Dan Grossman

If you sell services, downloadable software, ebooks or other intangibles through PayPal, you should understand how various types of disputes and fraud can affect you. The rules, and the balance of power in various types of disputes within PayPal’s system, are very different when you don’t sell trackable physical goods.

Buyer Complaints, Escalated Claims, Unauthorized Claims and Chargebacks

There are four types of disputes that can be brought against you over a PayPal payment by the sender of that payment (your customer).

Buyer Complaints

Buyer complaints are the simplest form of dispute in the PayPal system. The buyer is unhappy with their purchase for some reason, and asks to dispute the purchase with you through PayPal’s system. They identify the type of purchase the payment was for, and choose from a list of reasons they are unhappy.

An e-mail is sent to the merchant, you, that a buyer is disputing a payment. The funds are temporarily held so that you cannot spend or withdraw them from your account. You log in to your account and have the option of sending the buyer messages, issuing a partial refund and issuing a full refund. The hope is that by sending messages back and forth through the PayPal site, you and the buyer will resolve the dispute without PayPal’s assistance, ending in either the buyer withdrawing the dispute, or you issuing a full refund which automatically closes it.

At no point does PayPal actually step in unless either you or the buyer chooses to escalate the dispute to a claim. Until that point, there is no difference between selling physical goods and intangibles, as PayPal is not involved and their policies aren’t relevant.

Escalated Claims

A claim, which is the result of escalating a dispute, is a whole different matter. Escalating a dispute to a claim is a request for PayPal to step in, review the messages both parties have left, and make a decision in favor of one party or the other, resulting in either issuing a refund to the buyer or closing the claim and leaving the funds with the merchant.

A claim is governed by the Buyer Protection Policy, a policy which is designed to protect PayPal users from being ripped off by unscrupulous merchants — eBay sellers whose descriptions don’t match what they’re selling, or who don’t ship the product at all.

The Buyer Protection Policy explicitly excludes two general categories of disputes — those over the quality of goods, and those over payments for intangibles such as services, virtual goods and downloads.

If the buyer truthfully identified the payment as one for a service or intangible, then the claim gets automatically closed in your favor. PayPal sends both parties a message that the Buyer Protection Policy does not cover that purchase, and the hold on the payment is removed, returning it to your balance.

If the buyer is dishonest and categorized the payment as one of the physical item categories, then PayPal begins its investigation by asking you for shipping details to prove you shipped whatever was purchased to the buyer. Since you can’t fill out any of the fields in the page requesting this information, your best bet for having the claim closed in your favor is to choose “other” as the shipper, and write a message such as “This payment was for virtual goods, not a physical good, and is not covered by the buyer protection policy”. 9/10 times, once the PayPal representative reviewing your case reads that, they will recategorize the claim and close it in your favor.

Unauthorized Claims

A buyer can also identify a payment as unauthorized, meaning that someone other than the account owner initiated it. Unfortunately phishing and password stealing malware does lead to this happening, and it can be a major problem if you’re selling services or virtual goods. You’re an easy target since the criminal gets instant benefit from buying from you — they don’t have to wait for a physical product to get shipped, or reveal that they live in a different location than the address on the stolen PayPal account.

You don’t have the same protection here you have with claims. PayPal protects its customers from unauthorized use of their accounts, and that means someone has to pay when it happens — and that’s you, not PayPal. You have a chance to provide any evidence you have showing that the payment was not, in fact, unauthorized, such as e-mail correspondence with the buyer. If you don’t have any evidence, though, you have to eat the costs.

The only thing you can do to reduce losses to unauthorized claims is to make sure they don’t happen in the first place. Identifying risky payments before you accept them is a challenge and how you do so will usually be specific to what you’re selling.

Chargebacks

Chargebacks operate under an entirely different set of rules, primarily because PayPal doesn’t get to set them. A chargeback occurs when a payment to you was funded with a credit card, and the card holder has called their bank and asked to reverse the payment. Reasons a bank will initiate a chargeback include a claim that the payment was unauthorized, that what was purchased was never received, or that it was materially different from what was advertised.

Technically when a buyer initiates a chargeback through their bank, they are charging back PayPal. It is PayPal that actually placed a charge on the credit card — they did it on your behalf, but it was through their merchant account underwritten through their bank.

PayPal passes on the chargeback to you by holding the funds from the payment, similar to a dispute. They then ask you to assist in disputing the chargeback — PayPal must dispute the chargeback under the rules provided by Visa and MasterCard if they hope to recover the funds. If the dispute is not successful, the chargeback stands, and both you and PayPal lose the funds.

Additionally, if there is a fee associated with receipt of the chargeback, which there often is, that fee is passed on to your account.

PayPal’s Buyer Protection Policy does not come into play here, since they are playing by the bank system’s rules, not their own. The PayPal Seller Protection Policy, however, does. This is a policy designed to protect you, the seller, from bogus claims. However, it only applies to physical goods again, so if you’re selling services or virtual goods, you have no shipping information to provide to make use of that policy.

PayPal will dispute the chargeback with the card issuing bank on your and their behalf, hoping to get the money back. You can help by providing any evidence you have that the service was provided to the right person, or that the virtual goods were received by the right person. Unlike in the case of a claim, you’re on the defensive and anything you can provide can help PayPal with its dispute. Any e-mails, logs of downloads, IP information that shows you provided service/goods to the right person should be submitted.

Tips for avoiding disputes

The best thing you can do to minimize losses due to these types of disputes is to avoid them ever happening. Don’t put yourself in a situation where a buyer can dispute a payment and incorrectly classify it as a physical good by simply providing what they purchased, responding to support e-mails in a timely manner and trying to resolve any disputes outside the system.

Keep records of everything. When it comes to unauthorized payments and fraud-related chargebacks, any evidence you can provide will improve your chances of having the payment returned to you. Record the time and IP address when each order is placed. Match any contact information provided through your website with the information on the PayPal account. Keep copies of all customer e-mails, and log the time and IP address when virtual goods are downloaded.

Also be aware of activity which may tip you off to fraud — especially big ticket purchases or many purchases in the same day, an IP address which maps to a risky country, or e-mails requesting you provide services faster than usual.

If the number of claims and chargebacks you’re receiving gets out of hand, not only will you be losing a lot of money, but PayPal might consider closing your account. Visa and MasterCard mandate that fraud rates have to be below a certain percentage, and PayPal will close accounts that are raising their fraud rates too much.

At that point you need to consider doing more to verify each order before accepting it — require proof of ID be faxed to you before taking an order, or calling each customer to verify they placed the order.