How to Avoid Chargebacks on PayPal

I built this list based on the most common reasons customers initiate the chargeback process. 

Our coverage will be as follows: 

• Ways to prevent chargeback cases against you 
• Reasons consumers file a chargeback
• How PayPal processes a chargeback

In the end, you should have a clear guideline on how you can avoid chargebacks if you are using PayPal as a payment processor. 

Key Takeaways:

• PayPal has a seller protection program that will reimburse you for a chargeback you lost
• Transparency, accuracy, and honesty are critical in winning chargeback cases
• There is a software program you can use to detect potential chargebacks

Ways to Prevent PayPal Chargeback 

There are several ways to prevent a chargeback. It all starts with setting expectations. As we always say, prevention is better than cure. 

1. Be Clear with Your Return & Refund Policy

Most consumers today expect that they can return a product or ask for a refund if they are unhappy about what they received. Some can turn this into an excuse to file a chargeback against sellers. 

The thing is you can avoid this if you set clear policies for refunds. How so? Usually, chargebacks only happen if you refuse to offer a refund to your customer.

If your refund policy is clear, your customer is not likely to contact his bank to file a chargeback. Instead, he would:

• Contact you and ask for a refund
• Process a dispute with you
• Communicate with you to resolve an issue

This policy is more about your behavior as a seller rather than the behavior of a consumer. A clear and reasonable refund and return policy eliminates the possibility of a chargeback. 

In addition, you can offer to make amends by fixing an error that happened from your end. For example, you can send a new item to the consumer once he has returned the defective one, free of shipping charges. 

2. Follow Standard Business Practices

Standard business practices refer to common processes that protect you and the consumer. Here are some examples:

• Confirming a customer order by email
• Obtaining proof of shipment 
• Using strong customer authentication processes

The third one is already being implemented by PayPal. Industry standards refer to this as PSD2 or The Second Payment Services Directive. The other name for it is SCA or Strong Customer Authentication (SCA).

There are three ways by which payment processors use this:

• Knowledge – the customer provides information that only he or she knows, like a password. 
• Possession – it is something that only a true credit card owner can receive, such as a text message that has a code, or an authentication on an app. 
• Inherence – something that is unique to a user, like a voice print fingerprint, or eye scanner. 

Since PayPal already has this, you do not need to implement it on your site anymore if you use PayPal as a payment processor. 

3. Be Transparent About Your Business

Business transparency is key to avoiding chargebacks because it makes a consumer feel secure about their identity. Most of the time, customers file a chargeback because they panic, thinking that you are a fraud. 

Here are some ways by which you can make your business transparent:

• Provide a way for customers to chat with you
• Make it easy for consumers to file a complaint or lodge a repair
• Add an address or contact detail at your online store’s footer
• Respond to consumers in 24 hours or less

You should also make it a point to answer inquiries as they come, as honestly as you can. If you sound like you are hiding something, the consumer is more likely to feel suspicious about you.

This suspicion can easily prompt a customer to call the bank and file a chargeback. 

4. Use Chargeback Alerts

A chargeback alert is a notification that you get BEFORE the payment processor, like PayPal, gets to know about it. It is a financial tool for merchants, and the best tool I can provide is Chargeback.IO. 

The tool helps you manage chargebacks by issuing a refund before the actual chargeback is even filed. As a result, you get the following benefits: 

• PayPal will not put your funds on hold
• You prevent getting a “bad record” on PayPal
• You avoid chargeback fees

There are some intangible benefits to a tool like this. For example, you do not suffer from brand image damage, and you also spare yourself the headache of dealing with chargeback cases. 

Reasons Customers File a Chargeback

Customers file a chargeback for several reasons. If you know what these reasons are, it would be easier for you to prevent them from happening. 

1. Item Not Received

Customers have expectations, and if these expectations are not met, they immediately feel someone is deceiving them.   

If a customer has not received an item a day or two after the expected date, this customer is likely to file a chargeback. Some customers may contact you, but some have such a high degree of expectation that they become vindictive. They want to punish you by filing a chargeback. 

To prevent this, make sure you:

• Keep your shipping commitments
• Do not over-promise on shipping times; add a leeway for actual delivery dates
• Work with reliable shipping partners

I also highly suggest that you take a proactive approach in this regard. Many logistics companies now provide you with access to the status of a shipment. You will get notified if there is a delay, and you must communicate this to your customer to prevent any misunderstanding.   

2. Item is Different

We all make mistakes sometimes. If you shipped the wrong item to a consumer, they are likely to file a chargeback. Whether a customer thinks you deliberately did this or not, the consumer is upset and can take steps that are not favorable to you. 

Be on top of your business processes—prevent mistakes like this at all costs. If one slips through the cracks, it is a good idea to first apologize, own the error, and then offer reasonable compensation. 

3. Transaction is Unauthorized

Now this can get a little muddy. If a customer’s card is used fraudulently, this customer will file a chargeback.

PayPal will typically put the money on hold. This transaction will go through an investigation, and you have to provide proof that you did your due diligence as a merchant.

If you can show proof of shipping and verification, PayPal will close this case in your favor. 

4. Scam Chargeback

A scam chargeback is a situation where a person buys an item from you, gets it, and pretends that he did not receive the item. Some will claim that they did not authorize the transaction. 

In a case like this, the standard procedure still applies—you must provide documentation and proof that you sent the time to the buyer. Do this, and both PayPal and the bank will decide in your favor. 

Summary: Customers typically file a chargeback because they feel defrauded. Operate your business with the mindset of preventing this, and you will significantly reduce cases against you. 

The Process of PayPal Chargeback

PayPal does not initiate a chargeback. PayPal is merely a payment processor, and it is the bank or credit card issuer that initiates a chargeback once a consumer requests it. 

In addition, PayPal does not even judge whether a chargeback case is valid or not. The credit card issuer, or the bank, is the one responsible for making that judgment. 

Here are some standards by which chargebacks happen:

• The customer calls his bank, and the bank files the chargeback case
• Since PayPal processed the payment, they will get involved
• PayPal will place your funds on hold; you get an email notification about the case
• You now have the opportunity to despite this chargeback
• PayPal makes a decision

If you are eligible for the Seller Protection Policy of PayPal, they may rule the chargeback case in your favor. This means that the customer will get the money back, but you will also get your money as a seller. PayPal will shoulder this financial loss. 

Typically, customers have 180 days to file a chargeback from the date of the purchase. You, as the seller, have only ten days to respond to the complaint from the date PayPal notifies you. Cases like this typically take weeks to resolve. In some cases, it can drag on for 75 days. 

Summary

A chargeback is a bad thing. It can damage your reputation and can even result in PayPal barring you from using their services. 

The next step here that I suggest is for you to try Chargeback.IO. You can start using the service for free and upgrade to get more services.