What is a payment reversal?

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Anthea Taylor
January 27, 2023
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What is a payment reversal?

Payment reversals are a concern for merchants of all sizes. And, no matter how frustrating they may be, every merchant will have to deal with them at some point. If a merchant is unable to provide exactly what the customer bought, a refund will need to be issued. Likewise, a merchant may need to reverse a payment if there has been an error in processing or, in order to appease an unhappy customer.

Each type of payment reversal is different and knowing what these differences are will help merchants to optimize the way that they deal with them.

In this article we explain what a payment reversal is and how long they take to take action. We also describe the three main types of payment reversal and the steps a merchant can take to minimize them.  

What does payment reversal mean?

The term payment reversal applies to any transaction when payment funds are returned to a cardholder’s bank. A payment reversal can be initiated by the cardholder, merchant, issuing bank, acquiring bank, or card network.

There are lots of reasons why a payment reversal may take place. These include:

  • when the item is no longer in stock
  • if the product does not meet the expectations of the customer
  • if the customer changes their mind for another reason
  • if the incorrect amount of money was taken
  • and when the purchase was made fraudulently  

All payment reversals are a concern for the merchant, for different reasons. A payment reversal may point to operational failings, substandard products, or an inadequate approach to fraud prevention. The consequences of a high payment reversal rate go beyond the money being paid back out. Depending on the cause, payment reversals can harm a merchant’s brand loyalty or attract stricter anti-fraud controls from banks and card issuers. As such, understanding more about payment reversals is key to building a more profitable business.

What types of payment reversals are there?

There are three main categories of payment reversals. In this section we will explore each.

Authorisation reversal

Authorisation reversals take place before a payment has been completed. This is possible because card payments can take days or even weeks for the funds to be transferred from the customer’s bank to the merchant's bank. Authorisation is a way for the customer’s bank to approve that the payment can take place, and ringfence those funds in the customer’s account ready to be paid out. That provides a window of opportunity to withdraw the authorisation before the money has left the customer’s account.

The trigger is often someone spotting an issue as the transaction is being processed. It could be that the merchant notices they have keyed in the wrong amount, or the customer wants to pay with a different card. Depending on the payment software, there will usually be a mechanism to stop the transaction, such as a cancel button. In technical terms, an electronic communication is sent to the issuing bank through the merchant’s payment processing system, instructing them to reverse a transaction that was just authorized.

Other times, a merchant requests that a customer payment is pre-authorised prior to them consuming the product or service. This is sometimes referred to as a security payment, and is common with the hotel and car rental businesses. If the customer does not spend the authorized amount, the merchant will then need to reverse this authorisation, either fully or partially.  

The longer the authorisation takes, the more complicated the reversal becomes as the payment passes through various stages, from issuing bank to card network and acquiring bank. In an efficient authorisation reversal, the funds should never leave the customer’s bank, and the merchant can avoid interchange fees that are usually levied at the point of settlement.

If the reason for the reversal is due to an error on the part of the merchant, the reversal can be completed without the customer even being aware. Another benefit of a fast authorisation reversal is that the merchant does not have to account for the arrival and return of revenue on its balance sheet. This accounting exercise becomes complex when merchants are processing high volumes of transactions.

As such, authorisation reversal is the cheapest, fastest and most customer-centric way of cancelling a payment.  

Refund reversals

Once a payment has settled (and so the opportunity for an authorisation reversal has passed) the next best option is a refund reversal. In a refund reversal, the merchant returns funds to the customer’s bank. In purely transactional terms, a refund reversal is a completely separate activity to the original customer payment, although typically they are for the same amount of money. As such, the refund reversal will be subject to normal fees and settlement times. But in that time, a customer should be able to see a pending credit item on their bank statement. This should appease any measures the customer may take to contact their bank to get their money back.

It is for the merchant to decide when to initiate a refund, and for what reasons. That said, without a generous refund policy the customer may initiate a chargeback request.

Learn more: What is the difference between a refund and a reversal transaction?

Chargeback reversals

Chargeback reversals are the worst case scenario for merchants. A chargeback occurs when the customer’s issuing bank refunds the customer and then seeks to reclaim the money from the merchant. If the merchant does not dispute the chargeback, it will need to refund the customer plus an additional penalty fee to the issuing bank.

Fighting the chargeback will require the merchant to provide evidence, and the process can take weeks, even months, of additional administrative burden. Even if the merchant wins, a high volume of chargeback requests can result in the bank or card networks classifying the merchant as high risk, and applying stricter security thresholds on it. In turn, a merchant’s payment acceptance rates can fall. In extreme cases, a merchant with an excessive chargeback rate can have their account suspended by the card networks, leaving them unable to trade.

