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
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.
You have absolutely ZERO IDEA what you are talking about..And furthermore you are a complete MORON..
#1 listing 2 companies which also have this despicable practice? Doesnt make this practice “industry standard”, by any means..Thats exactly why you can only list TWO others that do this, because almost none of them DO..
#2. Why are people getting “so many returns?”…Obviously you dont sell on eBay, or have one f#%cking clue what kind of culture is cultivated on there..But FRIVOLOUS IDIOTIC returns are actually ENCOURANGED..Not to mention buyers absolutely refuse to even bother to READ a listing anymore, why? Because they dont HAVE TO..They can simply get the item, realize they f#%cked up, and just get a free return..So why not??
You also dont talk about wonderful order CANCELLATIONS!!! These happen before the sale us even partially completed, and usually seconds after a sale is paid for, its great..And now this criminal lowlife, dirtbag company thinks they have the right to keep the fees on these transactions too, when a buyer is literally refunded in MINUTES with nothing being shipped out..
Well F#%CK THEM, AND F#%CK YOU MORON
Why dont you sit down and shut up, because again you havent got clue ONE as to what youre talking about at all..J#%koff
1. I listed the two that most people are bringing up when discussing this topic. The vast majority do not refund the fees. Square is the only one I’m finding now that shows they still will. They just recently increased their fees in general, though, and I wouldn’t be surprised to see them stop refunding fees as well. Sure, you may find someone that will refund your fees when you refund, and you can certainly choose to use that processor. I would make sure you factor in all variables, though, and not let this refund thing be a primary concern.
2. I have clients who have done $500k+/mo in sales on eBay, Amazon, and other platforms. Yes, buyers can be frustrating on these platforms. We know this, and we account for it. By doing some extra due diligence as I’ve explained in this article/video, we are able to drastically reduce the amount of complaints/returns we get. It’s additional work up front, but it helps enough on the other side that it’s worth it. Depending on your product/service this may or may not be worth it to you. That’s up to you to decide as a business person. Simply blaming PayPal for not refunding your fee is just lazy.
3. Yes, I very specifically mentioned the cancellation problem. That would easily be eliminated with the Authorization and Capture procedures that I outlined here. Had sellers and platform builders bothered to implement these procedures all along, PayPal likely would have never had to introduce this policy change and would continue refunding fees, because it would be a much smaller problem for them.
So if your buyer purchases something and you only do an Authorization, and then later they want to cancel before you ship, all you have to do is Void the Authorization. No money was ever moved, and no fee was ever charged, so there is no fee that needs to be refunded.
The problem if you’re selling on eBay is that eBay does not provide this Auth -> Capture checkout flow. They simply process the payment right away, and then yeah, you’d have to process a refund later. Is that the payment processor’s fault? They clearly provide the functionality for this. Or is it eBay’s fault, that got lazy and did not bother implementing the proper procedures for checkout systems? (This, by the way, is one of the reasons a company like eBay should leave it up to the payment experts like PayPal to build checkout systems.)
On that note, Adyen Payments, the company that eBay is using for their Managed Payments Platform, provides Auth/Capture as well. I still have not seen anything about it in eBay’s Managed Payments platform, though.
So, if you’re having this problem, there are MANY variables involved. The point I’m making here is that if you solve the main root of the problem, the refunding of fees will not be a problem for you at all no matter who you’re processing payments with.
I just made my first refund since the new policy. I sell software which is automatically downloaded once the transaction is complete so I am not even covered by seller protection even though I have had a PayPal business account for 20 years and keep a large balance in my account.
The person realized after downloading it that he already purchased it. I lose 3% (2.9% plus .30).
I offer the software for Windows only. It is plastered all over the website. I still have Mac people who order it, try to download it then want a refund because they didn’t know it doesn’t work on a Mac. Like how could you not know? That will cost me 3%. It is already difficult to stay afloat. Now, it is going to cost me even more.
Most of the time the funds come from some other PayPal account. I am charged the same as a credit card sale. How hard is it for PayPal’s computers to change the numbers from one account to another account.
I feel your pain with the fact that software downloads are not covered by Seller Protection. It’s unfortunate, but the same thing is true when processing payments with other merchant accounts. If the person files a dispute, you would have to provide a tracking number from a shipping carrier showing it was delivered. Since we cannot do that with software downloads, we lose the dispute.
I have personally updated our refund policy to show that I will refund 95% of the order if a refund is requested for any reason beyond my control. So far this seems to be acceptable for our customers.
For your problem with Windows only and Mac people ordering, I would suggest that you add some sort of logic into your checkout or your product page that checks for the user’s OS. If it’s not Windows, don’t let them buy it. Display a message accordingly when they attempt to add the item to their cart.
Just because an order is paid with PayPal does not mean the funds came from cash sitting in that account. Many times users will choose a credit/debit card or bank account as the funding source when paying with PayPal. So it’s not just a matter of “changing the numbers from one account to another account.” Sometimes it may be paid with PayPal cash, but PayPal is still processing that payment for you and dealing with all the risk, liability, etc. that comes with that for you.
Believe me, I don’t want to be paying fees when I don’t have to, and the refund policy is a bit frustrating. Again, though, it’s not just PayPal, and as a business owner I understand charging for provided services. I don’t cheer for it, but I also don’t consider them some horrible company for doing it.
I’m frustrated by it, too, but we just need to adjust our processes to handle it as best we can.
