Understanding credit card disputes, claims, chargebacks, and bank reversals

From a simple misunderstanding to a human error, many businesses experience a customer dispute or complaint every so often. It can happen to a business of any size and in any industry.

Whether the customer claims their item was not received, or they declare the transaction was unauthorized or fraudulent, customer disputes are an inevitable part of running a business.

Instead of worrying about when you may face your next customer dispute, 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.

What is a dispute?

A dispute occurs when a customer challenges a charge that they believe is erroneous. The customer might believe that the transaction was fraudulent, that there was a billing mistake, or that they were charged for goods or services that were not delivered or were not as described.

During the dispute process, the customer can ask the credit card issuer to investigate the charge and potentially reverse it. The merchant will also have a chance to respond to the dispute and provide evidence that the charge was legitimate. During the dispute process, the customer and the merchant typically communicate directly with each other to resolve the issue in a fair and mutually beneficial way. The payment process can be involved, however.

The goal of the dispute process is to address issues before they escalate into a claim. 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.

Here’s an example. 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 to a claim.

What is dispute management?

Dispute management involves helping buyers and sellers arrive at a solution for a dispute that all parties agree with. 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. Because every dispute is unique, solutions are likely to vary. Find out more about the dispute management process.

Types of disputes and reasons for them

Disputes come in many different forms, though the most common include the following:

• Item Not Received (INR): The buyer is claiming they ordered and paid for an item but didn’t receive it.

• Significantly Not As Described (SNAD): The buyer states the item they received is significantly different than they expected, based on the merchant’s description. For example, the buyer ordered a gold-foil mirror but received a blue polished silver mirror instead.

Dispute management: Business impact

While a single dispute is unlikely to create a significant impact on 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 your account could be reviewed, your balances could be affected, and reserves or limitations could be put in place.

What is a claim?

What’s the difference between a dispute and a claim? In essence, a dispute comes first. If a buyer dispute can’t be resolved, either party can escalate it to a claim.

When an agreement cannot be reached in a dispute between a buyer and seller, it can be escalated to a claim, in which the buyer requests a refund for the purchase from the payment processor. At this stage, the customer or merchant may not be able or willing to communicate directly any longer. Buyers can also file credit card claims (without first creating a dispute) if they suspect their account has experienced fraud.

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.

Learn more about how to dispute a claim and resolving claims.

Common reasons for claims

There are a few different types of claims you should be familiar with, including:

• Item Not Received (INR). In this case, the buyer is claiming they ordered and paid for an item but didn’t receive it.

• Significantly Not as Described (SNAD). This happens when the buyer claims the item they received is significantly different than they expected, based on your product description. For instance, the buyer ordered a red sweater but received a blue one instead.

• Unauthorized Transaction. If a complaint is filed for this reason, it means the buyer’s account may have been compromised or hacked, and someone made a purchase from the account without their permission.

How to escalate a dispute to a claim on PayPal

Struggling to resolve a dispute with a customer? If you feel the need to escalate it to a claim, follow these steps:

1. Log in to your account with PayPal.
2. Go to the Resolution Center.
3. Click View next to the dispute you want to escalate.
4. Click Escalate this dispute to a PayPal claim near the bottom of the page.
5. Follow the instructions.
6. Click Escalate to a claim.

How will I know if a claim has been filed against me?

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.

Will I be penalized for having a claim filed against me?

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 money 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.

How to respond to a claim

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:

1. Log in to your account with PayPal.
2. Go to the Resolution Center.
3. Click Respond in the Action column next to your claim.
4. Select how you would like to respond and click Continue.

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.

How will the claim be processed with PayPal?

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. This claim resolution process usually takes about 30 days, but more complex cases may run longer.

How to help prevent claims and disputes?

Preventing claims and disputes comes down to warding off any disagreements. The good news is there are a few steps you can take to help avoid them from happening in the first place, such as:

• Be honest about your products. Make sure your item descriptions and videos or photos are accurate, detailed, and truthful. The last thing you want is for a customer to wind up disappointed that your product isn’t what they expected.

• Clearly communicate your shipping practices. Give customers the tools and information they need for shipping and tracking, so they know what to expect and when to expect it. Make sure to ship items promptly, too. And if an item may take weeks to arrive, include that information on your product detail page, so they don’t feel duped after purchase.

• Display your customer service information. Your phone number, email address, and chat functions should be clearly visible on your website to make it easy for customers to get in touch with you if there's a problem.

• Outline your refunds and returns policy. Be upfront with your refunds and returns policy and give customers the information they need to start the process.

• Stay responsive. If customers can't get in touch with you, they may get frustrated and upset — so make sure you're available to help troubleshoot issues. Learn more about how to prevent claims and disputes with great customer service.

What are chargebacks? Causes and prevention

If you’re wondering how do chargebacks work, they’re ultimately rather similar to a payment reversal. A chargeback occurs when a customer asks their card issuer to reverse a charge that they believe was unauthorized, fraudulent, or otherwise incorrect. The card issuer will then investigate the charge and determine whether to initiate the refund.

When a payment is reversed, the merchant usually is required to refund the customer's money and may also be subject to additional fees or penalties. It's important for merchants to have a clear and fair refund policy in place to help avoid chargebacks, and to be prepared to respond to them if they do occur.

Here are some common reasons for chargebacks:

• Item is not received by a customer.

• Customer doesn’t recognize the transaction.

• Item is defective or damaged.

• Customer is charged more than once.

• Transaction was made fraudulently.

How to prevent chargebacks

When it comes to chargebacks, it’s more important 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 and claims — you’ll want to maintain strong communication, ship orders promptly, and create a clear return and refund policy, among other strategies.

Learn more about how to prevent chargebacks here.

Chargebacks vs. credit card disputes

A credit card dispute is the initial step where a cardholder contests a transaction, typically due to issues such as unauthorized charges, product not received, or dissatisfaction with the product or service. A chargeback is the subsequent process initiated by the issuing bank if the dispute cannot be resolved between the customer and the merchant.

Disputing a transaction simply means the customer is questioning a charge on their account. Chargebacks, on the other hand, involve the actual reversal of funds from the merchant's account back to the customer.

What is a chargeback reversal?

If a merchant appeals a chargeback and wins, a chargeback reversal will occur. This is when the issuing bank restores the funds back to the merchant.

What is a bank reversal?

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. This request may be made by the customer or the bank and is often triggered by suspicions of unauthorized use of a bank account.

How to prevent bank reversals

One of the best ways to prevent bank reversals is to review orders for signs of fraud or suspicious activity. Here are strategies you can leverage to identify and prevent potential risks:

• Keep an eye out for transactions that show unusual patterns, such as large orders, shipping to high-risk locations, or requests to change the shipping address after payment.

• Make sure your business name is clearly displayed on invoices, so customers can easily recognize charges or settled transactions.

• Contact customers before orders are shipped to confirm order details and give them an opportunity to catch any mistakes or errors.

Learn more about how to avoid reversals.

Financial impact: Recovering from credit card disputes and chargebacks

Sometimes experiencing a credit card dispute or chargeback is unavoidable. Consider implementing safeguards to help protect your business in the future. As a friendly reminder:

• Analyze transactions and orders for potentially suspicious activity.

• Clearly indicate your company name on invoices to avoid customer confusion.

• Reach out to the customer before a product ships to confirm order details.

You can also leverage PayPal for dispute and risk management. 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 to help your business manage risk here.