PayPal has become THE staple in the United States for small businesses taking payment from customers for selling goods and services. However, as anyone in a small business knows, sometimes payments don’t go exactly as planned. If you have gotten into a chargeback or other sticky situation with PayPal, I’m here to help you understand just what the process is for defending your payments, what evidence you should be collecting and keeping from your transactions, and hopefully helping you minimize the worry and stress that these situations can bring.
1. What is a chargeback?
A chargeback is a situation where a buyer goes straight to their credit or debit card company to reverse a transaction after it’s already been completed. This process is only available to buyers who make a payment on PayPal with their credit or debit card. Chargebacks are initiated by buyers for many reasons, but some of the most common include:
- Their card was used without their permission
- The buyer does not recognize the charge
- The item did not arrive
- The item was received and was significantly different than described
- The buyer was charged twice for the same purchase
The process for a chargeback is determined by the credit or debit card issuer’s regulations and time frame, so there may be slight differences in each issuer’s process, although the general process remains the same.
2. How will you know if a chargeback has been filed against you?
Once a buyer requests a chargeback from a card company, the company will then notify the merchant bank. This merchant bank will then notify PayPal at their chargeback department. As a seller, you will know that a chargeback has been filed against you once PayPal emails you to notify you of the claim. Once this happens, the claim is also generated in the PayPal Resolution Center, which is located in the main area of PayPal’s website. This claim center is where you will access and submit information related to the claim.
3. How can you respond to the claim?
To respond to a chargeback, log into your PayPal account and select how you would like to respond to the action in PayPal’s Resolution Center. A very important thing to remember at this stage in the process is that you have only 10 days to respond.
After PayPal has emailed you about the action, they will often request additional information from you that can be used to address the chargeback. The requested information will vary depending on the reason for the chargeback, but the most common requests include proof of shipment or delivery, the transaction receipt, and any communication between you and the buyer. PayPal will compile internal information and combine that with any additional information that they requested from you earlier to help you dispute the action. PayPal will submit the evidence you have provided, as well as, any internal information that they have accumulated to the card company. The company will use the information submitted in making their decision about the chargeback.
PayPal does offer chargeback specialists through the Resolution Center as a resource for sellers, however keep in mind that these specialists work for PalPay and are not on your side in the dispute.
4. How are chargebacks processed?
Once a customer has filed a chargeback, as stated previously, you will have 10 days to respond to the claim. PayPal generally processes chargebacks within 30 days, but the process can take an additional 75-100 days for the card company to resolve the issue and make a decision. Because the card company determines their own processes for addressing the action, the time frame is determined by them. During this review process, a temporary hold will be placed on the funds associated with the transaction, which will stay in place while the chargeback is in process. These funds will be released back to you if the chargeback is settled in your favor. If the card company issues a decision in your favor, then the buyer will be charged for the transaction and the money will be returned to your account. If the card company issues a decision in the buyer’s favor, then the transaction is cancelled and the buyer will receive a full refund.
The good news is that while the chargeback is processing, you can continue selling your products and go about business as usual, as long as your account has not been limited for any reason.
Whenever a buyer files a chargeback, you are charged a non-refundable $20 fee, charged regardless of the outcome of the case. PalPay’s intention behind this fee is to cover their involvement in the process. If you are a member of PayPal’s Seller Protection Program (which I’ll explain below), this fee is waived. Remember that there also may also be other fees assigned depending on the bank involved.
5. What is the Seller Protection Program?
PayPal’s Seller Protection Program is a feature that provides protection for merchants, as well as, additional practice tips. One downside to this program is that it covers physical goods, not digital items or services. So if you’re a photographer, this program will NOT apply to any service or gallery charges (only physical sale of goods like albums).
If you do sell physical goods and decide to opt into this program, you must have proof of delivery of goods from within the United States. There’s no charge for this service, although there are initial requirements for the transaction to be covered under the program, including:
- The item was shipped to the address on the Transaction Details page
- The item sold is a physical, tangible item that can be shipped to the buyer
- Your permanent address as a merchant listed in your PayPal account is in the United States
- If PayPal requests any documentation or information, it is notrequired butstrongly encouraged that you respond within 10 business days.
The program covers two types of buyer complaints: unauthorized transactions and items not received, which each have additional requirements for the transaction to be covered under the program. In order for the Seller Protection Program to apply to an “item not received” action from a customer, the additional requirements include:
- The payment must be marked “eligible” or “partially eligible” on the Transaction Details page
- You as a seller must provide online tracking
In order for the Seller Protection Program to apply to an “unauthorized payment” action from a customer, the additional requirements include:
- The payment must be marked “eligible” on the Transaction Details page (note that the “partially eligible” mark does not apply here)
- You as a seller must provide proof of delivery or proof of shipment
The Seller Protection Program can be a great resource and additional source of protection for you as a seller, so make sure to utilize it whenever possible.
6. How can I avoid chargebacks or increase my chances of successfully disputing a chargeback?
If you allow your customers to use credit or debit cards for purchases, payment issues are an unfortunate issue that can come up. In order to try to have a plan for when these issues do arise, here are some tips and practices that may increase your chances of being successful should you have to go through the dispute.
1. My first big tip (and this should be no surprise) is a have a contract!
Not only is a contract a great way to explicitly state what each party is obligating themselves to do, but it also provides great evidence should you need to provide additional information in a chargeback dispute
2. Establish your PayPal account as a merchant account.
Establishing your account as a merchant account, will give you access to the Seller Protection Program, as well as a bunch of other resources PayPal provides that can help your business grow and thrive.
3. For larger payments, establish more safety measures, like signature confirmation of the delivery.
By requiring additional security measures, especially for delivered goods, you create more insurance around your transactions, and provide additional evidence to PayPal that you performed your end of the transaction, should you need it for a chargeback situation.
4. Keep as much information about your transactions and customers interactions as you can.
Keep written records of your transactions! I cannot stress how important this is to having evidence that you performed your services and are owed payment. Keep copies of any communication with your clients, especially about the date of delivery or services performed, payment schedules, and any changes to payment or delivery schedules.
5. Publish or make your return policy public so that your customers know that they can communicate directly with you should any issues arise.
By having a set return (or no return) policy apparent to your clients this can help divert a resolution away from a chargeback situation, and can strengthen your relationships with your clients by demonstrating that you are open and willing to solve any conflicts that may arise.
THIS BLOG POST IS NOT A SUBSTITUTE FOR LEGAL ADVICE. EVERY SITUATION IS DIFFERENT & IS FACT-SPECIFIC. A proper legal analysis is necessary based on your location and contract. Consult an attorney in your home state for advice regarding your contract or specific legal situation.