Disputes, Chargebacks, and Refunds: Do You Know Which Is Your Worst Enemy?

Understanding PayPal Disputes, Claims, and Chargebacks

When your customers pay you through PayPal, they can open what’s called a dispute if they’re unhappy with a transaction. A dispute, which tends to be the easiest way to resolve an issue, involves direct communication between you and the customer while PayPal holds the funds.

  • For physical products, you must prove that they were shipped to the right address and successfully delivered. You can provide a delivery slip, tracking code or ID number, or signature confirmation.
  • For digital products, you need to show that the buyer downloaded or used the products.
  • For services, you have to submit a signed contract, service agreement, or other documentation that testifies the service completion.

Are Disputes and Chargebacks Treated the Same?

When paying online, if a buyer is not happy with the transaction they can either open a refund request, file a dispute with PayPal, or initiate a chargeback with their bank.

Setting a Smart Refund Policy

One of the best ways to protect yourself against disputes, claims, and chargebacks is to establish and enforce a clear refund policy. In 2021, over 20% of online purchases in the US were returned, with the total return rate for brick-and-mortar and online stores rising to 16.6%, as compared to 10.6% in the previous year. Nowadays customers want to be able to return their purchases and get a refund, but this doesn’t mean your business has to suffer. You can create a smart and clear refund policy that satisfies your customers and still makes your business profitable.

  • What items are eligible for a refund and what condition they must be in (unused, unopened, not downloaded, etc.)
  • Why customers may apply for a refund (for defects or items not received)
  • How to request a refund (email, phone, online, or other)
  • When customers can request a refund (within 30 days of purchase is a typical timeframe)
  • Who will pay for return shipping (you or the customer)

Reject Refunds with Caution

If you must reject a refund request, be sure you’re doing so for the right reasons and always act in line with your refund policy. You’ll want to be able to show that your customer’s problem has been addressed already or that the request violates the refund policy that the shopper agreed to by making a purchase. Once you decide to reject a refund request, inform the buyer of your decision. Communicate clearly and politely. Let the customer know that you’ve carefully considered the request and state the reasons that led to this decision. If you’re unsure about how to properly communicate your decision, use a template letter for denying refund requests and personalize it accordingly.

What is Friendly Fraud or Chargeback Fraud?

One of the most common types of eCommerce fraud, known as “friendly fraud,” happens when a customer makes a purchase and then initiates a chargeback in order to receive a refund and remain in possession of the product. In 2021, merchants reported that 32% of registered chargebacks were chargeback fraud.

  • The payment wasn’t authorized or they don’t remember making the transaction
  • The product wasn’t delivered
  • It doesn’t match the online description

Chargebacks Versus Refunds: What is the Difference?

Chargebacks and refunds usually happen for the same reason: the customer is unsatisfied with their purchase and they want their money back. The main difference between a chargeback and a refund is the route the buyer takes to receive their funds back. Customers are usually expected to first contact the merchant, communicate their issues, and request a refund before going to the bank. A refund means a total transaction reversal where the buyer gets their funds back, and the items are returned to you, the vendor.

Refunds Can Be Your Best Friend

Because they help avoid chargebacks, refund requests can actually be your best friend. Think of these requests not as an inconvenience, but as an opportunity to work through a customer problem, keep the money, and create a happy customer. Taking the time to provide excellent service and resolve a problem to a customer’s satisfaction can actually make that customer happier than never having an issue in the first place. It communicates that you’re prioritizing their experience and focusing on building strong relationships with your clients.

Chargebacks Are Your Worst Enemy

On the other hand, the chargeback is clearly your worst enemy because it tends to cost you money and customers at the same time. By the time your customers are frustrated enough to resort to a chargeback, they don’t want to deal with you anymore and are willing to appeal to a higher authority to solve their issue.

To Sum Up…

With the rise in popularity of online purchases, disputes and chargebacks have become common methods for buyers to request their money back. As a merchant, you should treat an open dispute as an opportunity to understand the customer’s issue and avoid escalation to a claim or chargeback as much as possible.

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2Checkout (now Verifone)

2Checkout (now Verifone)

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2Checkout (now Verifone) is the leading all-in-one monetization platform for global businesses built to help clients drive sales growth across channels.