Introduction
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.
Video
PayPal Fee
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
Check out this PayPal fee calculator to simplify the math for you!
Refunds
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.
Example
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.
Community Backlash
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.
Nail in the coffin. Goodbye, @PayPal. pic.twitter.com/sAweMHxtLn
— Sean McCabe (@seanwes) September 19, 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
@paypal is going to enact their “steal your money fee” They will no longer refund your transaction costs. They already steal .30 on every refund anyways. — SAVANTone (@pcsavants) September 18, 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
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
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 Payments
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 Payments
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.
Others
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.
Websites
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.
FREE!
eBay
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.
Product Descriptions
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.
Fraud Management
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.
Conclusion
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?
Schedule a live meeting with Drew Angell, PayPal Certified Developer, and get all of your questions or concerns answered.
There are millions of transactions, almost all being handled by software written to get rid of employees to increase profits. Now for work that is done by electrons, they want to KEEP FEES for completely legitimate refunds. They do literally nothing to earn that money. They obviously did just fine before. This is clearly a rule with one intention. I had an item on eBAY sell recently, and the guy didn’t pay for it. So, I get the blessing of making sure I get my fees back for something that wasn’t even paid for (I can do this manually, or set it up to do so automatically through eBAY). eBAY then says — HEY RELIST IT! So I did. I made the very minor (though common) mistake of relisting when the original listing was for up to QTY 2. Well, I didn’t notice. A dude buys both. I IMMEDIATELY see it, write him back, apologize and tell him “I can give you one and do a partial refund, or refund the whole thing.” Literally NO WORK FROM ANY HUMAN. Completely automated. No exchange at all to this point. Just need to ‘cancel’ and refund. Just return the damn fees! Nothing happened! This is 100% corporate greed and unacceptable. As if eBAY hasn’t gotten ridiculous enough, now this. I am absolutely fed up with eBAY turning their marketplace, where a seller and buyer can shake hands and make a mutual transaction. They instead have stuck their nose into everything. They have continued to increase rates throughout the years when they have always been profitable. If something is growing, there’s no good reason to raise rates or fees OTHER THAN to take more of it away. Why the change? Greed. Pure and simple. There is no other answer. It’s pathetic. They have ruined the marketplace and forced everyone to look like an employee of eBAY instead of their own, fun, trust driven entity. I’m out. I’m done. This is it. They want to take money from honest, hard working people when software is handling all their work — to benefit — only a few.
I understand how stuff like this can make you emotional. but come on, really think about what you’re saying and what’s happening here.
“Work done by electrons.” “They do literally nothing…”
Whose computers are those electrons firing on? Who’s paying for the internet connections? Who’s paying for the server admins to manage all of that and make sure it works every time, quickly and securely? Who handles all of the PCI compliance and relationships with banks across the world to build these bridges that we walk across every day so effortlessly?
In your example, you admit that you made a mistake. Had you not made that mistake, this problem would not have happened. That sort of thing does happen, though. I’ve done those sorts of things myself.
This is just another example of what I talk about in the article and video (which it seems you didn’t actually read or watch). If eBay had the Authorization and Capture system built into their platform, and you were using it, you could have simply Voided the Authorization for the order you couldn’t fill, and no fee would have ever been charged in the first place.
The fact that eBay does not provide this for you is not PayPal’s fault. PayPal (and all payment providers) make this option available for those integrating their services. Why eBay chooses not to implement it..?? I don’t know. I think we need to be throwing heat their direction, though. Not at the payment processor.
“No exchange at all to this point.” That’s simply not true. Money WAS exchanged between bank accounts. Those systems that these banks spent billions of dollars to build over the passed 20+ years moved the buyer’s money safely and securely from their account to yours. You were charged the fee that you agreed to pay for such a transaction. Now, because of a mistake, you are asking them to reverse that, and move money back across those systems they built safely and securely, so that you can all move on with your lives. That’s a pretty valuable service if you ask me, and it’s one I’m happy to pay for.
Also, PayPal pays fees to these banks for moving all of that money, too, and then that causes more procedural effort that needs to be implemented. Do they refund their fee? Some do, some don’t. Now they have to pay their partner managers and developers to build in a bunch of if/then logic, test it, deploy it, deal with bug reports, etc. Heck no, it’s easier just to kill the refund…especially when your competition isn’t doing this either.
You can certainly go back to check/cash if you want to. That’s an option we all have, and some of my clients still prefer to pay me that way. It just slows things down, but it works, and it’s certainly an option for you.
Again, though, had an Authorization been placed instead of a Sale, you could have canceled the order with no fee at all, because no money would have actually been moved around yet.
Greed? Eh, no more than any other business. Are you a small business owner? If so, take a look at your financial statements. If you ever saw one category in your expense reports jumping out at you…and then you look at your competition and you think…none of these guys are doing this…why are we eating all these fees when we don’t have to be? We can drop this expense line by x%, which will boost our bottom line. I guess you can call it greed if you want to, but to call PayPal out for it and act like they’re the only one doing it is just not realistic.
I would recommend that you take your complaints about your example to eBay, and ask them why they don’t offer Authorization and Capture.
I would also recommend that you do your best to sell as much on your own website as you can. This gives you complete control over things like Auth and Capture, and you don’t pay platform fees at all.
It is completely unfair and unwarranted. Example, I do local deliveries only but I do have overseas customers who buy for a recipient locally. So i leave the option for other countries to purchase.