This is totally wrong
Refund policy just helped you on site like ebay for instance to get good rating and have more sale.Now if i do not get the fees back I am going to moan about it,try partial refund,not paying for transport when item is returned etc..etc..On ebay you had blackmail for rating and now people will blackmail to get a discount and if you don’t they will ask for refunds
Paypal is doing that because a lot of pay with it so lots of sellers are captive
Just read on forum that a guy lost 590€ fees (like 650$) because he did not want to make a low invoice to a chinese guy so the guy asked for refund
Reading your thread I am sure you think that this is the seller’s fault
eBay makes it tough because they do not provide the standard features that would eliminate all of this; Authorization and Capture.
In your example, if the person wanted to cancel the order and it was not Captured yet, all the seller would have to do is Void the Authorization. No fee would have ever been charged, so no feed would need to be refunded.
PayPal provides this feature. Adyen (the company eBay is using for Managed Payments) provides this feature. All payment processors provide this feature.
eBay has chosen not to implement it. So no, I wouldn’t say it’s the seller’s fault in this case because they don’t have the option on eBay. It’s definitely not PayPal’s fault, though.
I would say the community should be barking at eBay to implement standard procedures so that sellers can avoid such problems.
I took PayPal off of my 2 eCommerce sites due to they no longer refund the transaction fees. Firstly, most (if not all) payment processors allow you to pre-authorize a payment, and to not charge in the cart. The pre-auth will automatically fall off usually within 3-5 days if not charged. All forms of payments that I accept, I set to pre-auth only. Because if I need to cancel the order for any reason, I can simply just void the order on my eCommerce platform and the pre-auth will fall off at no cost to me. If I do charge the payment method, and then have to refund later, all of the payment processors I work with only keep the .30 cents transaction fee, not the 2.9% so-called commission fee. PayPal does not give you the option to only pre-auth a charge, the charge is fully charged/captured by PayPal.
Also, shortly after PayPal initiated its new refund policy, I had 2 fraud orders originating from a country known for high fraud and using the same PayPal account. I simply refunded the suspected fraud orders within 1 hour after placed. I didn’t ship any product or anything. I got the funds from PayPal and then refunded within 1 hour. PayPal kept over $170 in transaction fees from me. I called them and said that those orders were suspected fraud orders, and that meant nothing to them at all! They kept MY $170. So, in that case, I didn’t have money stolen from me from an online fraudster, I had my money stolen from me by PayPal! SO, think of this….if you have some fraudster attempting to charge several thousands of dollars worth of product on your site multiple times, you can still lose hundreds if not thousands of dollars to PayPal. That is insane! I no longer accept PayPal and have started using alternatives. Amazon Payments seems is a great alternative to PayPal and many people use it.
PayPal does provide the Authorization and Capture feature. That is literally the exact thing I explain in this article and in the video, which you obviously did not actually read or watch. Had you had that in place you would not have lost that money on fees.
If you’re using a shopping cart system like WooCommerce, Shopify, BigCommerce, eBay, etc. then you’ll need to check that system to see if they provide this functionality or not. PayPal provides it like all the other processors. It’s about whether or not your platform provides it.
If you’re using our PayPal for WooCommerce plugin, it fully supports this. If you’re using PayPal Standard HTML buttons, here is a guide on how you can get that done very quickly and easily. I think you’ll appreciate the video on that page, too.
Square is the only payment processor I see that is still advertising they will refund you the fees. Don’t be surprised to see them change their policy soon, though. They are also more expensive for every transaction you will ever process on your website. You really think that’s a good trade? I’ve worked with many others, and they not only won’t refund you the fees, but many charge you additional money for processing the refund. I also provide details about this in the article and video.
I can appreciate your opinion, but please, at least skim the headings in the article before jumping straight to the comments. You never know, you might learn something. 😉
Scumbag corporate shill. Square refunds the fees and YOU DO NOT MENTION IT. WHAT A SCUMBAG CORPORATE SHILL! We used to have consumer protections, but then apologists like you come around and make the world worse.
Square refunds the fees. `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 a lie! Verifone refunds fees! Ingenico refunds fees! I’m sick and tired of you defending corporate scumbags and theft.
Square does still show they will refund you fees when you refund the original transaction. However, look more closely at what you’re trading here.
PayPal’s fee is 2.2% – 2.9% when using them for direct credit cards and PayPal options. Take a look at Square’s fee documentation, and you will see the following:
Every transaction that runs through your website would be “keyed-in” and would be charged at this 3.5% rate vs. PayPal’s 2.2% – 2.9% rate.
So you would trade a higher rate for ALL transactions in exchange for getting your fee refunded when you refund your customer…which should be happening less than 1% of the time..?? That isn’t logical in a business sense or an emotional sense.
Also, PayPal gives you the option accept both PayPal payments (which many buyers prefer) as well as Credit Card payments. Square is only credit cards, so you’ll lose out on all those sales where people don’t want to key in that data. I think you’ll find there are many, and your conversion rate will drop significantly.
I understand that it’s easy to emotionally react to things like this, but you really need to make sure you’re reviewing all of the details or you’ll only put yourself in a worse position. You can me a shill or whatever, but the reason I choose PayPal for myself and for my clients is because they provide the cheapest overall rates with the most features and flexibility over any other processor.
I have shopped with MANY processors. No, the “vast majority” do NOT offer refunds of fees. Square is the only one I’m seeing still showing that, and I would not be surprised if they remove that soon just like PayPal did.
Show me a better solution when all variables are considered and I would seriously consider switching myself and my clients to them for credit cards.
I just showed you why Square is not, so let’s take a look at another one. Happy to compare any other processor you feel is better.