Understanding Payment Reversals: A Comprehensive Guide for Merchants

Payment reversals, a common frustration for merchants of all sizes, are a blanket term for any situation where transaction funds are returned to the cardholder’s bank account. This includes authorization reversals, refunds, and chargebacks. While these reversals can be a source of frustration, understanding their nuances can help merchants navigate them more effectively.

What is a Payment Reversal?

A payment reversal, also known as a credit reversal or a reversal payment, refers to a situation where funds from a transaction are returned to the cardholder’s bank account. This can occur through various methods, some initiated by the cardholder, others by the merchant or bank. While these reversals can be frustrating, they can also lead to greater customer satisfaction and retention when handled correctly.

Why Would a Payment Be Reversed?

Payment reversals can occur due to a variety of reasons. These include:

• Product unavailability: The customer made a purchase, but the merchandise is backordered, out of stock, or unavailable for some other reason
• Merchant error: The merchant made an error in the transaction process, such as requesting the wrong dollar amount or accidentally processing the order total more than once
• Buyer dissatisfaction: The customer may have a legitimate issue with the order. Perhaps the wrong item was sent, or the description was misleading or inaccurate
• System subversion: The buyer may want to secure a refund without going through the return process, or could be deliberately trying to get something for free (aka friendly fraud)

Types of Payment Reversals

There are three primary methods of payment reversals: authorization reversals, refunds, and chargebacks.

Refund

A refund is a credit transaction that returns money from the merchant to the customer when an authorization reversal is no longer possible. Processing refunds can be costly, including losing revenue from the sale, interchange fees spent on the transaction, cost of return shipping, and more.

Imagine a scenario where a customer purchases a product from your store and then decides they no longer want it after it’s been shipped. They return the product, and you issue a refund to return the money to the customer’s account. This is a common scenario that many merchants deal with on a regular basis.

Authorization Reversal

An authorization reversal occurs when a merchant cancels a transaction before it has been settled. This effectively voids the sale and prevents the transaction from going through. From a merchant’s perspective, an authorization reversal typically does the least amount of damage as no money has been transferred, which means no interchange fees. And, since the order was never shipped, there are no return hassles or fees to worry about.

For example, let’s say a customer orders a product from your online store. After the order is placed, you realize that the product is out of stock. Instead of letting the transaction go through and then issuing a refund, you can initiate an authorization reversal to cancel the transaction before it’s settled.

Chargeback

A chargeback is a forced payment reversal initiated by the cardholder’s issuing bank due to a claim of fraud or abuse. Chargebacks come with all the negative consequences associated with other payment reversal forms plus additional collateral damage like chargeback fees, reputational damage, and threats to sustainability.

For instance, a customer might claim that they never received a product they ordered from your online store, even though it’s been shipped and delivered. If the customer’s bank sides with them, they’ll initiate a chargeback, forcing you to return the money to the customer’s account. This can be particularly damaging for merchants, as it can lead to additional fees and damage to your reputation.

Tips to Minimize the Threat of a Reversal

While it’s impossible to eliminate payment reversals completely, merchants can prevent a good number of payment reversals through vigilance and best practices. Here are some tips:

• Avoid Errors: Double-check transactions before they are submitted. Pay special attention to information fields that identify and track data such as Transaction Identifier Numbers (TID), Retrieval Reference Numbers, and so on
• Submit Transactions Promptly: Cardholder transactions should be sent for clearing as soon as all the information is collected and confirmed. Otherwise, a cardholder may mistake a forgotten purchase for an unauthorized transaction and file a chargeback
• Confirm Projected Clearing Date: Send an email confirmation after an order that includes estimates for shipping/delivery, as well as when the customer can expect the transaction to clear
• Use Clear Billing Descriptors: Create easy-to-understand descriptors thatclearly identify your business and the nature of the transaction. This can help avoid confusion that might lead to a chargeback
• Provide Excellent Customer Service: Be responsive to customer inquiries and complaints. A quick, effective response can often prevent a refund request or chargeback

Final Thoughts for Merchants

Payment reversals are a reality of doing business, but understanding their nuances can help merchants navigate them more effectively. By implementing best practices and being vigilant, merchants can minimize the threat of reversals and ensure a smoother transaction process for both themselves and their customers.

FAQs on Payment Reversals

What is a Payment Reversal?

A payment reversal is the reversal of a financial transaction. It is also known as a payment refund and can occur when a customer initiates a refund, authorization reversal, or chargeback.

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

A refund is a type of payment reversal that is initiated by the customer due to dissatisfaction with a product or service. An authorization reversal, on the other hand, is initiated by the merchant when an order cannot be fulfilled.

What is the meaning of a duplicate transaction reversal?

A duplicate transaction reversal occurs when a customer has been charged more than once for the same transaction. The duplicate charge is reversed to ensure the customer is not overcharged.

Why did I get a payment reversal?

Payment reversals can occur for various reasons including customer dissatisfaction, processing errors, or suspicion of fraudulent activities.

Is a payment reversal a refund?

Yes, a refund is a type of payment reversal that is initiated by the customer due to dissatisfaction with a product or service.

Is a bank reversal the same as a refund?

A bank reversal can be a type of refund but it can also refer to other types of payment reversals such as chargebacks or authorization reversals.