Hack 25 Protect Yourself from Chargebacks

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Reduce or eliminate the risk of having disputed payments reversed from your PayPal account.

A chargeback is the result of a credit card charge being rejected by the credit card holder, typically in cases where the credit card was stolen and used fraudulently. But such charges can also be disputed by customers who feel that they've been defrauded by sellers.

If you accept credit cards, in person or through PayPal, you might encounter a chargeback from a buyer, just as a seller accepting personal checks might receive an occasional bad check. Chargebacks are an unfortunate but realistic cost of doing business, so most sellers factor this cost into their business plans.

When a customer initiates a chargeback with his or her credit card company, PayPal may deduct the amount of the transaction from your account if you're not covered under PayPal's Seller Protection Policy [Hack #24] . All sellers who accept credit card payments run this risk and might be liable for chargebacks.

Even if you have a low-volume online business, you cannot avoid the risk of chargebacks. According to a study by the Gartner Group, approximately 1.1% of online transactions are estimated to result in fraudulent buyer chargebacks. That's like paying an extra 1.1% fee for each and every transaction! Of course, chargeback risk varies a good deal depending on the type of goods you sell, but nearly everyone who accepts credit card payments faces some chargeback risk.

Of course, none of this applies to non-credit card transactions, such as payments funded by a bank account transfer or PayPal balance.

3.13.1 Protecting Yourself

Whereas most merchant account providers and payment companies simply pass all of the chargeback risks and associated fees and liabilities on to sellers, PayPal is different. As long as you follow PayPal's guidelines (the Seller Protection Policy outlines these guidelines), PayPal helps protect you against fraudulent chargebacks.

Be sure to familiarize yourself with this policy; click the User Agreement link on the bottom of any page on the PayPal web site, and then click Seller Protection Policy. When you follow the policy's guidelines strictly, PayPal protects you from chargeback liability on all qualified transactions. In addition, PayPal takes chargeback claims seriously and, when appropriate, investigates and vigorously contests chargebacks on your behalf.

PayPal is able to guarantee protection against reversal of funds only if a chargeback occurs for nonreceipt of the product or in the event of an unauthorized charge (resulting from a stolen credit card or account takeover). Even then, you're entitled to this protection only if you have followed the terms of the Seller Protection Policy.

Here are some best practices you should follow to prevent chargebacks from occurring:

  • Make sure the item you're selling is described (on your site or in your eBay listing) in as much detail and as accurately as possible. You should not assume that simply providing a picture in your listing will sufficiently answer any quality questions that your customers might have. Avoid merely stating that the merchandise is being sold "as-is." This won't protect you as much as you might expect. A detailed item description will help your defense in the event that a buyer claims that your item was not as described.

  • Get to know your customers. Although selling in an online environment doesn't make it easy to build a face-to-face rapport, it doesn't have to keep you from learning about your customers. While the volume of your business might prevent you from contacting all your buyers, you should make every effort to respond to any customer inquiries regarding the transaction or the purchased items, both before and after the transaction. Plus, this practice will help get you more repeat customers.

  • Keep any and all records and correspondence with your customers. This allows you to provide further evidence that you adequately described the item to the customer or responded to the customer's inquiries.

  • Take some time to review the online resources listed at the PayPal web site. Click Security Center at the bottom of any page for further help. For more tips on how to avoid fraudulent transactions, see [Hack #24] .

3.13.2 Shipping Products

When a customer disputes a transaction (e.g., files a chargeback) with her credit card company for an unauthorized charge or undelivered item, the first item of information the credit card company will expect from PayPal (and you) when disputing the chargeback is proof that the customer received the merchandise.

Providing verifiable proof that the customer received the item in question does not mean simply being able to prove that you shipped the merchandise. You must also prove that the package was delivered and, if applicable, signed for. To that end, you should always use a shipping service that provides some type of online package tracking.

To further protect yourself, make a habit of requiring a signature for delivery, a feature required for items worth US$250 (or the equivalent in the currency of the transaction) or more. Checking the box on the shipping form that indicates that a signature must be obtained overrides any waiver of signature that the customer might have on file with that shipping company.

Use the PayPal Shipping Tool by clicking the Ship button in your transaction history, as shown in Figure 3-6.

Figure 3-6. Using the PayPal Shipping Tool

This way, your customer's shipping information is automatically inserted into the shipping label (saving you time), and the resulting shipment tracking information is automatically stored along with the transaction details (streamlining any subsequent chargeback defense), as shown in Figure 3-7.

Figure 3-7. Tracking any package shipped with the PayPal Shipping Tool

If you don't use the PayPal Shipping Tool, you can still provide PayPal (and your customers) with your tracking information. Just open the transaction in your account history and click the Add button next to Shipment Tracking Information. Among other things, this feature will also eliminate a large portion of customer complaints and possible disputes filed prematurely by impatient or otherwise confused customers for nondelivery of items.

For eBay auctions, use PayPal's Post Sale Manager (located under the Auction Tools tab of your account) to help manage shipments, as shown in Figure 3-8.

Figure 3-8. Using PayPal's Post-Sale Manager to manage shipments for eBay sales

3.13.3 Responding When You Receive a Chargeback

Unfortunately, no matter what steps you take during the transaction process, you still might receive a chargeback. Whether it is due to nonreceipt of an item, an item not as described, or a transaction that was reported as unauthorized, it can happen to you.

