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As a merchant using PayPal, it's important to understand the process of disputes and chargebacks. These can happen for various reasons, including customer dissatisfaction or fraudulent activity. Here is an overview of the different stages in the PayPal dispute and chargeback flow:

PayPal internal inquiry

A customer may file a dispute about a purchased item through PayPal's Resolution Centre. PayPal is not involved in reviewing the case, and if the customer is not satisfied with the merchant's response, they can escalate it to a claim. The merchant has seven days to address the dispute by refunding or opposing it. Customers have 20 days to file a claim from the time they open a dispute. If they don't do so, the dispute is automatically closed in the merchant's favour.

A PayPal Transaction Dispute is a formal notice that a problem exists. PayPal does this to push the customer into contacting the merchant before things get out of hand. It's a less confrontational way of guaranteeing the merchant is in the loop; otherwise, customers may bypass you altogether.

However, it is important to keep in mind that closed PayPal disputes in the merchant’s favour can later result in chargeback raised with a card issuer. Meaning, even in cases where customers never replied, there is still an option for them to submit a dispute (chargeback) via card issuer bank, which can later increase your chargeback rate. And we all know it is not a good thing. 

PayPal Transaction Dispute

This is a formal notice from PayPal to the customer that a problem exists. PayPal does this to encourage the customer to contact the merchant before escalating to a claim. Merchants can use PayPal's chat in the Solid admin panel to contact the customer at the dispute stage, and PayPal reviews these messages. If the customer never replies, PayPal may close the dispute in the merchant's favor. However, it's important to note that closed PayPal disputes in the merchant's favor can still result in a chargeback raised with a card issuer.

PayPal Alert (pre-chargeback)

This is an alert that indicates there is a possibility of receiving a chargeback. It is not an actual chargeback case but an indicator of a chargeback that could follow. Merchants can identify transactions with the possibility of receiving a chargeback using pre-chargeback alerts. They have a 20-hour window to issue refunds and respond to these alerts.

Internal Claim (chargeback)

If a dispute escalates to a claim, the merchant has 10 days to address it. It can be due to reasons such as an item not received, significantly not as described, or an unauthorized transaction. Merchants cannot send messages to the customer at this stage, but they can oppose the claim by providing evidence which PayPal will consider. At this point, it is recommended to make refunds, since most disputes can lead to further chargebacks. If a refund is made, the customer can revoke the claim.

External chargeback 

An external chargeback is initiated by the customer's card issuer, not through PayPal. Merchants must respond to these chargebacks within 10 days. They cannot send messages to the customer at this stage, but they can contest the chargeback by providing evidence that they provided the service. It's important to note that external chargebacks can impact a merchant's chargeback rate.

To increase the chance of a successful resolution, it's crucial for merchants to keep records of transactions and communicate effectively with customers at every stage of the dispute and chargeback process. It's also important to understand the reason codes for chargebacks and how to prevent them from happening. By taking these steps, merchants can minimize disputes and chargebacks and maintain a positive relationship with their customers.

External chargeback is a chargeback initiated by customers through their Card issuers, not through Paypal. These chargebacks must be answered within 10 days. There is also no way to send messages to the customer at this stage, but there is a possibility of contestation - providing evidence that you provided the service.

External chargeback rates should not exceed 0.9% of sales.