There has been a lot of discussion lately about the new PayPal Refund Fee policy updates they are announcing. Basically, PayPal will no longer be refunding the fee from initial payments when you refund your buyer.
Many sellers are complaining loudly about this change, but is it warranted?
I’m going to break down all of the details of exactly what is happening here, and why I feel people are making a much bigger deal out of this than they should.
Then we’ll discuss the best procedures to follow so that you can avoid these unnecessary fees.
When you accept a payment using PayPal (or any other payment processor) you are charged a fee for processing the transaction. This is a standard procedure with all payment processors.
PayPal’s fee structure starts at 2.9% + .30 USD. As you process higher volume the fee structure is reduced, but we will stick with the initial rate for this example.
If you sell a product for $100 you would be charged a total fee of $3.20 broken down as follows:
- Percentage Based Processing Fee = 100 * .029 = $2.90
- Flat Rate Transaction Fee = .30
- Total Fee = $3.20
If you have to refund your buyer for any reason, you would typically process a refund from the original transaction in your PayPal account.
When you do this, the original processing fee you paid of 2.9% is currently (as of September, 2019) refunded back to you. This amount is then included in the funds that get returned to the buyer. The .30 transaction fee is not refunded.
You can see in the refund transaction that PayPal returned the $2.90 payment fee back to the seller. The net amount returned to the buyer is $97.10. This is something that PayPal has always done even though it does not follow the industry standard.
This has been a nice perk that PayPal merchants have enjoyed for many years. Unfortunately, it caused sellers and marketplace providers to get a little bit lazy with their payment integration. There are things sellers can do to avoid refunds, but this was not happening. As such, PayPal had to make a change.
New Fee Refund Policy
PayPal has begun sending all account holders an email notifying users about this policy update. Here is the copy I received.
PayPal Notice About Fee Refunds
The policy change is going into effect beginning on October 11, 2019.
In line with industry practice and according to our updated policy, we will not charge a fee to process refunds, but the fees from the original transaction will not be returned.
This policy will not apply to duplicate transactions, voids and most disputed transactions.
This policy change was originally announced to go into effect in May, 2019. However, it seems that the community backlash and confusion caused a delay.
As mentioned, it is now officially going into effect on 10/11/19. As such, the community backlash has picked up again.
This has caused quite a backlash in the community, and people on Twitter, Facebook, Reddit, and PayPal’s direct community are making it known that they are not happy.
PSA: Paypal will no longer return processing fees (2.9% + $0.30) when you refund a customer starting October 11, 2019.
After walking back the decision in May due to outrage, Paypal is now moving forward anyway and hoping you don't notice.
— Sean McCabe (@seanwes) September 19, 2019
I started to sell on eBay and other online stores about a year ago and had no real issues doing business. Until PayPal decided to not refund sellers the 2.9% transaction fee. I will now close my Paypal account and never use this service again. #Paypal #eBay
— The Garage Depot (@TheGarageDepot) September 20, 2019
Big mistake @paypal. Policy change will strangle your business customers. “In line with industry practice and according to our updated policy, we will not charge a fee to process refunds, but the fees from the original transaction will not be returned.” #SmallBusiness #CheckOut — Tony L (@Bennylux1) September 18, 2019
People need to stop using @PayPal this come on 10/11/2019 will stop refunding merchants fees, so what this means is when you refund a customer their money PayPal will keep your fee. @paypal is just one of many merchants that you can use. Let’s show this company!!! #paypalsucks
— Navy Veteran (@bicharlie0712) September 20, 2019
There is a lot more, of course. Personally, I feel this backlash is short-sighted, and comes from a misunderstanding of how the payments industry works.
Is this Really an Industry Standard as PayPal Claims?
The email that PayPal sent states that this change is “In line with industry practice.” Is this true? Let’s actually take a look at some and see how they compare.
Adyen is the payment processor that eBay is switching to after moving away from PayPal.
Let’s go ahead and take a quick look at Section 7.5 and Section 7.6 of the Adyen Terms and Conditions:
Adyen Refund Policy Section 7.5
Refunds will be charged as a Transaction by Adyen and a Refund fee can be applied by Adyen after giving prior notice to Merchant…
This states that Adyen will actually charge an additional transaction fee for processing the refund transaction.
Remember, PayPal says they will not charge an additional transaction fee for the refund, but they simply are not refunding the processing fee.
Adyen Refund Policy Section 7.6
Fees charged for executing the original Transaction will not be refunded in part or in whole to the Merchant…
This states that Adyen will not refund the original processing fee, just like PayPal will now be doing.
So when compared, PayPal actually comes out better than Adyen because they will not charge an additional transaction fee for processing the refund.
Stripe is another popular payment processor that many people are making blind claims about, thinking that moving from PayPal to Stripe will allow refunding of fees. Once again, let’s review their documentation on refunds:
Stripe Refund Fee Policy
There are no fees to refund a charge, but the fees from the original charge are not returned.
That sounds familiar. It’s exactly what PayPal is saying about their fees now. So this is the same as well.
If you shop around, you will see that the vast majority of payment processors follow this practice. It is indeed true that PayPal is making this move in line with the industry standard.
Is PayPal “Stealing” or “Being Greedy”?
Many are making claims that PayPal is stealing their money by keeping fees when they process refunds. Others are claiming that PayPal is just being greedy. Really? How exactly is this, I would ask..?? You did use PayPal’s service exactly as advertised, right?
They provided their service for you to process the order payment quickly, easily, and securely.
Then, when your buyer wanted a refund for one reason or another, they processed that refund for you quickly, easily, and securely.