Unfortunately, some customers still make the mistake that we deliver overseas and buy thinking we will deliver. I have to explain to them and refund them. It is not common bt it happens.
What I dont understand is, why should i be penalised? There is no goods being sent, nobody is losing anything but Paypal has decided to punish me for something I have very little control over.
Worse is if some customers decide to purchase a huge amonut say 1k, only to find out I Do not deliver overseas. So i have to call them and tell them we cant and we will refund but now I have to pay $40++ for something that was not delivered. Already paypal is charging 4% from the hundreds of sales i do ,and easily we have 5-10k sales a month on paypal. Why cant they absorb this amount?
I will be forced to make some decisions if I lose $$ for company policy. Its either i choose another payment option, or I completely remove this payment mode.
The Authorization and Capture I offer in this article / video would solve the problem in the examples you just gave. Please at least read/watch the content before continuing to complain about the problem.
Companies are just trying to survive, while I don’t like paypal doing this and I’m sure paypal would prefer no doing it, is just the cost of doing business, paypal cost of doing business has increased, just like other business, the reason paypal became what it was is because it wasn’t just another industry standard and the regulations on paypal were lower, the last year 2019 we had massive tax increases (sales tax) almost every state is now charging sales taxes now and a lot of countries are doing the same, and the cost to paypal had been massive, the amount of people now having to working on paypal just making sure tax collection is done correctly is a lot, this has increase paypal cost, add that the amount of regulations passed that most people don’t know and cost just keep going up, I’m surprise they haven’t increase their fees, but they eventually will, people need to understand that is the government the problem, this will happen all over the economy, banks will start looking for ways to increase their fees as well, while I don’t like these new fees now I have to pay I think that paypal is no the one to blame.
Hi, I run a small business and often send a customer a PayPal invoice. Occasionally they will give PayPal one address and then email and say can you deliver to a different address. This happened yesterday a Ms the guy had moved house. I refunded him but lost the fee. I can’t just ship to the wrong address because of seller protection. Can you suggest how I can avoid this? I am in an EU country so I don’t believe I can withhold a refund and in any case I don’t want to annoy the customer because normally I will still make a second sale to the correct address.
I also do not recommend ever shipping to an address other than what’s on the transaction details and showing seller protection. That’s the right move.
With a PayPal Invoice, that is a bit of an issue because it doesn’t have the Authorization and Capture ability tied into it. When people pay an invoice it’s always paid as “Sale”.
The first thing I would suggest is to try and verify the shipping address with buyers before they pay the invoice, and make sure you have already gotten the shipping address they want so that you can specify it on the Invoice.
If that doesn’t work well enough or it begins a big enough problem, you could always consider building your own simple Invoicing system using the PayPal API, which would give you more control and allow you to tie Authorization/Capture into the mix.
Sorry I don’t have a more simple answer, but that’s the best I can give you on that one. Let me know if you have any questions or concerns about that.
This is a BIG problem. THE WHOLE IDEA for online payments is it makes it easy for anyone to buy stuff for others. Etc I can be buying a present for my uncle overseas, so it is extremely common for the buyer address to be different from the recipient address. The system is just flawed
Well, it’s not PayPal’s system that’s flawed, though. If you take a credit card through any other processor, then ship merchandise to a random address that is not associated with that card at all, and a chargeback is filed, you will lose that dispute every time.
Also, here’s a rule I like to try and follow as much as possible. If I come to you with a problem, I try to also come with at least 3 possible solutions, which is what I have done in this article/video. You are not accepting those solutions, and you are coming back at me with this problem. What are your solutions?
AHHH.. this is nonsensical. The VAST majority of Paypal payments involve transactions from one Paypal account to another. There is NO fees on Paypal’s part as it is simple an automatic data shift on some computer somewhere. So, they are MAKING tons and tons of money. It is not no different than EBay’s ridiculous policy of making the shipping cost of an auction be including in the final value fees the seller has to pay.
Who built that system that processes all these payments quickly, easily, and securely for you? Who maintains all of the servers and the data to make sure that stuff stays that way, twenty-four hours per day, seven days per week? What makes us so special that we should just get that service for free?
The whole idea of paypal is to have something virtual and avoid the same fees as the banks. If they are going to do this its defeating its purpose as an alternative cheaper way to exchange currency.
I would disagree with that being “the whole idea of PayPal”. It’s about quick, easy, secure payments, globally. They provide that service, and they charge their fee for it accordingly. Am I happy they made this change? Of course, not. However, I can see the reason and logic behind, and it doesn’t build up this hate my veins like it does others, which I still just do not understand. Adapt and move forward. This is really not that big of a problem unless you allow it be.
I think it’s they make a lot of money in low currency rates, 3% minimum, charge for every transaction,but for moving from 1 PayPal to other and back with out sales is too much.
It’s robbery and nothing else.
And they stilling it from small family business people.
For my family budget every 10$ matter . They a richest company in the world and do that dirty business with non refundable fee for canceled transactions.
Go to f-n mars with your boss and burn there.
#boycotpaypal
There are many ways to address currency conversion. You can hold separate currency balances in your accounts, for example, and no conversion would take place. So if you’re sending money between PayPal accounts like you said there would be no loss / conversion.
They are not stealing anything from anybody. They are providing a service, which people can choose to use or not. When you use it, you pay for it. Simple as that.
Elon is not associated with PayPal anymore, by the way. Hasn’t been for many years.