In its predictions for 2024, PayPal recognized “friendly fraud” as one of the most alarming types of online scams. According to PayPal’s study, merchants deal with approximately 679 PayPal chargeback scams every month. Fraudulent chargeback requests compromise not only the business revenue but also their reputation.

With the rise of online commerce scams, it’s important to understand the mechanisms of chargeback fraud. This guide will explain best practices if you’ve been scammed and offer prevention strategies to avoid PayPal chargeback scams.

Defining PayPal Chargeback

In non-fraudulent chargeback disputes, the buyer receives damaged goods, wrong items, or an empty package. Unable to reach the merchant or settle the issue privately, they dispute the charge directly with the debit or credit card issuer.

The chargeback process includes the following stages:

1. The buyer contacts the credit card company to place a chargeback request
2. The credit card company withdraws the funds from PayPal after notifying the merchant bank
3. PayPal places a hold on the merchant’s funds equivalent to the chargeback amount
4. PayPal notifies the seller, allowing them to appeal the chargeback decision with evidence

The chargeback option also allows cardholders to dispute unauthorized transactions and protect their funds. It benefits users whose bank accounts have been hacked through PayPal or another platform and victims of online payment scams.

What Is PayPal Chargeback Fraud?

In a PayPal chargeback scam, the fraudster places an order with a Facebook Marketplace business or another online store and pays via PayPal. 

Upon receiving the goods, the scammer starts a chargeback dispute with the card issuer based on allegations about the product’s quality or delivery. In most cases, the scammer successfully secures a refund while holding onto the “purchased” goods.

Merchants and card issuers don’t enjoy the same level of protection as chargebacks usually hurt their business. The biggest concerns regarding chargebacks include:

• Lengthy process—Determining the culprit in the dispute can be time-consuming and complex
• Financial loss—Besides refunding the customer, the merchant must pay a chargeback fee. In most cases, the business is also left without the goods
• Automatic card declines—After PayPal disputes fraud, cards can be denied automatically to prevent further fraudulent activities 
• Compromised reputation—Frequent chargeback disputes can damage the seller’s reputation. According to PayPal’s Purchase Protection program, a merchant could lose the ability to receive payments via PayPal due to multiple chargeback claims 

What To Do if You Fall Victim to PayPal Chargeback Fraud

If you suspect the buyer who opened a chargeback dispute against you is a scammer, take the following steps:

1. Gather important evidence—Provide transaction records and proof of communication with the scammer. You want to prepare any emails, text messages, invoices, and documentation related to the transaction and delivery
2. Notify PayPal—Log into the PayPal Resolution Center to report fraud as soon as you discover it to start the process
3. Contact card issuer—Since the card issuer gets a final say in whether the refund is initiated, you want to appeal the chargeback. If you choose to collaborate with PayPal’s chargeback specialist, the platform will contact the card issuer on your behalf
4. Address PayPal disputes and claims—Responding to disputes and claims filed against you is important, especially if you’ve been wrongly accused
5. Offer your full cooperation—Keeping up with PayPal’s investigation and responding promptly can turn around the situation for you. Do not hesitate to share all the details related to the scam, as marginal as they may seem
6. Inform law enforcement—Criminal activity and substantial financial loss should be reported to the authorities, even if the PayPal investigation is still in progress

Does PayPal Offer Protection Against Scams?

Yes, PayPal offers protection against scams for both buyers and sellers. In the face of common issues, such as invoice scams, shipping scams, and restricted account access fraud, PayPal offers security features including:

• Account protection—There’s no buyer liability for unauthorized purchases
• Transaction monitoring—PayPal monitors transactions 24/7 for fraudulent activity, including the cards in your wallet
• Email payment confirmation—PayPal will send a confirmation email for every transaction so you can act quickly if you notice an unauthorized payment

PayPal’s Seller Protection program clearly distinguishes between eligible and ineligible transactions. The table below highlights important criteria, including the instances where Seller Protection doesn’t apply:

Eligible	Ineligible
The seller has a permanent address in the U.S.	The seller’s description of the item is significantly different than the sold good
The transaction includes a tangible, physical good	The transaction includes an item deemed counterfeit by PayPal
In the case of intangible or digital goods, the seller must provide “compelling evidence” of delivery	The payment was made in the seller’s physical store
The good is shipped to the address provided on the Transaction Details page	The transaction involves donations or gift cards
The seller provides the information PayPal requests within ten business days	The transaction was made through PayPal’s friends and family functionality
The seller can provide proof of delivery for the disputed item	The item is a motor vehicle, motorcycle, recreational vehicle, aircraft, or boat
The seller can provide proof of shipment	The buyer paid in gold—physical or exchange-traded form

How To Avoid PayPal Chargeback Scams

Chargeback scams are sophisticated and calculated, making it harder for sellers to win disputes. By employing prevention strategies, you can decrease the chances of your business being the target of fraud in the first place. 

Here are the most effective preventive measures for avoiding a PayPal dispute charge scam:

1. Create a return policy
2. Offer clear communication
3. Avoid suspicious transactions
4. Describe goods in detail
5. Prioritize safety practices

Create a Return Policy

Having no or vague return policy can damage your business in more ways than one. A detailed return policy can increase the probability of winning a chargeback dispute, while a lack of one may attract scammers.

An effective return policy includes:

• Finite return period
• Defined return scope specifying eligible items
• Detailed return, exchange, and refund process
• Specified payer for return shipping

Offer Clear Communication

Without proof of communication, it will be difficult to challenge the fraudster’s dispute. You want to be specific when providing transaction and delivery details, including delivery date and order status. 

Scammers often file a dispute claiming they never received the purchased item. This is why you should request a signature upon delivery and documentation from the shipping company.

Avoid Suspicious Transactions

Fraudsters often pose as fraud victims, claiming that the transaction was unauthorized. Because of this, make sure to approach orders from high-risk countries and locations cautiously.

You also want to ensure that your company’s name is clearly displayed on the invoice. This makes it easier for customers to authenticate the transaction. 

Double-checking the customer information before sending out an order is a must. Contact the customer to ensure you have proof of order confirmation. It is also important for the delivery address to match the one provided in the transaction details. 

In addition to mismatched addresses, multiple requests for a single item and sketchy email addresses represent red flags.

Describe Goods in Detail

A “significantly not as described” claim can seriously affect your business’s reputation. Always provide detailed descriptions of your products, including any defects. Product photos clearly showing the item from every angle are hard to dispute.

If you’re selling fragile or expensive goods, investing in shipping insurance is a good idea.

Prioritize Safety Practices

Keeping an eye out for chargeback scams is just one step in protecting your business from PayPal fraud. Scammers use insidious tactics that could target sensitive information and compromise your account’s safety.

Whether you mistakenly share your information with a scammer or they obtain it from other sources, your earnings are at risk. 

In chargeback scams, fraudsters usually capitalize on policy technicalities to get an item for free, but your funds remain intact. However, if they manage to access your PayPal using other tactics, they can quickly drain your bank account. This is why it’s important to diversify your savings platforms and store a portion of your cash reserves in a secure place.

Transferring your funds to a highly secure high-yield savings account like FortKnox shields your money from money-grabbing schemes while growing your funds.