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PayPal Chargebacks Resources Hub

PayPal Chargebacks Resources Hub

Your guide to using PayPal as a payment facilitator. We cover the pros and cons for both merchants and consumers—specifically, how the platform stacks up in terms of PayPal chargeback and fraud protection.

PayPal Chargebacks: All the Rules, Fees, & Time Limits You Need to Know

PayPal Chargebacks: All the Rules, Fees, & Time Limits You Need to Know

If you’ve ever done any online shopping, odds are that you’ve at least heard of PayPal. With roughly 360 million active users, Pay is by far the world’s largest online payment system. In fact, nearly 90% of online shoppers use PayPal.

PayPal users—both buyers and sellers—count on the company to provide safe online transactions. But how does the service work? Is it a viable option for merchants and cardholders? And, does it offer any real protection against PayPal chargebacks or fraud attacks?

Let’s take a closer look at some of the benefits and challenges of PayPal’s services.

What is PayPal?

PayPal Holdings, Inc. is a financial technology company primarily known for facilitating online money transfers between buyers and sellers. By connecting a user’s payment card to an “electronic wallet,” the company provides a safe alternative to traditional payment channels such as checks. As a separate service, PayPal also offers payment processing for online vendors. 

First known as Confinity, a developer of security software, the company shifted to online payments and was rechristened PayPal in 2002. Their services were heavily used by internet auction company eBay, which owned PayPal from 2002 to 2015. 

In 2015, eBay spun PayPal off into its own entity. The company immediately began expanding its offerings through new services and acquisitions. In addition to its core services, PayPal is also the parent company of Venmo, Braintree, Bill Me Later, and multiple other brands.

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What Are the Benefits of Using PayPal?

Besides security, the comprehensiveness of PayPal's services is perhaps its greatest feature. The free app features bill-pay options, peer-to-peer transfers, interest-free “buy now/pay later” services, and more. Users can pay through a connected bank account or credit card, with rewards or QR codes, or even with cryptocurrencies.

For merchants, PayPal competes with other online payment services such as Stripe and Authorize.net. The company isn’t necessarily incompatible with these or other traditional payment processors, however. Merchants using the service can offer customers both PayPal Checkout and traditional checkout options.

There are multiple other reasons for both buyers and sellers to consider PayPal:

Simple Registration

Simple Registration

Establishing a PayPal account is a quick and easy process from the consumer side. Creating a new account as a merchant is almost as straightforward, and the procedure typically only takes a few minutes.

Services are available for casual sellers and larger companies alike, allowing merchants to select a service level based on their needs.

Ease of Use

Ease of Use

Establishing a PayPal account is a quick and easy process from the consumer side. Creating a new account as a merchant is almost as straightforward, and the procedure typically only takes a few minutes.

Services are available for casual sellers and larger companies alike, allowing merchants to select a service level based on their needs.

All-in-One Options

All-in-One Options

With traditional services, merchants will need a processor, a merchant acquirer, a payment gateway, and several other services to facilitate payments. With PayPal, there is no need for these extras—all the necessities of conducting transactions from beginning to end are included. This also simplifies record-keeping, as all necessary transactional information is in one place.

On the consumer side, the PayPal app consolidates all its money-management features in one intuitive dashboard.

Global Exposure

Global Exposure

PayPal offers one of the most comprehensive networks on the planet, operating in over 200 countries and in more than two dozen currencies. This global reach is a significant benefit to both customers and merchants.

Buyers can easily send and receive money internationally. In addition, the PayPal name lends credibility to merchants in remote locations, reassuring international customers that the seller will not suddenly disappear with their funds (and vice-versa).

What Are the Challenges of Using PayPal?

So, there are clear benefits to using PayPal to conduct payments. Of course, there are some drawbacks to using PayPal as well:

Fees Add Up as Transaction Volume Grows

Fees Add Up as Transaction Volume Grows

PayPal’s service does not require a monthly fee, but this is only true of a basic payments account. Just as issuers charge an interchange fee to accept payment cards, PayPal charges merchants a set fee for each transaction.

