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.
- 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 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 customer 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.
- 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
- For example, if your dispute ratio exceeds 1.5%, you will be charged a $30 high-volume dispute fee. Imagine a business with $100,000 in total sales and $5,000 in claims from disputes. This results in a dispute ratio of 5%, which is well above the 1.5% threshold, triggering the fee.
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. Sometimes, 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.
- 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)
- For example, if there are 100,000 transactions and 500 chargebacks per, the chargeback rate would be 0.5%. But the real card scheme chargeback rate would be ~1%, because total count of sales contains PayPal card and PayPal balance transactions.
❗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 keep the Chargeback rate below 0.4% to avoid card scheme
Guide
Prevent risk by keeping chargeback and fraud ratio below monitoring thresholds.
monitoring program’s
.