The content of this article is provided for informational purposes only. You should always obtain independent business, tax, financial, and legal advice before making any business decision.
A transaction dispute happens when a customer encounters a problem with a transaction and raises the issue with the seller. From there, they might request a refund from you or their financial institution. These disputes can result from a misunderstanding, human error, shipping issue, or even fraud.
A transaction dispute can happen in a business of any size and in any industry, so you’ll likely encounter one at some point.
While you can solve many disputes amicably, some customers might escalate them by filing a claim with their financial institution. You’ll generally want to avoid this since it can impact your business reputation and accounts.
Take a proactive approach by understanding the different types of credit card disputes merchants can be faced with, including claims, chargebacks, and bank reversals. Plus, get helpful tips and strategies to manage and prevent them.
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During the merchant dispute process, the customer can ask their financial institution to investigate the charge and potentially reverse it. The merchant will also be able to respond to the dispute and provide evidence that the charge was legitimate.
It’s worthwhile for merchants to work with their customers to resolve disputes, as it allows them to provide excellent customer service, solve the problem, and prevent it from worsening. It also helps businesses create loyal, long-term customer relationships and avoid negative reviews and potential legal issues.
A customer may decide to request a refund using your processes. If they’re not satisfied with the outcome, they may file a dispute with their financial institution. They might also try to skip your refund process and go straight to a dispute. In most cases, however, the customer is required to attempt to resolve the issue with you directly first.
Customers begin disputes with their bank or credit issuer. This gives you much less control over the situation, because the bank or card issuer makes the decision. That’s why exceptional customer service before disputes occur is so important.
Once filed, the customer’s institution reviews the dispute for validity. The bank may request additional documentation and evidence from either party in order to fully assess the claim.
If the customer’s financial institution finds that the dispute is valid, they will initiate a chargeback. They will return funds to the customer’s account and then seek to reclaim funds from your business’s account.
If you disagree with the chargeback, you will have an opportunity to respond and provide evidence to counter the customer’s claim. In such cases, the issue may escalate to arbitration or a court.
A refund request is a process that you manage when a customer contacts you or a third-party retailer directly about an unsatisfactory transaction. Most businesses have policies to determine whether customers’ requests are valid. Handling these requests gracefully and efficiently can improve customer satisfaction and help prevent chargebacks.
A credit card or bank dispute is a process that a financial institution manages when a customer contacts them. The institution often asks customers to attempt to resolve the issue directly with you first. When they accept the dispute, the institution will investigate it, and if they find in the customer’s favor, may issue a chargeback.
Payment processors can also manage a disputed transaction if a customer contacts them instead of their bank. Disputes through payment processors like PayPal give both parties the opportunity to submit information and escalate the dispute to a claim. The payment processor will set the purchase amount aside and release it to the party that wins the claim.
Customers can have many reasons to dispute a transaction. Some disputes involve genuine mistakes by one party, while others may be due to fraud. Here are the most common examples:
The differences between a dispute, chargeback, and refund are:
The following table describes the details and impact of each:
Chargeback | Refund | Dispute | |
|---|---|---|---|
Definition | A type of payment reversal: the bank’s decision to reverse a charge | Business elects to give a customer a refund | The process when a customer asks for their bank to investigate a charge |
Initiator | Bank | Business | Customer |
When it occurs | After a dispute investigation | The customer contacts the business directly | When a customer files |
Financial impact | Penalty fees and potential account restrictions | No impact other than returning the money | Can result in a chargeback |
Governing rules | Consumer protection legislation | Business’s terms of service | Bank terms and consumer protection legislation |
A payment reversal, also known as an ACH return or bank reversal, is a request to cancel a transaction and return the funds to the original payment method. The customer or the bank may make the request, which is often triggered by suspicions of unauthorized use of a bank account.
There are multiple types of payment reversals, including authorization reversals, refunds, and chargebacks.
As a friendly reminder:
A chargeback is a specific type of payment reversal. It occurs when a customer asks their card issuer to reverse a charge that they believe was unauthorized, fraudulent, or otherwise incorrect. If the card issuer agrees with the customer, then it initiates a chargeback.
When it comes to chargebacks, it’s more beneficial to prevent them than fight them. That’s because every chargeback affects your total chargeback ratio, which determines your standing with credit networks. The more chargebacks you receive as a seller, the higher the likelihood that you may be flagged as a higher-risk merchant.