PayPal’s standard cost for merchants is 2.9% of the transaction total, plus a flat fee of $0.30 per transaction. On a per-transaction basis, this makes it more expensive than a standard processor. Upgrading to the Pro level also requires a $30 monthly fee. If your business relies on a high volume of transactions, this can add up quickly.

PayPal
2.9% + $0.30
Average Transaction Fee
No Monthly Fee*
VS
Traditional Processor
1.9% + $0.10
Average Transaction Fee
Monthly Fee

*monthly fee applicable to upgraded service level.

In most cases, customers can send money to friends or family at no charge. Payments to merchants, however, will incur a fee.

Additional Restrictions

Additional Restrictions

PayPal is exempt from many of the mandates limiting traditional banks and processors. For example, PayPal can freeze an account at their own discretion if they suspect involvement in fraudulent activity. Under certain circumstances, they may also limit the amount available to withdraw from one’s account each month.

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Can Cardholders Dispute PayPal Transactions?

It’s important for customers to know that they are protected from fraudulent activity on their accounts. As with credit cards, PayPal transactions can be nullified by demanding a chargeback from the bank. However, it is important to note that a PayPal chargeback on a credit card transaction is different from a PayPal claim or dispute. 

Differences arise because PayPal provides more than one type of transaction. Take transactions in which both the buyer and seller are using PayPal, for example. For disputes in which both parties are PayPal users, the company facilitates the two parties working together to resolve the claim internally.

In contrast, a PayPal chargeback occurs when a customer does not use a PayPal account, bypassing PayPal and going straight to the bank to contest a payment. In that case, resolving the dispute is out of PayPal’s control. Regardless of the PayPal chargeback policy, what happens next is at the issuer’s discretion.

Learn more about PayPal chargebacks

PayPal does have programs in place to help merchants and customers in these situations. We’ll discuss that more later.

Does PayPal Assess a Chargeback Fee?

If a merchant receives a chargeback on the PayPal platform, the business will incur a PayPal chargeback fee in the currency of the original transaction listing. The company deducts this non-refundable fee directly from the merchant’s account. 

The amount of the fee varies depending on the currency used. For example, the PayPal chargeback fee is currently set at $20 for transactions conducted using US Dollars.

Again, however, PayPal differentiates between outside chargebacks and internal disputes. PayPal dispute fees apply to transactions disputed via their online dispute resolution process. 

If a merchant’s PayPal dispute ratio exceeds 1.5% and they processed more than 100 sales transactions in the previous three calendar months, they will be charged a high volume dispute fee (in the US, $30 per dispute). Otherwise, they’ll pay the Standard $15 Dispute fee for each dispute.

Learn more about PayPal chargeback fees

Using the Resolution Center to Resolve PayPal Disputes

The PayPal Resolution Center is a portal that enables merchants and buyers to deal directly with each other to resolve issues. Merchants aren’t assessed a fee for this, and all parties benefit from faster claim resolution. By comparison, a conventional bank chargeback could take weeks, or even months, to resolve. 

Customers can use the PayPal Resolution Center to report transaction issues or ask PayPal to investigate a potential problem with a transaction.

Sellers can respond to customer inquiries and transaction problems. The feature is a great resource for buyer/merchant collaboration and dispute resolution. 

That said, the PayPal Resolution Center is only an option for transactions conducted using PayPal’s payment services. If the customer bypassed both PayPal and the merchant to file a chargeback with the bank, it means PayPal is only serving as a merchant processor and acquirer. The dispute center will not be able to help.

Learn about the PayPal Resolution Center

Common Question

How comprehensive are PayPal protections?

It varies, but all protections are limited based on certain conditions such as item purchased, payment method, and so on. Each type of protection will only be applicable under specific circumstances, which can be found in your PayPal agreement.

Does PayPal Offer Payment Protection?

PayPal offers three payment protection programs to safeguard both buyers and sellers. Each one provides a different type of protection, but the three are often confused because the names are so similar. Here’s a quick breakdown of them:

PayPal Purchase Protection

PayPal Purchase Protection

PayPal Purchase Protection is an option for buyers if an order is significantly different than described, or was never delivered at all. If users believe they are the victim of fraud or merchant abuse, they should check to ensure the transaction in question qualifies for Purchase Protection. If so, that buyer can make a claim directly with the merchant through the PayPal Resolution Center.

