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Chargebacks? PayPal Can Leave You Holding The Bag

For years we’ve been using PayPal as our preferred payment services provider.  We’ve recommended their services to hundreds of clients since we first started conducting online transactions as far back as 2001.   In all those years and over thousands of transactions we had always found PayPal fees and service charges to fair.   However in the past few years PayPal has become increasingly aggressive in their fee structures and has become more and more like a typical old-school merchant services provider.

When PayPal was young and competitive they were just as concerned with assisting their vendors and service providers as handling transactions and collecting fees.   Today PayPal has continued tweaking their fee schedules and add-on costs to the point of being a non-competitive alternative to the established providers.   They have also learned more than a few of the bad habits of the larger banking institutions.

Recently it came to our attention that PayPal no longer offers any form of seller protection for digital merchants.  If you are selling electronic digital goods, such as an eBook or a WordPress plugin by some chance, you are 100% liable for any fees associated with the fraud that some consumers engage in.   But here is the real gotcha when dealing with PayPal, if for any reason your “customer” files a chargeback with their credit card company you are not only 100% liable for the original transaction, which PayPal will automatically remove from your account but you also get hit with a $20 Chargeback Fee which cannot be contested.

That means that for every single transaction you conduct you have a potential of $20.35 negative revenue if the customer complains to their credit card company instead of directly to PayPal.   The chargeback can be initiated for ANY REASON.

A Perfect Example

In our case a customer, we’ll use the name David Cutting (since that was his name), purchased our Store Locator Plus WordPress plugin for $25.00.   Rather than communicate with us, or with PayPal, the customer notified their credit card company that they did not make the purchase and that it was an unauthorized charge.

PayPal’s immediate response was to issue a an unresolved complaint via the Resolution Center.   It simply said “customer did not authorize purchase, under investigation”.  We immediately refunded the $25.00 to the customer, but PayPal did NOT close the case.  Instead is remained open for nearly 45 days.    Then it hit.     In addition to the $25.00 removed from our account (plus the $0.35 PayPal transaction fee that you never get back), PayPal charged us an additional $20 chargeback fee.

That simple $25 product we sold ended up netting us NEGATIVE $20 because the customer complained to their credit card company.

Even more interesting is that PayPal refused to close out the account.  In fact if you request funds from the user you do not receive a notice that the account is closed, which is odd since the user claims it is being used fraudulently.

PayPal Response

We did, in fact, call PayPal Merchant Services to inquire as to how to protect ourselves in the future.   At 4:55PM EST on 12/29/2011 we spoke with a friendly but unhelpful customer service agent.   We were told some interesting things about this situation:

Merchants that sell digital goods have no proof of delivery and therefore are not covered under the Seller Protection Policy.

Anyone can perform a chargeback through their credit card company.  We cannot do anything about it, it is just a cost of doing businesses.

… the credit card company charges us OVER $100 per chargeback, we are only charging you a small portion of that fee.

Some of the statements that were made are downright laughable.  $100 per chargeback?  Really?  With who?  If that is the case then PayPal is horribly mismanaged and needs to find a new CFO.     We were also told things like “we realize PayPal is not a good fit for everybody” and that the “PayPal fraud filters do not catch 100% of fraudulent transactions” which is why we are liable as merchants.

Alternatives

Are there viable alternatives to PayPal?  These days?  Yes, plenty.    Google Checkout has similar services at lower rates for and better discount tiers.  They also have a maximum $10 chargeback fee (versus $20 at PayPal) and do offer recourse for digital goods merchants.   Also the online payment technologies of many major merchant service providers are at least as sophisticated as the PayPal online payment systems, in fact many far exceed the features and capabilities of PayPal.   Going direct to a merchant service provider can also reduce the rates charged for transactions to nearly HALF of PayPal’s 2.5% rate and they offer much better chargeback protection.

Will we be changing our payment system?  Maybe.   I’d change it today if it wasn’t so ingrained into our product line and licensing system.  The fact of the matter is it will be very costly to replace PayPal with another provider, but a couple of more chargebacks and it will quickly change the equation.

One thing is for certain, we will no longer be recommending PayPal as the only payment services option to our clients.  Google Checkout, Authorize.Net and several other payment systems will be given equal billing and possibly be favored simply by publishing the full payment fees and discount rates offered by each service.

Wall of Shame

Customer Chargebacks

Honfeng Dong (iphonex@hotmail.co.uk)

iPhonex claims their credit card was stolen and this charge was not authorized.   Their $15 purchase for MoneyPress : eBay Pro Pack will now cost CSA more than $23.   Was this user too lazy to contact us and request a refund?  Or didn’t want to go to PayPal and start a charge dispute?  Or was the card truly stolen and this is a fraudulent credit card charge?  Who knows.   Send then an email and find out!

Marteau Jacques-Antoine (jacquesantoinevia@gmail.com)

Marteau claims that their PayPal account, which is still active, was used fraudulently and that the purchases they made at CSA were not authorized.

Point Immatriculation
Marteau Jacques-Antoine
6 rue du beffroi
02200 SOISSONS
France

Email: jacquesantoinevia@gmail.com

Phone: 0323727272

Interesting that they claim fraud yet their site is using Store Locator Plus.   Guess the thief that stole their card also hacked their website and installed the Store Locator Plus application!  http://www.cartegrise-pointimmatriculation.fr/ou-faire-carte-grise/

Ryan (Mark) Chesney (chesneyryan@gmail.com)

Mark decided that the best route for getting a refund on a product that was purchased 3 months ago was to issue a chargeback through his credit card company rather than contacting me directly.    Nice move, now he gets his refund and his “purchase” costs me an additional $22.   What a tool.

Want to ask Ryan what he’s thinking?  You can reach him at:

Attn: Ryan Chesney
K2S
516 W 860 N
American Fork, UT 84003
USA
(801) 369-3635

Stacy Kaufman

Stacy claims that the purchase she made here is an unauthorized charge, yet her PayPal account remains open and active.  Odd, why would PayPal keep an account open and active when someone claims the account has been compromised?   I can’t quite figure that one out.

Oddly, Stacy is using the full version of Store Locator Plus on the Pure Brazilian website.   Kind of retarded that people don’t know you can actually VERIFY use of the product on a live website.   Not only is Stacy using the product but using a version that was just published a few weeks ago.

You can get in touch with Stacy here:

Email: purebrazilianhair@gmail.com

Tel: 9542171980

Billing address

Stacy Kaufman
Pure Brazilian
905 Shotgun Road
Sunrise, Florida 33326

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1 Awesome Comments So Far

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  1. Kevin Perry
    February 17, 2012 at 11:39 PM #

    I have recently fallen victim to a chargeback myself as a website designer….but unfortunate for me, it was $1500. I provided paypal everything I had to try to stop it….screenshots of the websites in the customer’s cpanel, email conversations, positive feedback that was left…but it was all no good, because it’s all digital. The case is not closed, but currently being looked at by the credit card company, which could take up to 75 days. Until a verdict is reached, I am on the hook for the $1500, which I needed to put into the paypal account to bring it out of the negative.

    One piece of advice I can give you that will help with future claims is to send the software to your clients via regular mail as well as digitally. Get a tracking number with it so you can verify that it reached the destination. THAT DOES qualify under Paypal’s seller protection policy.

    It’s an expensive lesson I learned, but it won’t happen to me again.