Preventing chargebacks is like preventing disputes. You’ll want to maintain strong communication, ship orders promptly, and create a clear return and refund policy.
In some cases, customers may initiate their dispute with a payment processor, like PayPal, instead of their card issuer. If they choose to escalate the issue, the next action is known as filing a claim.
The payment processor will handle the investigation, evidence gathering, decision, and appeals, according to their rules and terms of service.
There is usually a 20-day period between when a buyer first opens a dispute and when it can be escalated to a claim. During this process, both the buyer and seller are typically asked to provide additional information before a decision from the payment processor can be reached.
Dispute management aims to achieve an ideal resolution to disputes between buyers and sellers. The process can include identifying and addressing the issue, facilitating communication between the buyer and seller, and finding ways to resolve the dispute in a mutually satisfactory manner.
The goal of the dispute process is to address issues before they escalate into a chargeback. It can also help businesses protect against fraud.
While a single dispute is unlikely to significantly impact your business, it’s important to keep a close eye on your overall claim rate. The more credit card claims filed against your business, the higher the likelihood that:
Resolving legitimate disputes swiftly and satisfactorily for customers can help reduce chargebacks. Documenting disputes can also help protect against fraudulent claims.
Dispute management also aims to transform negative experiences into positive interactions. This can help create long-term trust and win back customers who might be dissatisfied.
Say a customer purchases a rug from an online store. Upon receiving it, they notice a large stain along the left side. The customer contacts the company to request a refund or a replacement product.
However, the company does not believe the product is damaged and refuses to provide a refund or replacement. Because the customer and the merchant cannot come to an agreement, the issue may be escalated.
The customer, at that point, may choose to file a dispute with their card issuer, after which the issuer will investigate and decide whether a chargeback is necessary.
If the customer used a payment service provider like PayPal to make the purchase, then they might choose to work through that provider instead. If they originally filed the dispute with PayPal, they can escalate it to a claim.
Customers can also begin a claim right away. PayPal, in this case, would investigate and make the decision.
Preventing claims and disputes comes down to warding off any disagreements. Take steps to remove ambiguity and settle issues quickly, such as:
Struggling to resolve a dispute with a customer? As a business, you can also escalate a dispute to a claim.
If you feel the need to initiate a claim, follow these steps:
If a claim has been logged, you’ll be notified via email. You’ll also see that a case has been created in the Resolution Center.
Once the dispute has been escalated, you’ll be asked to provide evidence, depending on the type of dispute that has been filed. PayPal will also communicate a timeline with you for expected responses.
Having a claim filed against you doesn’t necessarily mean you’ll be penalized. There are no automatic fees levied against you, and your seller feedback won’t automatically be affected.
Still, you should keep in mind that if your claim rate is too high or other indicators are trending negatively, your account could be reviewed, and reserves or limitations could be put in place.
For instance, a temporary hold may automatically be placed on funds when a claim is opened. This hold will stay in place while you work with the buyer to resolve the claim and will be released back to you if the claim is settled in your favor.
For Unauthorized claims or Item Not Received (INR) claims filed through the PayPal Purchase Protection program, if you provide the relevant information as outlined in the PayPal Seller Protection, and the claim is decided in your favor, the money will be released to you. Note: Seller Protection is available on eligible transactions only. Limits, terms and eligibility criteria apply. Learn more about Seller Protection.
Once a claim has been filed, the best thing to do is quickly provide any requested information.
Resolving a claim filed with PayPal can be simple. If a customer files a claim or a dispute is escalated to a claim, follow these steps to respond as soon as possible:
After you make a selection, follow the instructions. Keep in mind that once you upload the files, you won’t be able to view them again. You’ll just see a summary of the information you’ve submitted.
If a claim is filed, the seller is asked to respond within 10 days. If they don’t respond, the claim will automatically close in the customer’s favor, and a full refund will be issued.
If the seller does respond, PayPal will work to evaluate the information provided and determine the outcome. If PayPal finds the claim in your favor, then your claim reversal will be successful and you’ll get the funds back.1 This claim resolution process usually takes about 30 days, but more complex cases may run longer.
Sometimes, experiencing a credit card dispute or chargeback is unavoidable. But you can reduce legitimate disputes and address fraud with business management tools from PayPal.
PayPal can help merchants manage fraud, reduce credit card disputes, claims, and chargebacks, and expand their operations safely. Our fraud detection tools may also help you protect your business from existing and evolving threats. Browse more of our resources and learn about how PayPal can help your business manage risk.