You could have used cash or check, mailed envelopes and purchased stamps, waited on time in the mail, deposit check at the bank and wait on it to clear. Then, for the refund, you would have to repeat that process over again.
Instead, you used a payment processing service (again, they all work this same way) and they charged you for using their service. Is it their fault your customer wanted a refund?
Why should they have to eat the cost of the resources involved with processing millions of refund transactions because sellers aren’t following proper procedures to avoid them?
If You Are Upset, Why Are You Processing So Many Refunds?
The primary reason people are upset about is, well…money. When you hear that your fees will no longer be refunded, you instantly consider that this will result in lost profit due to increased expenses.
Of course, this is true…if you are processing lots of refunds. If this policy change is a problem for you, my question then would be “why are you processing so many refunds?”
When I ask this question I almost always get some form of the following replies:
I am selling on eBay, and I get lots of orders where the buyer cancels before I ship the product.
I have good product descriptions and pictures, but buyers do not read well, and it’s too easy for them to file and win disputes.
Understandably, this could be extremely frustrating. Especially if your are selling high dollar items and this is happening often.
Is this really PayPal’s fault, though? Or any payment processor, for that matter? Let’s review some details of how we might help ourselves avoid this problem.
How to Avoid PayPal Fees from Refunds
Regardless of how you feel about this policy change, and whether or not you will be continuing to use PayPal or not, there are things you should do to protect yourself from paying unnecessary fees related to refunds.
Authorization and Capture
When you process a payment with PayPal (or any processor), there is a two step procedure that occurs.
- Authorization – The payment method is authorized, and the amount of the transaction is held so that it will be available for processing. No money has been processed at this point.
- Capture – The pending authorization is then Captured. This is the point at which the transaction is actually processed, and the money is moved from the buyer to the seller account.
The payment fee of 2.9% is not charged for an Authorization. As such, if the buyer cancels the order before the product or service is shipped / provided, you can simply void the transaction, and no fee would have been charged, so there is no fee that needs to be refunded.
This would also eliminate any possibility that competition or internet trolls could try to submit a bunch of orders so that you have to pay a bunch of fees.
If this sort of thing is happening, that’s called fraud, and there are other procedures in place to deal with that besides simply refunding the orders and expecting the payment processor to cover it.
Depending on how your website is built, configuring Authorzation and Capture may or may not be quick and easy.
If your site is built in a hosted platform like eBay, BigCommerce, Shopify, Etsy, etc. you will need to check the settings they provide to see if Auth an Capture functionality is available.
If you are hosting your own website you will have more flexibility to use existing tools or do a custom integration.
For example, if you are using WordPress / WooCommerce, our PayPal for WooCommerce plugin supports all of this with PayPal Checkout Smart Button integration as well as PayPal Pro and Braintree credit card integration.
This will allow you to process your orders with Authorization, and only Capture when you ship.
This will help you avoid unnecessary refunds because a buyer cancels their order.
To my knowledge, eBay does not allow you to configure your payments to use Authorization and Capture. PayPal provides the technology for it (it’s an industry standard), but eBay simply doesn’t integrate payments that way.
So if you are getting a bunch of eBay payments and people are canceling orders before you ship, is that a PayPal problem or an eBay problem? I would argue the latter.
If this is indeed something that eBay simply does not provide, our concerned voices should be directed at them.
Buyer Due Diligence
If you are getting a lot of refund requests after deliving your product or service, I would suggest that you need to look at your own procedures and figure out why buyers are not happy with what you delivered them.
PayPal has provided their service to you when you process the payment on their platform, and you paid your fee for this. Is it their fault your buyer is unhappy and wants their money back? Again, I would argue that it is not, and that sellers should take action to stop these refunds.
Of course, the best way to avoid such problems is to ensure your buyer knows exactly what to expect. Pictures, videos, detailed descriptions, and anything else you can provide on your product pages or online listings will go a long way towards resolving this problem.
Sometimes, though, buyers just don’t review all of this stuff, and it’s not until they receive the product that they realize it’s not what they wanted or isn’t what they expected.
If this is happening to you a lot, I would suggest that you need to make a change. Follow up with your buyers before Capturing their payment and shipping their product. Give them a call, setup a Google Meet, and really discuss all of the details with them to be sure you’re both on the same page.
Much of this depends on the type of product/service you are selling. Some items may require more buyer due diligence than others. That’s all part of your business model, and should be considered when planning what types of products/services you will be selling.
It is a fact that credit card companies (not just PayPal) will almost always award a disputed transaction to the buyer (card holder.)
Some people out there are dishonest, and they will take advantage of these policies and procedures to scam sellers out of merchandise or cash. It’s unfortunate, but true, and the entire financial industry fights this every single day.
If you are selling a product / service where you find this happening a lot, it’s just that much more important that you follow up with your buyers before you deliver your product/service.
Again, talk to them on the phone or in a Google Meet. Feel them out and make sure they seem legitimate. In most cases, you can spot the fraudsters almost instantly when you talk to them, and you can simply cancel the order, Void the Authorization, and no fee will have been charged.
Again, I can understand why the initial reaction of some that see this is negative. However, when you look at things from all perspectives, and you consider the procedures available to avoid such problems, I think we can all agree that it’s up to us as online sellers to do everything we can to avoid refunds.
The banks don’t like refunds, PayPal doesn’t like them, buyers don’t like them, and we as sellers obviously don’t like them. It all starts with us, though. If we simply don’t Capture a payment until we know for sure our buyer will be happy, the vast majority of this can be avoided.
Return rates should be below 1%, and businesses can handle that. If you are getting higher return rates, I would strongly recommend reviewing your procedures and putting what I’ve outlined in this article into action.
Need Additional Help?
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