Filing a dispute with PayPal implies some type of fraud on the part of a seller. Purchase Protection kicks in if the merchant won’t work with the customer, or the two parties cannot agree on a resolution. At that point, PayPal is asked to intervene. If the customer wins the claim, the money will be taken from the seller’s account and refunded.

Learn more about PayPal Purchase Protection
PayPal Chargeback Protection

PayPal Chargeback Protection

PayPal Chargeback Protection helps shield merchants from fraud, particularly friendly fraud, or invalid chargebacks filed by customers. In some cases, the buyer may believe they are the victim of fraud, or mistakenly think a chargeback is the same as a refund. In other situations, the fraudster may be using the chargeback system to “cyber-shoplift” and get merchandise for free.

Chargeback Protection may apply if a cardholder files a chargeback with their bank instead of contacting the merchant through the Resolution Center. The issuing bank and the card network will handle these cases. PayPal will facilitate the case and potentially help the merchant with evidence, but otherwise, the company is largely removed from the process.

By proving that the claim is valid, the merchant may eventually get the purchase funds back. If the chargeback results from a merchant mistake, however, the customer will receive a full refund. The merchant will be charged a nonrefundable fee from PayPal in either case.

Learn about PayPal Chargeback Protection
PayPal Seller Protection

PayPal Seller Protection

PayPal Seller Protection is similar to Chargeback Protection. One key difference is that, instead of calling the bank to make a claim, the buyer uses the PayPal Resolution Center to dispute or reverse the transaction.

Under this arrangement, merchants may qualify to retain the full purchase amount if a chargeback is filed on an eligible transaction. The merchant would also avoid paying related chargeback fees, including PayPal’s $20 per-chargeback fee.

PayPal’s Seller Protection only covers two kinds of buyer claims: unauthorized transactions (i.e. fraud) or “item not received” claims. It specifically doesn’t apply to claims for which an item was significantly different than what the customer ordered.

Learn about PayPal Seller Protection

How to Prevent PayPal Chargebacks

There’s good news: the strategies merchants use to prevent PayPal chargebacks are largely the same ones they would use to prevent chargebacks under any other circumstances. Merchants simply need to:

Deploy the Right Fraud Tools

Deploy the Right Fraud Tools

Fraud is dynamic. It evolves constantly as technologies change, so risk mitigation strategies must be equally adaptive.

Card network tools such as Address Verification Service (AVS), card security codes (CVV), 32D Secure 2.0 (3DS2), and Visa Account Updater (VAU) are all methods of validating a shopper’s identity. Using two (or all of them) together can increase accuracy.

Eliminate Errors

Eliminate Errors

Merchant error accounts for 20-40% of the average merchant’s chargebacks. By taking steps to eliminate these errors, merchants may substantially reduce the number of PayPal chargebacks issued against them.

Examples include making improvements to the customer experience and ensuring effective communication. It also touches on optimizing every stage of the transaction process, from site design to order fulfillment.

Fight Invalid PayPal Disputes & Chargebacks

Fight Invalid PayPal Disputes & Chargebacks

Friendly fraud disputes can be initiated unintentionally by something as simple as a customer inquiry. They can also be deliberate cases of chargeback abuse.

One step merchants can take to prevent PayPal chargebacks resulting from friendly fraud is to challenge invalid disputes. Banks may take a refusal to fight illegitimate disputes as an admission of guilt. When merchants fight back against friendly fraud, though, it sends a message. It helps build a better reputation, a stronger relationship, and discourage future chargeback abuse.

Learn how to prevent PayPal chargebacks

Is PayPal a Good Choice?

Ease of use, a diverse range of features, and solid name recognition combine to make PayPal a good option for both consumers and merchants to consider. PayPal is a reputable company with the highest safety and consumer protection standards in place. They even offer additional programs to ensure buyers and sellers are treated fairly.

That said, the service isn’t perfect, which can be especially true when it comes to customer disputes. The company’s protections are limited, but a PayPal chargeback can be every bit as much a headache as one from the bank. 

True fraud prevention and risk mitigation requires a more comprehensive approach. 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.

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