How long do payment reversals take?

How long a payment reversal takes depends on the type of reversal it is. An authorisation reversal can be immediate, and often without the customer even being aware it has happened.

Refund and chargeback reversals take longer because funds have to be returned to the customer’s bank account. Of those, a refund reversal will be faster, but dependent on how the refund is processed (i.e as a transfer to the customer’s bank account, or credit added to the card used in the initial payment.) Settlement can take between one and five days.

Chargeback reversals will be longer again, especially if the merchant disputes the claim. Although disputes can take weeks, even months to resolve, a customer may expect their bank or card issuer to provide the refund while the dispute is ongoing.

How can businesses prevent payment reversals?

While every merchant will face some level of payment reversals, they should not be passive bystanders. There are plenty of things they can do to minimize payment reversals, or mitigate the disruption when they do happen.

In this section we will revisit some of the reasons why a payment reversal is initiated, and what a merchant can do in each situation.

Merchant error

If the merchant has made a mistake, such as processing the wrong value or requesting a single transaction twice, then speed is the key. In an online transaction, a speedy authorisation reversal means the customer does not need to be made aware that a mistake has taken place.

Unavailable product

Whereas some customers may be willing to be patient to receive their purchase, others will not be. By integrating the systems used for taking payments and stock control, a customer can be told at the point of transaction if the product is unavailable, and when new stock will arrive. The customer can then make an informed decision about whether to go ahead with the transaction, and be less inclined to change their minds later.

Payment data is incomplete

A single payment includes a lot of data. Alongside personal and banking information about the customer, a payment transaction includes a transaction identifier (TID), a retrieval reference number, a surface trace audit number, and payment authorisation code.

If any of this data is missing or in an unfamiliar format, the payment may be blocked between authorisation and settlement, and the customer’s money will need to be refunded. A payment processing gateway, typically offered by a third party, will ensure that payment requests are sent with all the necessary data.

The customer doesn’t recognise a payment

Customers who do not recognise a transaction will sometimes jump straight to requesting a chargeback from their bank. Processing a payment quickly will help the transaction be familiar with the customer.

A merchant should also regularly communicate with customers about their purchase, from the point of payment through to delivery (if that applies.) Clearly identifying the payment on a bill or bank statement (known as ‘deflection’) also leaves the customer more knowledgeable. The more a customer is kept up to date, the less they will query the payment and seek a refund.

Learn more: What is an ARN?

Recurring payments are being reversed

For businesses where the customer experience is drawn out over days or weeks (think hotels, car rental, tool hire), merchants can submit a single authorisation request for multiple payments  that accumulate over a set period of time.

By enabling all the payments under a single authorisation, it means the merchant only needs to get a payment request right once. It also means that the customer is made aware of funds that are expected to be paid out, and so will be less likely to challenge them.

Learn more: recurring payments explained

Refund reversals initiated by customer complaints

A refund reversal initiated by a customer complaint is also a learning opportunity. Systematically recording and analysing the reasons why customers are unsatisfied can surface commonalities and provide lessons to reduce future complaints.

These can include sourcing better quality products to sell; providing more accurate product descriptions so customer expectations are more realistic; or investing in after-sales support services. Merchants can collect this feedback in numerous ways, such as directly asking the customer or through social media listening tools.

Fraudulent payments are causing refund reversals

A fraudulent payment can often go undetected until the customer initiates a chargeback. By that point, the damage for the merchant has already been done. So merchants should aim to stop fraudulent payments at the point of transaction.

Today there are a range of software solutions available that are designed to manage a merchant’s risk appetite to fraud, while identifying and processing genuine transactions. As well as leveraging this software, merchants should also use payment technology that allows them to easily store and retrieve data that evidences a genuine transaction, in order to combat friendly fraud.

Learn more: 10 ways to prevent chargebacks

Reduce payment reversals with Checkout.com

Checkout.com has a range of solutions that can help businesses minimise the disruption and revenue lost to payment reversals. For example, with Fraud Detection Pro merchants can better identify and stop suspicious payments, and so reduce the risk of chargebacks. More generally, Checkout.com’s unified payment platform has sophisticated authorization processing capabilities, which nullifies the risk of human or data errors; and a customer experience engine that allows merchants to keep their customers up to date when refunds are activated. When a refund is initiated, Checkout.com’s integrated payouts solution ensures a fast refund.

As such, Checkout.com can support merchants with all three types of payment reversals we have explored in this article.

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