category, that can turn out to be a relatively small percentage of overall transactions.
PayPal’s Seller Protection program may apply when buyers claim any of the following:
- They did not authorize, or benefit from, funds sent from their PayPal account (referred to as an “Unauthorized Transaction” claim).
- They didn’t receive the purchased goods (referred to as an “Item Not Received” claim).
- A transaction is reversed because of a successful chargeback by a buyer, or a bank-funded payment is reversed by the buyer’s bank.
That’s just the start, however; to be eligible for PayPal’s Seller Protection, you must also meet all of the following requirements:
Even meeting all these conditions does not guarantee a transaction will be covered, and there is another entire list of criteria that automatically disqualify a transaction from eligibility.
AUGUST 2021 UPDATE: PayPal Chargeback Protection
As of August 2, 2021, PayPal now offers PayPal Chargeback Protection on card transactions. This allows merchants to pay a higher interchange fee for card transactions processed through PayPal. In exchange, those transactions will be protected against chargebacks. Check out the main article on our blog for more information.
Is Some Protection Better Than Nothing?
It’s a gesture of good faith that the company tries to protect its users. However, the PayPal chargeback coverage is limited, and the growing list of transactions not covered by Seller (and Buyer) Protection reflects areas particularly vulnerable to fraud under current regulations.
You shouldn’t consider Seller Protection as a first line of defense against PayPal chargebacks. At the same time, PayPal’s judicious use of restrictions on the Seller Protection program does reflect an intent to mitigate the chance of chargeback fraud. By not offering protection in certain high-risk categories, the company is hoping fraudsters will pass them by in search of easier targets.
Ready for Real Help?
A PayPal chargeback can be every bit as much a headache as a bank chargeback. True dispute prevention requires much more attention and scope than PayPal’s Seller Protection can provide. To learn about chargeback management help that goes beyond the minimal assistance offered through PayPal and other processors, talk to Chargebacks911® about a free chargeback analysis today.