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5 Ways to Protect Your Business From PayPal Chargeback Fraud

5 Ways to Protect Your Business From PayPal Chargeback Fraud
Written by MicroStartups

With the increase in chargeback (or “friendly”) fraud, merchants are finding themselves at risk when they accept legitimate online payments. Although PayPal has long been viewed as a secure way to buy and sell products and services online, thieves are increasingly using PayPal to commit fraudulent chargebacks and claims.

Here’s what you need to know to protect your business against PayPal fraud.

PayPal Chargebacks vs. PayPal Claims

Processing $143 billion in digital payments in the third quarter of 2018 alone, PayPal is more popular than ever.

But as sales have risen, so too have PayPal fraud complaints. The typical scenario? A fraudster places an order online and via PayPal, either using a credit card or a PayPal account – but then turns around and files a dispute, either with the card issuer (resulting in a chargeback) or with PayPal’s Resolution Center (resulting in a dispute and claim).

Although they look similar, credit card chargebacks and PayPal claims have a key difference: who resolves the dispute.

  • PayPal Chargebacks. When cardholders dispute questionable credit card transactions with the credit card issuer, the issuer determines whether the cardholder is responsible for the charges. If the cardholder isn’t responsible, the issuer processes a chargeback — reversing the transferred funds, debiting the merchant’s account for the amount of the sale plus a $20 chargeback fee, and not refunding seller fees.
  • PayPal Claims. A customer disputes a transaction with PayPal by first opening a dispute through PayPal’s Resolution Center and trying to resolve the issue with the seller. If that fails, the customer can escalate the dispute to a claim for PayPal to investigate. If PayPal reverses the transaction and returns the funds to the customer, the merchant is responsible for the full amount and may be out the merchandise as well.

Many merchants feel that PayPal resolutions tend to favor the purchaser — even in fraudulent transactions. So when a purchaser files and wins a fraudulent claim, the fraudster often gets away with both the product and the money.

When you consider the costs of fees, transaction amounts, and lost product, the cost to merchants can quickly add up.

What to Do About PayPal Chargeback Fraud

You can help protect your business from PayPal fraudsters by following these five suggestions.

1. Meet Seller Protection Requirements

Follow the requirements that PayPal has set for its Seller Protection Program. This program is designed to increase sellers’ confidence by protecting online sales; minimizing claims, chargebacks and reversals; and helping prevent fraud. In certain situations, the program also lets merchants retain the full purchase amount and waives related fees, even if that transaction has been reversed through a chargeback.

2. Avoid Risky Transactions

Merchants should be wary of conducting high-risk transactions (such as selling high-tech equipment or investing in crowdfunding platforms) through PayPal, as not every transaction is protected. For example, PayPal recently eliminated its purchase protection for gift cards.

What does that mean for businesses? Fraudsters can now easily purchase a merchant’s gift cards using PayPal and file a claim against the transaction. And because gift card transactions are no longer covered, merchants are out the funds.

3. Minimize “Unauthorized Transaction” Claims

“Unauthorized transaction” disputes often arise when customers believe their PayPal accounts have been used without permission.

PayPal suggests merchants avoid fraudulent orders by:

  • Clearly communicating the business name that customers can expect to see on PayPal invoices. This helps prevent claims stemming from confusion over a DBA or parent company name that may appear on a credit card statement.
  • Contacting customers before merchants ship items, confirming order information.
  • Meeting or exceeding proof of delivery requirements, including providing documentation from a shipping company that shows the date of delivery, “delivered” status and a delivery address that matches the address on the transaction details.

4. Reduce “Item Not Received” Claims

Fraudsters may claim that an order wasn’t received and subsequently initiate a dispute with their credit card issuer or through PayPal.

Ways to avoid these types of claims include:

  • Providing clear delivery dates so customers know when to expect their items.
  • Updating customers when an order has shipped and has been delivered.
  • Not using a buyer’s shipping service or prepaid shipping label.
  • Purchasing shipping insurance to cover fragile or expensive items.
  • Meeting or exceeding the proof of delivery requirements listed in the previous section.

5. Avoid “Significantly Not As Described” Claims

When fraudsters claim that the item received wasn’t the item ordered (whether or not that’s actually true), they may file “significantly not as described” claims. Because this type of sale is ineligible for PayPal’s Seller Protection Program, it’s important for merchants to minimize these claims by:

  • Including thorough product descriptions, including measurements, defects and damage
  • Including pictures from multiple angles
  • Answering customer questions promptly and completely
  • Meeting the proof of delivery requirements mentioned above

Implementing a Comprehensive Fraud Protections Strategy

Even merchants who follow these strategies may find themselves on the losing end of a credit card chargeback or PayPal claim. Losing a claim under PayPal’s Purchase Protection Program affects more than finances and inventory: It also affects a company’s reputation and ability to conduct future transactions via PayPal.

Author Bio: MicroStartups is grateful to Rafael Lourenco for writing this great article! Rafael is Executive Vice President at ClearSale, a card-not-present fraud prevention operation that helps retailers increase sales and eliminate chargebacks before they happen. Follow on twitter at @ClearSaleUS or visit the website.      



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A team of writers and marketers, MicroStartups was founded to inspire the entrepreneurial and business community to give back. We believe in business growth through giving and supporting the local community.

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