How to prevent PayPal chargebacks

Morgan Ackley | Monday, February 6th, 2023 | 8 minutes

PayPal boasts a commerce platform that helps businesses accept payments online, in-person, and by phone or email. It offers flexible options through buy-now-pay-later plans, Venmo, and PayPal Credit.

Businesses that use PayPal can connect with the platform’s growing 350 million customer base. Over 3.7 billion payment transactions amounted to $246 billion in the U.S., in the third quarter of 2020 alone. In the same quarter, PayPal’s active registered accounts grew by 70 million — up 22% from 2019.

With PayPal’s consumer popularity growing, it makes sense that businesses would want a piece of the profits. But offering new payment options can expose businesses to disputes and chargebacks as a result of criminal and friendly fraud. Businesses that want to stay profitable and combat fraud will need to know how to prevent chargebacks from PayPal.

What is a PayPal chargeback?

In a PayPal chargeback, a customer disputes a payment made through their PayPal account. The customer initiates the chargeback process when they dispute a payment with their bank or credit card company. In many cases, the customer suspects a PayPal payment was made fraudulently. In other cases, the chargeback is the result of friendly fraud, which occurs when a customer doesn’t recognize the transaction. Finally, a customer may initiate a PayPal chargeback when they want their money back on a purchase. Maybe the merchant shipped the wrong item, the item never arrived, the item arrived damaged, or the customer’s item was significantly not as described (SNAD).

When customers dispute charges from PayPal accounts, their bank or credit card company notifies PayPal and requests a response. Here, PayPal represents the merchant and follows a three-step process.

  1. PayPal notifies the seller or merchant that a customer initiated a chargeback and holds the customer’s payment. PayPal strives to notify merchants of chargebacks, at minimum, within 30 days.
  2. PayPal asks the seller or merchant to provide evidence to help answer the chargeback. This evidence might include proof of shipment or delivery, a transaction receipt, or direct communications with the customer.
  3. PayPal submits the merchant’s evidence to the customer’s bank or credit card company for a decision. Chargeback decisions can take as many as 75 days to process.

If the bank or credit card company sides with the customer, the customer receives a full refund. If the bank sides with the merchant, PayPal releases the customer’s payment to the merchant. Regardless of the outcome, PayPal charges merchants a $20 nonrefundable fee for every chargeback a customer initiates. PayPal offers chargeback protection through their Seller Protection program. Merchants that qualify for the program may have their $20 fees waived.

3 ways businesses can prevent PayPal chargebacks

Businesses that accept payments via PayPal — online or in person — need effective chargeback protection. The right tools can help businesses take a proactive approach to chargeback prevention by stopping criminal fraud in its tracks, pre-authorization. They can also help them reduce chargebacks from friendly fraud.

1. Automate decisions with AI and machine learning

The best way to get ahead of chargebacks from criminal fraud is to stop suspicious or risky payments before they happen. An advanced, AI-driven fraud prevention platform that uses supervised and unsupervised machine learning can make it happen. Supervised machine learning can learn from past transaction decisions. Unsupervised machine learning can detect emerging fraud trends. Altogether, an AI-driven platform can use machine learning to link billions of fraud signals to establish the trust level behind every payment event.

If businesses can customize risk thresholds (based on transaction size or volume, for example), they can set up the platform to automatically approve or decline transactions. With these tools, the business can approve high-trust payment events quickly and challenge or decline low-trust payment events. Overall, automating decisions can help businesses accept more good orders, reduce manual reviews, and keep out criminal activity that can lead to chargebacks.

2. Use a dispute management solution to communicate transaction details

Once businesses can prevent chargebacks from criminal fraud effectively, they can turn their attention to chargebacks from friendly fraud. Preventing those events requires a dispute and chargeback management solution. These tools come from integrations with major card brands and can help businesses intercept disputes and communicate transaction details.

Businesses that use dispute and chargeback management tools can get dispute inquiries and chargeback alerts as soon as customers contact their banks. Once a business gets a dispute inquiry, they can quickly and automatically relay transaction details that can help the customer recognize their purchase. And if a business gets a chargeback alert, they can quickly refund purchases or stop shipments to prevent inventory loss.

3. Partner with fraud experts to refine fraud policies

Businesses that use professional services to partner with fraud experts stand the greatest chance of preventing fraud and chargebacks across channels, including PayPal. Fraud experts can help businesses measure and maintain success by tracking performance and course correcting as needed. Plus, a professional services engagement can keep businesses from expending resources on manual reviews. And it can stabilize fraud costs with guaranteed protection against criminal fraud and chargebacks.

An enterprise-grade solution for PayPal chargeback protection

Not just lost inventory and $20 PayPal fees, chargebacks have hidden costs too. These hidden costs come in the form of time-consuming manual reviews, wasted labor, lost opportunity costs, lowered bank authorization rates, and customer friction.

Worst of all, credit card companies may place merchants that exceed defined chargeback thresholds into chargeback monitoring programs. Once in the program, businesses incur additional monthly fees until their chargeback rate is under control. And the higher the chargeback rate, the higher the fees and penalties. Businesses that accept payments through PayPal will need an enterprise-grade fraud solution that prevents chargebacks from criminal and friendly fraud.

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Morgan Ackley

Content Strategist

Morgan has worked in the tech industry for over 5 years. Her breadth of knowledge and curiosity about technology and all things fraud-related drive her to craft compelling, educational pieces for readers seeking answers.