Colin Rule has more than 15 years of experience as a mediator and facilitator, including a stint as an Adjunct Professor at the University of Massachusetts-Amherst, where he taught and researched dispute resolution. He also wrote Online Dispute Resolution for Business, one of the first books to examine how buyers and sellers can best resolve their problems online. 

Chargebacks are a perennial hot topic within the eBay Community. They're also an especially serious issue for sellers accepting PayPal payments. At eBay Live! 2005 I had dozens of conversations with sellers that dealt with chargebacks in one way or another. Get any group of merchants together and ask them about their primary concerns and you're sure to hear something about chargebacks.

What is a chargeback?
However, there's still a lot of confusion in the Community about what exactly chargebacks are. Chargebacks aren't well understood by the average eBay member, much less the average person on the street. Many misunderstandings persist around the difference between PayPal's complaint processes (such as the Buyer Complaint Process and PayPal Buyer Protection) and credit card chargebacks. The word “chargeback” is sometimes used inaccurately to indicate any buyer complaint against a seller on PayPal. I've had several sellers tell me that they had a buyer do a chargeback only to later learn after I looked into it that the buyer had in fact filed a PayPal Buyer Protection claim.

To be specific, a chargeback is when a buyer contacts the company that issued him or her a credit card and asks to reverse a charge that had been placed on the card. The credit card issuer then asks the buyer for more information on the kind of chargeback it is.

Their questions may include: did the buyer actually not purchase the item? Did an item they ordered not arrive? Or did the item received differ significantly from the item they had viewed and expected to get?

Most credit card issuers immediately presume the buyer is right, because it is to their benefit to preserve the relationship with the cardholder. So they grant the chargeback without too much rigamarole. They then inform PayPal through the credit card association that a chargeback has been filed. The payment to the seller is then reversed.

Chargebacks and PayPal
Most sellers doing business in the brick-and-mortar world have encountered credit card chargebacks at some point. However, many eBay sellers have never had a merchant account with a bank that enabled them to take credit cards directly. PayPal has enabled hundreds of thousands of small businesses to accept credit card payments online, many of whom might not have otherwise been willing or able to open a merchant account with a traditional bank. As a result, if a buyer calls their credit card issuer and requests a chargeback on a PayPal payment made from their credit card, that chargeback may be the first chargeback that the seller has ever received. If it's the seller's first time, they often don't really understand what's happened. Often the seller inaccurately thinks that PayPal is the one who filed the chargeback, because sellers are informed of the chargeback by PayPal.

A buyer cannot file a chargeback on the PayPal site. To file a chargeback, the buyer must go directly to their credit card issuer (in other words, the bank for the credit card and the company to which the buyer makes their payments). The chargeback process is neither designed nor maintained by PayPal, so PayPal can't change it or reject chargebacks.

When a buyer files a chargeback, PayPal has to abide by the guidelines of the credit card associations. As a result, when a chargeback is filed, PayPal is playing by someone else's rules – like VISA, MasterCard, American Express, etc. Everyone who accepts, issues, or processes credit cards has to abide by the same rules, from the casual seller on eBay to huge retailers like Wal-Mart or Target. There's no choice involved.

PayPal has chargeback specialists to help you
Now it's important to note that even with these rules, sellers can dispute chargebacks they receive if they disagree with the buyer's claim. Maybe you have proof of delivery to a confirmed address like the buyer's credit card billing address. In that case, you can work with PayPal to submit evidence they have to “re-present” the charge – essentially dispute the chargeback.

Sellers that process their credit card payments themselves without using PayPal's help have to do all this work themselves. But you can also work with a chargeback specialist at PayPal who will review the claim made against you and file the dispute if you disagree with the chargeback reason offered by the buyer. PayPal has a team of experts who work on a seller's behalf when a chargeback comes in against them.

Preventing and tackling chargebacks
The best way to deal with chargebacks is, of course, to avoid having transaction problems that might lead a buyer to file a chargeback in the first place. In other words, your good customer service and business practices are the best way to prevent a chargeback.

• State your terms and conditions clearly. Be very clear in your terms and conditions about your payment preferences, and in your description of the item. Doing this will help you review the buyer's information and prevent “item not as described” claims by buyers.
• Watch for unusual shipping requests. Look out for requests like shipment to different addresses or “rush shipping at any cost.” This may be an indication that the buyer is paying with a stolen credit card, which may result in an “unauthorized” payment claim down the road once the real cardholder learns of the charge on their statement.
• Use tracking options in shipping. Ship with tracking and give the confirmation number to your buyer. Tracking helps you prevent “item not received” claims and respond appropriately if any do arise.
• Communicate with your buyers. Be communicative with your buyers, particularly by providing them with an estimated delivery time. By putting the buyer at ease you remove any incentive they have to file a chargeback.

However, if you do get a chargeback, a few pieces of information can be extremely helpful in responding to it. These include:

• Proof of delivery. Online tracking showing delivery to a confirmed address, can be key in beating the chargeback.
• Proof of acceptance. A copy of the buyer's signature confirming receipt can also be extremely effective in fighting the chargeback.
• Proof of refund. Finally, if you did refund the buyer at any point, proof of the refund (and/or the shipment of a replacement item) is important. Of course, if you used the PayPal refund tool, PayPal already has the evidence it needs to respond to the chargeback.

Seller Protection Program
In some cases, PayPal proactively protects sellers against chargebacks. The Seller Protection Program is a free chargeback protection program provided by PayPal. Verified businesses and premier sellers qualify for the program, and it covers shipments of physical goods against claims of unauthorized payment or false non-receipt. As long as you ship to a confirmed address within seven days of payment, and get online proof of delivery for your shipment (including a signature for payments over $250), PayPal will protect you against non-receipt and unauthorized chargebacks and will immediately return your funds.

In essence, by following good selling practices and good customer service as described in the steps of the Seller Protection Program, you can give PayPal the information to dispute the chargeback, so PayPal can automatically dispute the charge on your behalf. The best thing about Seller Protection from the seller's perspective is that even if the dispute of the charge is denied, the seller will keep their money.

Savvy sellers have a chargeback strategy
Most eBay sellers are savvy enough to understand that there's always a risk associated with doing business anywhere, including on eBay. There's always a risk that an item will be returned, a shipment will be lost, or even that a buyer may attempt fraud (such as payment with an unauthorized credit card). Most bricks-and-mortar sellers have set up processes or thought through how to handle these typical business problems. But many sellers on eBay haven't had the experience of running a face-to-face retail store, which also has its own risks: shoplifting, bounced checks, counterfeit currency, returned merchandise, or payments from stolen credit cards.

In reality, as large merchants have understood for a long time, selling (whether as an eBay seller or a large bricks-and-mortar retailer) always involves some risk. Businesses grow by understanding how to balance risk with profit. Being too risk-averse may limit your buyer pool, and in turn, your total sales volume. On the other hand, not being risk-aware opens you to problems such as chargebacks. Managing these risks intelligently may involve exposing yourself to more chargebacks, but the tradeoff may in fact be worth it.

Chargebacks are an unfortunate part of life for sellers, both online and offline. However, by getting into the habit of taking certain proactive steps to avoid chargebacks, and by working with your customers to resolve their issues and concerns, you can significantly minimize the risk that you'll get a chargeback. And you'll maximize the chance that you'll be vindicated should a chargeback be filed against you.