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Effectively managing PayPal disputes and chargebacks

While using PayPal, it is essential for merchants to understand the process of disputes and chargebacks. Those can occur for various reasons, including customer dissatisfaction or fraudulent activity. PayPal operates two primary dispute systems:

  • Internal disputes
    Internal disputes, including inquiries (dispute before escalation to PayPal) and claims (dispute after escalation to PayPal) are managed within the PayPal platform.
  • External chargebacks
    External chargebacks are initiated through the customer’s issuing bank.

If an external chargeback exists on the transaction, the existing internal disputes on the same transaction are closed.


Pre-escalation disputes

This stage involves the customer resolving issues directly with the merchant without escalating to PayPal. Dispute without immediate escalation to PayPal can only be raised for the following reasons:

  • Item Not Received MERCHANDISE_OR_SERVICE_NOT_RECEIVED
    The buyer reports that they ordered and paid for an item but did not receive it.
  • Significantly Not As Described MERCHANDISE_OR_SERVICE_NOT_AS_DESCRIBED
    This happens when the buyer reports that the item they received significantly differs from what they expected based on your product description.

The Standard Dispute Fee will be waived for disputes in the PayPal Resolution Center that aren’t escalated to a claim, those resolved amicably between the buyer and the seller, or those filed to PayPal directly as an unauthorized transaction.

Internal dispute clarification
  • dispute_channel: INTERNAL
  • dispute_life_cycle_stage: INQUIRY

Parameters should be obtained from the disputes object in the PayPal dispute API report.

Claims

A PayPal claim occurs when a merchant and customer cannot resolve a dispute independently. Escalating a dispute to a claim means PayPal intervenes, acting as an intermediary in the merchant-customer communication. Claims are classified as follows:

  • Claims from disputes
    Claims with reasons: Item Not Received, Significantly Not As Described. Including disputes escalated to a PayPal mediation claim if it isn’t resolved.
    This type of claim is the only one included in calculation of Dispute ratio.
  • Claims with reason UNAUTHORISED
    An internal case where a user reports unauthorized account access and transactions.
    Such disputes are automatically escalated to a claim and not included into calculation of Dispute ratio.
  • Claims with reason “Billing error” and “Other”
    These internal cases often involve misunderstandings or forgotten purchases, and buyers report issues such as duplicate payments or incorrect debit amounts.
    Such claims are not included into calculation of Dispute ratio.

Unlike disputes, merchants cannot send messages to the customer at this stage. PayPal reviews the claim within 10 days, and if it is accepted, the merchant has 10 days to respond with compelling evidence.

Claims clarification
  • dispute_channel: INTERNAL
  • dispute_life_cycle_stage: CHARGEBACK, PRE_ARBITRATION, ARBITRATION

Parameters should be obtained from the disputes object in the PayPal dispute API report.

Merchants incur a dispute fee ($15) if they are found responsible for claims (excluding unauthorized). A high-volume dispute fee ($30) applies if the dispute ratio exceeds 1.5%.

➤ Dispute ratio = total transaction USD amount of claims from disputes in previous 3 calendar months / total transaction USD amount of sales in previous 3 calendar months

External chargeback

An external chargeback is a payment reversal request initiated by the customer through their issuing bank, not via PayPal. Even though a chargeback is initiated through the customer’s card issuer, merchants can resolve it through the PayPal Resolution Center. In some cases, merchants receive a Pre-Chargeback Alert from PayPal with a 20-hour window to issue refunds and close the case. If no refund is made, merchants have 10 days to contest the chargeback by providing evidence of service delivery for PayPal’s consideration.

External chargeback clarification
  • dispute_channel: EXTERNAL
  • dispute_life_cycle_stage: CHARGEBACK, PRE_ARBITRATION, ARBITRATION

Parameters should be obtained from the disputes object in the PayPal dispute API report.

Chargeback rate

➤ Chargeback rate = total count of chargebacks (current month) / total count of sales (current month)

❗It is important to note the difference between “total card sales count” and “total sales count.” For instance, a purchase made via PayPal after a wallet top-up is not counted as a card transaction. Thus, merchants should generally keep the Chargeback rate at least below 0.4% to avoid card scheme Guide
Prevent risk by keeping chargeback and fraud ratio below monitoring thresholds.
monitoring program’s
.


Dispute entity

dispute_life_cycle_stage Description
INQUIRY The customer and merchant resolved the dispute without escalation to PayPal. This occurs when the customer hasn't received goods, reports goods not as described, or needs more details.
CHARGEBACK The inquiry escalated to a claim. PayPal investigated and decided that it was visible only to PayPal agents. The merchant can accept, challenge, or resolve the claim.
PRE_ARBITRATION Merchant's first appeal stage. Appeal a chargeback if PayPal's decision is unfavorable. Must appeal within the appeal period.
ARBITRATION Merchant's second appeal stage. Appeal a dispute again if the first appeal was denied. Must appeal within the appeal period.
dispute_channel Description
INTERNAL Internal Dispute.
Customer contacts PayPal to file a dispute with the merchant.
EXTERNAL External Chargeback.
Customer contacts their card issuer or bank for a refund.
ALERT Pre-chargeback alert when customer contacts their card issuer.
reason Description
MERCHANDISE_OR_SERVICE_NOT_RECEIVED Customer did not receive the merchandise or service.
MERCHANDISE_OR_SERVICE_NOT_AS_DESCRIBED Merchandise or service not as described by the customer.
UNAUTHORISED Customer did not authorize the purchase.
CREDIT_NOT_PROCESSED Refund or credit was not processed for the customer.
DUPLICATE_TRANSACTION The transaction was a duplicate.
INCORRECT_AMOUNT Customer was charged an incorrect amount.
PAYMENT_BY_OTHER_MEANS Customer paid for the transaction through other means.
CANCELED_RECURRING_BILLING Customer was charged for a canceled subscription.
PROBLEM_WITH_REMITTANCE A problem occurred with the remittance.
OTHER Other.
status Description
OPEN The dispute is open.
WAITING_FOR_BUYER_RESPONSE Waiting for a response from the customer.
WAITING_FOR_SELLER_RESPONSE Waiting for a response from the merchant.
UNDER_REVIEW The dispute is under review with PayPal.
RESOLVED The dispute is resolved.
OTHER Default status if no other statuses apply.

With this information, the best strategy for a merchant is to:

  • keep records of transactions and communicate effectively with customers at every stage of the dispute/chargeback process
  • understand the Guide
    Gain a better understanding of chargebacks nature and manage them effectively.
    reason codes
    for chargebacks and develop ways to prevent them from occurring

By implementing these strategies, merchants can minimize disputes and chargebacks, maintain positive relationships with their customers, and ensure the longevity of their PayPal accounts.