PayPal And Selling Digital Goods: Key Considerations
PayPal has always worked hard to protect buyers and sellers from fraud. Over the years, the nature of online fraud has changed considerably, forcing PayPal and other payment providers to adapt to new threats and consumer habits.
Digital goods, from eBooks to online subscriptions, games and gambling, to crowd-funding donations (and investments) and gift cards are a popular category of products the payments platform supports. For any payment provider, digital goods are high risk. The opportunities for fraud – either from the buyer or the seller – is easier to predict, since the products are intangible.
In June 2016, PayPal announced new rules for merchants and consumers that changed how chargebacks and disputes would be managed when the issue concerned digital goods. Although PayPal manages disputes according to the merit of each case, this move is clearly designed to reduce the potential cost of fraud for PayPal, which is forcing merchants to consider alternative payment platforms that limit their own risk.
New PayPal User Agreement Updates
PayPal updated section 11 and 13 in the User Agreement on 25 June 2016, with a further update in January 2017, which also impacts merchants when a payment is disputed.
In the new agreement, payments to crowdfunding platforms and gambling/gaming sites are no longer eligible for Purchase Protection (for buyers). PayPal considers both too risky, especially since at least 1 in 10 crowdfunding campaigns fails. Whereas gambling and online gaming are inherently risky, making it impossible for a payment provider to protect consumer money when they are unlikely to get it back.
PayPal also excludes anything “involving an entry fee and a prize”, since this is also, effectively, gambling.
At the same time, sellers of “Items considered equivalent to cash, such as gift cards, are no longer eligible for coverage under Seller Protection.” Excluding gift cards from any protection make them a risky prospect for merchants, since this increases the chance of friendly fraud. A consumer, or fraudster, could buy multiple gift cards, then request the funds back through PayPal, effectively doubling their money and leaving the merchant out of pocket.
Gift cards join the list of unprotected transactions, which includes “digital goods and services.” In the case of a dispute, a merchant needs to provide “compelling evidence” the goods/services were delivered, with all the relevant documentation, including emails and proof of download.
If, however, a chargeback is upheld and the merchant loses a dispute, in the most recent User Agreement update, a merchant is “liable to PayPal for the full amount of the payment plus any costs that we incur.”
PayPal is passing chargeback costs from banks and card providers to merchants.
What these Changes Mean for Merchants
Does this mean PayPal is too high risk for merchants of digital goods and services?
Anyone selling gift cards should reconsider this payment option since the risk of fraud is far too high. Other merchants selling digital goods should also consider alternatives. Providing you are selling what you claim, providing you are delivering high-quality products/services and can prove delivery to your customers, then you should not be affected by these changes.
However, as we have seen over the last few years, fraud is on the rise. Including friendly fraud, which can even involve your customers. No one is completely safe. It is worth remembering that these changes put merchants of digital goods/services at a disadvantage in the case of any disputes arising on PayPal.
To discuss how to reduce the risk of fraud when selling digital goods, and how to balance the risk of fraud with providing good customers with their preferred payment methods, get in touch with our team. Call +44 (0) 808 274 3229 or contact Secure Trading here.
You may also like to read our whitepaper on Fraud Solutions For Ecommerce Business. Download your copy here.