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 are not escalated to a claim, those resolved amicably between the buyer and the seller, or those filed to PayPal directly as an unauthorized transaction.

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 is not 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.

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%.

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.

Chargeback rate

❗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 .

Prevention recommendations

Beyond card payments, PayPal processes various alternative payment methods such as bank transfers, Buy Now Pay Later (BNPL) options, and more. Based on our empirical data, the denominator includes all sales for external chargebacks, while the numerator only accounts for half of the sales. Plus, PayPal uses multiple MIDs to distribute transactions, and this distribution process is completely obscure. All this can lead to discrepancies, where some MIDs may have higher chargeback rates despite an overall rate being below the Guide
Prevent risk by keeping chargeback and fraud ratio below monitoring thresholds. monitoring program’s . Unfortunately, these MID-specific rates are unpredictable and hard to track.

Block fraudulent geographies

Some Tier 3 countries and regions may have higher fraud levels. By identifying these high-risk areas, you can proactively protect your business from fraudulent activity. This may include implementing more stringent verification processes or blocking transactions from these regions altogether.

Implement clear unsubscribe options

Quick resolve of dispute alerts

Prioritize payment methods

Consider client risk scoring

Using a risk scoring system to determine if a customer can use PayPal for payment. This helps reduce fraud by accurately predicting high-risk transactions and disabling the PayPal option for those customers.

Send billing notifications

Use business name consistently

Dispute entity

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.

Dispute management

Effective communication and prompt documentation protect customers’ interests and minimise financial losses.

Description		Response	Action
Pre-escalation dispute (Inquiry)	Customers can file disputes directly with PayPal. Unresolved disputes can escalate to formal claims.	7 days (address issue) 20 days (respond)	Contact the customer via chat in the admin panel. PayPal can view these interactions.
Internal claim	PayPal encourages customers to contact merchants directly. However, resolved disputes may still lead to external chargebacks.	10 days	Engage with the customer through PayPal's chat in the Solidgate HUB.
External chargeback	This is initiated by the customer’s bank and requires a merchant response. For instance, Visa requires merchants to respond within 20 days for each phase of the chargeback process, with a tighter 10-day deadline for arbitration. Mastercard typically allows merchants 45 days to respond, although some specific requests may have shorter deadlines. In addition, merchants can use pre-chargeback alerts, which serve as an early warning system for potential disputes. This allows merchants to address and potentially resolve issues before they escalate to formal chargebacks.	20 to 45 days	Provide proof of service delivery to contest the chargeback.
Pre-chargeback alert	These alerts indicate potential chargebacks, giving merchants a 20-hour window to issue refunds and respond proactively.	20 hours	Issue refunds or provide evidence to contest the chargeback within the 20-hour window.
Claim	If disputes escalate, merchants have 10 days to provide evidence against the claim. Issuing a refund at this stage can prevent further chargebacks.	10 days	Provide evidence against the claim or issue a refund.

Reasons for refusing refunds

• External chargeback
  An external chargeback prompts the end user to contact their bank directly. PayPal may temporarily hold the disputed amount pending resolution via the PayPal Resolution Center. Resolving the dispute usually involves issuing a full refund to the customer, thereby closing the case.
• Insufficient funds
  The merchant’s PayPal account lacks the necessary funds for a refund. The account needs to receive more incoming payments from other transactions. This will increase the account balance to a level that can cover the pending refund amount.
• Suspicious activity
  PayPal has flagged the refund request due to unusual activity. In such cases, it is advisable to contact the PayPal support.

Maintain detailed transaction records and ensure effective customer communication. Understand Guide
Gain a better understanding of chargebacks nature and manage them effectively. chargeback reason code and implement prevention strategies to minimize disputes and maintain a healthy chargeback ratio.

Refund handling

Full refunds are prohibited if a dispute is open. The same applies to partial refunds if the dispute status is:

• OPEN
• WAITING_FOR_BUYER_RESPONSE
• WAITING_FOR_SELLER_RESPONSE
• UNDER_REVIEW

Refunds should be allowed if the dispute status is RESOLVED

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