Understanding PayPal Chargeback: Why They Happen & How to Avoid (2024 Guide)

Today's exhilarating whirlwind of eCommerce would be impossible without digital payment services like PayPal. Consumers relish the convenience of resolving transaction disputes with PayPal chargebacks, establishing the platform as a preferred payment option for shoppers.

However, that convenience doesn't necessarily favor merchants. Imagine pouring your heart and soul into cultivating a sale, only to have the buyer abuse the chargeback system. All your hard work goes down the pipe.

PayPal says businesses using their platform lose at least $4.5 million annually due to fraudulent online transactions.

Even if you haven't encountered chargeback fraud, you will. It's just a matter of time. As long as you offer checkout with PayPal, you will face first-party fraud incidents.

But don't despair. I'm here to provide you uncommon insights into PayPal chargebacks: what they are, why they happen, and how to avoid them effectively. By the end of this guide, you’ll be equipped to prevent PayPal chargeback abuse from undermining your hard-won success in the digital marketplace.

What is a PayPal Chargeback

A PayPal chargeback is a payment reversal initiated by the customer's card financial institution. Like traditional chargebacks, merchants can challenge PayPal chargebacks by submitting evidence in the Resolution Center. Nevertheless, the chances of winning are often slim, and we'll cover that in an upcoming article.

Apart from refunding the transaction amount when a customer's chargeback request is upheld, PayPal also assesses a $20 chargeback fee for every claim (if the transaction is in USD). The chargeback fee is non-refundable. Win or lose, that’s irrelevant.

PayPal chargeback involves multiple parties, including the buyer, seller, card issuer or customer’s bank, merchant acquirer, card association, and the payment processor (in this case, PayPal). The payment gateway facilitating the merchant’s transactions is also involved. So you can see how one chargeback incident quickly escalates into a complex business challenge.

How Buyers Resolve PayPal Disputes

PayPal established the three instruments below as the official channels through which customers can seek redress for any payment issues:

1. Dispute filling. In the conventional sense of the word, PayPal disputes are the preliminary form of chargebacks. A PayPal dispute is a complaint that buyers raise to sellers from their PayPal account when they face an issue with a transaction conducted through PayPal.

PayPal disputes give merchants the chance to address transaction cases before customers escalate them to the next stage of the process.

PayPal requires customers who wish to open a dispute against a PayPal seller to do so within 180 days of the payment date, and the case must be resolved within 20 days.

2. Claims. Claims are a refund request by the customer. Buyers escalate PayPal disputes to Claims when they cannot reach a favorable agreement with the merchant on their dispute or when the merchant isn't available to address their concerns.

Buyers who wish to escalate a dispute to a Claim must do so within 20 days of opening a dispute. Sometimes, depending on the nature of the case, a customer may choose to skip the initial dispute resolution process and file an outright claim. Filing a claim means they want PayPal to grant a definite payment reversal.

3. Chargeback filing. PayPal chargebacks are more like Claims. However, there's a slight difference, in that the customer side-steps both PayPal and the merchant to present the case directly to their card issuer or bank. The bank would either send an inquiry to gather more information about the transaction or proceed to reverse the charge.

Buyers who wish to file a chargeback must do that between 60 and 120 days of the transaction date.

Reasons for PayPal Chargebacks Explained

While there are several reasons why a customer can initiate a transaction reversal through their bank, PayPal has grouped these chargeback reasons into the following buckets:

1. Item Not Received: The customer claims they paid for an item but never received it. This category of chargeback makes up ~26% of all cases, as of the time of research.
2. Significantly Not As Described: The customer says they received an item that looks considerably different from what they expected when placing the order, either because the item received was impaired, looked different online, or has significant defects you didn't disclose at the point of sale.
3. Unauthorized Transaction: The buyer claims they did not authorize a bill or someone made a purchase from their PayPal account without permission. With an occurrence rate of 30% as of research, analysts say this is the foremost reason for all PayPal chargebacks. And they can be a result of actual fraud, a simple mistake of forgotten subscription, or merchant error.

The caveat is that chargeback reasons rarely underpin the customer's true intent in disputing a transaction. For example, industry records show that over 80% of buyers have filed a chargeback out of convenience.

What's even more disheartening is that customers who have initiated a chargeback are 9x more inclined to repeat the act. Seriously, only 14% of shoppers who file a chargeback first try to seek remediation from the seller.

“Many issuers continue to have zero-liability policies so that cardholders are not liable for unauthorized purchases—so they will generally issue a chargeback if a purchase is disputed unless they can confirm that the transaction was legitimate (and the cardholder or someone in their household authorized it). When a friendly-fraud dispute is coded as genuine fraud, it can lead to an uptick in false declines—where cards are denied due to suspected fraud, even though they shouldn’t be.” – Mastercard

How to Avoid PayPal Chargebacks

Preventing PayPal chargebacks ensures you can maintain your merchant account, as each chargeback leaves a lasting mark on your chargeback rate. Use these proactive measures to limit dispute exposure and maintain trust with customers:

1. Provide accurate product (or service) representation to close loopholes of feigned ignorance or genuine misunderstanding about product features, dimensions, specifications, or any limitations. Liar-buyers capitalize on information gaps to steal from you.
2. Avoid sleight-of-hand business practices. Ensure buyers know what/when they're paying, where to access your policies, how to opt out if they change their mind, and what constitutes a sales-final.
3. While you should make it easy for customers to self-serve with multiple customer service and communication assets, create systems to quickly escalate tough cases to human support for effective closure. For example, human support can upsell the customer into receiving store credits and not refunding a transaction.
4. Close potential fraud gaps with robust security measures to protect customer information and prevent unauthorized transactions leading to fraud chargebacks. The industry rule of thumb on safeguarding sensitive data includes using anti-fraud tools like 3-D secure, protected payment gateways, SSL encryption, and PCI compliance.
5. Never ship orders without tracking services. The absence of such data means you'll lose any dispute on order not delivered. PayPal will automatically side with the customer if you don't have trackable proof of delivery. If you sell a digital product, document the IP address, timestamps, server, or activity logs to show the customer accessed the product or service.
6. Work with reputable shipping companies to avoid post-purchase dissonance. Poor shipping practices like delays, missing items, inadequate packaging, incorrect addresses, and lack of tracking, often result in buyer’s remorse, dissatisfaction and eventual PayPal chargebacks.
7. Build trust with your clientele with automated chargeback recovery.​​ Industry records show the average merchant’s chargeback recovery rate is only 12%, resulting in bad reputation and excessive fines. Automated chargeback management tools like Chargeflow gives you up to 80% chargeback recovery rate. That helps you maintain trust with your customer base.

Reduce PayPal Chargeback Losses Today!

No one knows your business better than you do. I can only guess what you’ve spent to have your carefully curated storefront, products, or services reflecting your unique taste, and a sense of direction in this tumultuous eCommerce world.

But I can guarantee that ignoring PayPal chargebacks will cost you much more. It will cost you the right to collect payments and do business online.

The tips shared in this article are proven and battle-tested. They will help you stop PayPal chargebacks from casting a shadow over your growth prospects. Start by understanding the reasons for customer disputes, plug customer services and security loopholes to prevent chargeback abuse, and use automated dispute recovery to pre-empt unnecessary revenue losses.

Again, minimizing PayPal chargeback losses is integral to the overall business strategies of forward-thinking merchants. Use the tactics we’ve uncovered to charge up your growth prospects – and position your company as a leader in the industry. Manage chargeback risk on autopilot.