Think your digital sales are protected by PayPal?

PayPal’s Seller Protection doesn’t cover digital goods. Surprised? You’re not alone. Many e-commerce merchants offer their customers PayPal as an alternative payment method because they want to sell online securely. What’s more, their customers trust it, and it works in 25 currencies around the world.

But you need to check the small print in PayPal’s user agreement before you start selling.

The lowdown on PayPal’s Seller Protection Policy

PayPal’s Seller Protection covers two types of claims:

1. Unauthorized Transactions: the account holder claims the payment wasn’t authorized
2. Item Not Received: the buyer pays for an item but claims it was never delivered.

You won’t suffer a loss if your transaction meets PayPal’s requirements (e.g. you can provide proof of delivery, you are honest about any abnormalities, and you ship within seven days to the address indicated).

However, PayPal does not protect the sale of digital items or services. It protects only the sale of physical goods. In other words, if you’re selling intangible items like tickets, transport cards, e-books and music, then PayPal won’t protect you if your customer makes a claim against you.

Other instances when PayPal won’t protect you as a merchant

Apart from the obvious prohibited items such as guns, drugs and counterfeits (I’d like to assume you’re not selling those, but who knows), PayPal Seller Protection doesn’t kick in:

• if the item you sold is significantly different to how you described it
• if the transaction was made through PayPal Direct, Virtual Terminal, PayPal Business or PayPal Here
• if you receive multiple payments for one item
• if the claim was made directly through an eBay account

Whoa! So, PayPal doesn’t protect digital merchants at all?

Well, that’s not strictly true. There is now a splash of protection offered. In 2015, in response to the growing popularity of buying digital goods through its platform, PayPal extended its Purchase Protection to cover consumers buying intangible goods and services. Think online music, e-books, travel tickets and software downloads.

Now if a customer doesn’t receive a service or digital product bought through PayPal, or the service or digital product differs significantly from its description, he or she can file a Purchase Protection claim. But to make that claim, PayPal’s dispute resolution process must be followed. This arguably helps digital merchants in two ways:

1. The process encourages the buyer to contact the seller directly and provide proof of delivery to try and resolve the claim. This may discourage fraudsters because they’ll have to provide proof of delivery (which presumably they won’t have).
2. If you can provide proper Proof of Delivery, you’re much more likely to challenge successfully a customer’s claim for “Item Not Received”.

The main exceptions to this extended protection for buyers are payments to crowdfunding sites and gambling/gaming sites. These industries are simply too risky. The same goes for items considered the same as cash, for example, gift cards.

So, if you sell gift cards or gaming products via PayPal, know that PayPal won’t reimburse the buyer of these items.

What does PayPal’s extended Purchase Protection mean for digital merchants?

There is an upside to PayPal’s Purchase Protection for digital merchants: more customers will be encouraged to buy digital goods and services. The downside is that, if you want to dispute a customer’s claim, you’ll need to provide ‘compelling evidence’ of the transaction.

That can be a bit tricky for deliveries of intangible goods. You can’t just present a FedEx Proof of Delivery.

The type of convincing evidence you need to provide if a buyer makes a claim depends on the type of goods or services you sell. Examples include proving that you gave the buyer a link to the purchased file in a timely fashion, that the buyer accessed the file, and that the file was downloaded.

So, PayPal didn’t expand its Seller Protection to cover digital merchants at the same time?

That’s right!

What PayPal did do at the same time as extending its coverage for buyers of most digital goods was to stretch the time for a customer to file a dispute from 45 to 180 days. That’s a longer time frame than some credit card companies offer.

Fraudsters must have rubbed their hands with glee over that bit of good news.

We would recommend that you cover yourself by:

• making sure there are no loopholes in your terms of service (TOS)
• by keeping all records, emails and logs secure in case a customer makes a claim
• having a payment gateway that guarantees all your payments, even those made through PayPal

Don’t get me wrong. PayPal is an excellent alternative payment method and it’s extremely popular with consumers in Europe and North America. Just be aware that, if you sell digital goods and services, PayPal doesn’t give you seller protection.

Have you ever lost a claim made through PayPal? Did you even know PayPal doesn’t protect merchants of digital goods and services? Tell us your experiences by getting in touch with one of our Revenue Geeks.