The first step when you receive a chargeback notification is to make sure that you respond with accurate information and do so within the requested timeframe. This allows PayPal to effectively dispute the chargeback case on your behalf. Keeping good records of transactions and shipment of goods and communications, as described earlier in this hack, will make this an easy task.

Keep in mind that the rules governing a chargeback resolution are not the same as policies for PayPal's buyer-protection process. Credit card companies provide their customers with different timeframes in which to dispute transactions (and thus initiate chargebacks), and each card association (Visa, MasterCard, American Express, Discover, etc.) has different chargeback processing rules.

When a chargeback is first received, PayPal places a temporary hold on the associated funds in your account until PayPal is able to investigate the transaction and determine whether you're covered under the Seller Protection Policy. This does not mean your PayPal account will be debited; rather, it means the funds are, in essence, frozen and that a reversal is pending, which means that you cannot withdraw or otherwise use those funds. Upon review of your case (which can take up to 30 days), either of the following can happen:

  • If PayPal determines that you are protected under the Seller Protection Policy, the temporary hold of funds will be cancelled (the funds will be unfrozen) and released back to your PayPal account. You will not be held liable for the chargeback case.

  • If it turns out that you (and the transaction) are not protected under the Seller Protection Policy, PayPal might still dispute the chargeback on your behalf. (Obviously, providing as much information to help PayPal support the dispute on your behalf is crucial.) If this is the case, PayPal will, unfortunately, have to recover these funds from you while the chargeback is being disputed with the buyer's credit card company. If PayPal ultimately wins the chargeback dispute, the credit card company will reimburse PayPal for the chargeback and PayPal will reverse the recovered funds back to your account. This process may take up to 75 days, depending on the card type in the chargeback dispute.

As soon as PayPal notifies you of a chargeback, open the Transaction Disputes page by logging into your PayPal account and clicking the Resolution Center tab (or by going to https://www.paypal.com/SRVCTR). Next, select Open Disputes to go to the transaction in question, and click the Resolve button in the action column. Read the status details of the complaint and click the Resolve Chargeback Now button. At this point, you'll have three options:

  • Provide valid tracking information in order to dispute the chargeback.

  • Provide valid proof of a refund (either within or outside of PayPal) in order to dispute the chargeback.

  • Accept liability for the chargeback.

Click Continue and follow the instructions provided.

3.13.4 Providing Additional Information About Your Case

PayPal welcomes any additional information that might aid the dispute process; the information that might be helpful depends on the type of chargeback you're fighting:

Nonreceipt of merchandise

The information that PayPal needs to successfully dispute this type of chargeback is proof of delivery to the buyer's confirmed address. In most cases, this proof will be in the form of a tracking number that can be entered into your courier's web site. (You did use a courier with online tracking, right?) Many larger couriers also provide a copy of the recipient's signature online, evidence that can you use to prove that your customer actually received the product in question.

Unauthorized credit card transaction

If you can provide proof of delivery of the item to the customer's confirmed address [Hack #3], plus any records of correspondence, PayPal will have a higher chance of successfully disputing the chargeback. In short, do your best to prove that the transaction was indeed legitimate and not "unauthorized" as the customer might be contending.

Merchandise not as described (quality of merchandise disputes)

PayPal needs any description or details of the merchandise in question. If you sent a replacement item for the original item being disputed, you should provide tracking for that replacement item. If you already provided a refund for the disputed transaction, you should provide proof of the refund. If the original merchandise has been returned to you from the customer, provide the details regarding that return.

Duplicate processing

If the customer has indicated that he was charged twice for the same transaction, you'll need to provide a separate tracking number for each transaction or item, such that you can correlate each charge with a distinct, tangible product that you've shipped. Or, if the second PayPal transaction ID number is indeed a duplicate transaction, you'll need to provide proof that you have refunded the duplicate transaction.

If, at any time, you discover additional information pertinent to an open case, you should send it through PayPal's secure web server. Simply log in to the PayPal web site, click Contact Us at the bottom of any PayPal page, and then click Contact Customer Service. When completing the Ask Your Question web form, make sure to include the chargeback case ID number (e.g., PP-xxx-xxx-xxx) in the subject line of the Transaction Disputes page. This allows PayPal's Chargeback Department to quickly associate the response with the appropriate case. If you are unable to provide all of the information you have through the PayPal web site, you can send an email to chargeback-response@paypal.com. Again, be sure to include the PayPal chargeback case ID in the subject line.

Timing and Chargebacks

Because chargebacks usually happen in response to a claim or discovery that occurs well after the initial transaction, it can be weeks or even months before you learn that a chargeback has been initiated by the issuer (on the buyer's behalf) and that the transaction is going to be reversed.

Although there might be a delay before a chargeback is initiated, you (and PayPal) typically do not have the same luxury. PayPal is limited by the timeframe provided to PayPal by the buyer's credit card company, so they attempt to work toward the quickest possible resolution of the issue.

In general, upon initial notification of a chargeback case, you should provide all supporting documentation to assist in the chargeback dispute within three business days. Under certain circumstances during the processing of chargeback disputes, PayPal might ask for additional information from you to support the dispute. Any additional information should be supplied within the same timeframe of three business days.

When sending emails to PayPal, keep in mind that you will not be able to include attachments. However, if you need to provide additional documentation that cannot be described easily in an email, you can fax additional chargeback dispute information to PayPal's Chargeback Department at (402) 537-5755. Of course, you should always include your PayPal Case ID as a reference.