PayPal risk metrics
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PayPal risk metrics
Effectively managing PayPal disputes and chargebacks

While using PayPal, it is essential for merchants to understand the process of disputes and chargebacks. These can occur due to various reasons, including customer dissatisfaction or fraudulent activity. PayPal provides information to merchants about one of its key metrics:

  • Dispute rate
    aka INTERNAL Inquiry
    This is the least sensitive of the metrics provided by PayPal.

A PayPal dispute is essentially an internal matter involving the merchant and the customer. In such cases, the customer approaches the merchant through the PayPal Resolution Center to seek a resolution. The merchant is given a 20 day window to address the issue. During this period, the merchant can engage with the customer to resolve the dispute by options such as issuing a refund, delivering the goods, offering a discount, or other appropriate actions.

The formula for the Dispute rate is:
➤ total USD amount of disputes divided by the total USD amount of sales (for the previous three calendar months)

However, the Dispute rate encompasses three more critical metrics that merchants must comply with:

  1. Claim rate
    aka INTERNAL chargeback

    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. Unlike disputes, merchants cannot send messages to the customer at this stage. However, merchants can contest the claim by providing evidence of appropriate conduct for PayPal's consideration. Claims are resolved through the PayPal Resolution Center.
    The formula for the Claim rate is:
    ➤ total USD amount of claims (current month) / total USD amount of sales (current month)
  2. Spoof rate
    specifically for INTERNAL chargebacks with the reason “UNAUTHORIZED”

    PayPal has introduced a separate metric for Claims with the reason "Unauthorized" (i.e., the user did not authorize the transaction or was misled by the merchant's billing logic). This metric helps PayPal distinguish inquiries related to product quality from disputes linked to unfair merchant practices on their platform.
    The formula for the Spoof Rate is:
    ➤ total USD amount of claims submitted with the reason “Unauthorized Transaction” (current month) / total USD amount of sales (current month)
  3. Chargeback rate
    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. Initially, 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.
    The formula for the Chargeback rate is:
    ➤ total count of chargebacks (current month) / total count of card 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. A chargeback on this payment is then considered an INTERNAL chargeback, falling into the Claim Rate category.

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 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 account.