I learned a painful (and expensive) lesson recently, courtesy of Google Checkout. If you are a small business providing services to your clients, please read the rest of this story to decide for yourself whether or not you will risk offering Google Checkout to your clients as a payment method.

For most of my projects, I take two payments — a 50% deposit at the start, and the rest around 30 days later (or at the site launch if that comes first). This method seemed like a good compromise with my clients, decreasing the financial risk for both client and developer. The deposit is generally non-refundable under most circumstances because it pays for my time helping the client determine the course for their site, and I put a lot of time and effort into site planning.

Last spring, I started a project under these terms and accept a deposit through Google Checkout. Due to communication issues, the project progress stopped. (I won’t go into details here because this article is not about placing blame.) The client wanted 100% refund on his deposit, but I explained that I had already spent time on the project and could not offer him that. He opened a dispute through Google Checkout, in which we went back and forth for a while. I offered to give him all my notes, plans, and theme files for the project so that he could take them to another developer to complete the project. He refused, saying those files do him no good and that he wanted a website. I relented, offering to finish the site if he would close the dispute. He did not close the dispute — he wanted either 100% refund or a site. Not being able to trust him with an open dispute, I let the project go.

Months later, the client decided he still wanted his money back and he disputed the charge with his credit card company. I got a notice about the pending action and wrote up a lengthy response to the matter, sending in my earlier offer, my refund policy, and all of the ongoing conversations with the client as evidence. Google sent me a response a few weeks later, telling me that I had lost the dispute and that they were withdrawing the amount from my account in addition to a $10 fee for losing the dispute. Their reasoning was basically that their payment protection did not apply to service-based transactions. Regardless of the case I argued, I would have lost. He got his files and my time for free, and I was left with a -$10 balance in my Google Checkout account.

But the pain didn’t stop there. I had recently switched around my accounts after my bank increased fees on accounts, so the account Google tried to take the money from was no longer valid. Google then sent me a letter stating that if I did not repay the amount within 10 days, they would shut off all my Google services. As I use Google for Analytics, Gmail (Google Apps for Business), Feedburner, etc., I had no choice but to immediately pay up the amount plus the fee.

If you have a service-based business, I strongly suggest that you use PayPal if you want an easy credit card processing system. As a solo entrepreneur, I don’t do enough credit card volume to warrant having a merchant account solution, so I rely on 3rd party credit card processing. PayPal does a good job with seller protection and their dispute process, so I will be continuing on with them.

I have already removed all Google Checkout links from my site, and I will no longer be using my account there. Their fees are the same as PayPal anyway — I only started with them to offer my clients a choice and because Google automatically deposits the money into your account within a few business days. (With PayPal, you have to manually transfer it after receiving money.)

There is just no excuse for letting a buyer get a full refund on their purchase months after they made it. Google Checkout’s system would allow someone who purchased a site 6 months ago to get a full refund on it if, say, their business wasn’t working out or their traffic didn’t build the way they wanted it to (both of which have nothing to do with the developer who made the site). Clients shouldn’t be allowed to get automatic refunds just by disputing the charge with their credit card company.

For your protection, don’t do business with Google Checkout if you are a service-based business.

Flickr photo by Patrick Hoesly.