What is the difference between a refund and a reversal transaction?

The terms refund and reversal are sometimes used interchangeably, but they are far from synonymous.

As a merchant, it’s crucial that you understand the key difference between these two types of transactions, their role within the payments process, and the effect that they can have on your business. Because, whereas one can be achieved almost immediately with little to no inconvenience, the other presents a financial and administrative challenge that you’d be wise to guard against.

Refund vs. reversal transaction

Below we explain reversal vs refund, give some examples of when they might occur, and give you the lowdown on how you can minimize their impact.

Refund

A refund occurs when a transaction has already been approved and the payment has been taken from your customer and settled in your account. This usually happens when a customer has bought something that they’re dissatisfied with or that is no longer needed.

To initiate the refund, the customer contacts the merchant directly and the acquiring bank reimburses them via the same payment method. This typically takes between 1 and 7 business days to be processed (but can be considerably longer). As well as losing a sale, the downside of a refund for the merchant is that they also have to pay interchange, and often any return shipping fees (depending on the policy they have in place).

Reversal transaction

Unlike a refund, a payment reversal occurs before the customer’s funds have been settled in your account, and can be initiated by either the cardholder, the merchant, the card network, or the issuing or acquiring bank. A reversal can be completed a lot more quickly than a refund, which avoids interchange fees and is a lot less disruptive for both merchant and customer.

Reversals can occur for a number of reasons, usually because either the customer or merchant has noticed an issue with the transaction. For example, if the merchant charges the incorrect amount, the customer suddenly changes their mind about the purchase, or the item is no longer in stock.

Here, we are specifically talking about an authorization reversal - so-called because it takes place in the window of opportunity created by the authorization process and before the funds have left the customer account. Reversal transactions can take place almost immediately, sometimes without the customer even being aware (if the merchant is at fault and spots their error).  

Because the charge has to be reversed, refunds can also be categorized as reversals, and so can chargebacks, where a customer disputes a payment taken from their account, which incurs a penalty fee for the merchant.

Examples of refund vs. payment reversal

Below are typical examples of when a refund might take place and when a reversal might take place.

Example of a refund

A customer buys a pair of jeans from your ecommerce clothing store. In the time it takes order to be processed and delivered to their address, the payment has been taken from their account. However, when the jeans arrive and the customer tries them on, they don't fit. The customer then requests a refund directly from you, and the full amount plus interchange and return shipping fees are taken from your account.

Example of a reversal transaction

A customer sees the jeans on your online store and attempts to make the purchase, but is then told that the jeans are no longer available in their size. While the payment is still pending but has not yet been taken, the customer requests to cancel the transaction. No funds are transferred from their account to yours, so none have to be returned and there are no fees.

How Checkout.com can help merchants to reduce the risk of refunds and payment reversals

Refunds and reversals can be costly and disruptive for your business. With a trusted payments partner like Checkout.com, you can minimize the impact of both types of transactions.

We have a range of solutions that can reduce the impact of refunds and reversals, including Fraud Detection Pro, which identifies and stops transactions that are flagged as suspicious in order to prevent chargebacks. You can also use Rapid Dispute Resolution - a Checkout.com product in partnership with Verifi - to automatically resolve disputed Visa transactions before they turn into chargebacks.