In the world of eCommerce, transactions involve customers paying for goods or services, and merchants fulfilling those orders. However, glitches can arise in the process and often, merchants encounter the need to reverse transactions, refunding money to customers' accounts.
Whether it's processing refunds, managing chargebacks or authorising payment reversals, all forms of payment reversals can impact businesses. Understanding these processes is crucial for merchants to handle them effectively, boosting profitability and maintaining positive customer relationships.
In this article, we explore the main types of transaction reversals, providing valuable insights and strategies on how to manage and minimise their impact. Additionally, we discuss actionable strategies that merchants can implement to mitigate the effect of these reversals on their businesses.
What does reversal transaction mean?
As the name implies, payment reversal is the return of funds from a sale of a merchant’s product or service to the customer's account. This process involves undoing a transaction and typically occurs with digital payments and card present transactions. The steps in a payment reversal may vary depending on the payment method, the parties involved and the reason for the reversal.
Different scenarios demand different types of payment reversals (more on this below). Some may have minimal impact on a business’s bottom line, while others can be more costly.
Types of payment reversals
Now that we've established the meaning of payment reversals, let's delve deeper into the three types of reverse transactions that merchants commonly encounter.
Authorisation reversal (also known as void)
An authorisation reversal, also known as void, occurs before a payment is finalised in the merchant's account. In other words, it's a quick request typically initiated by the merchant (or through the acquirer) to undo a recent transaction by the bank cardholder before it's fully processed. The merchant must initiate it, usually by the request of the customer, but in some cases, it can also be requested and initiated by the merchant.
In brick-and-mortar stores, authorisation reversals typically occur after a payment has been made and a merchant realises they've entered an incorrect amount, or the customer decides to use a different payment method. Most point of sale (POS) terminals offer options to pause transactions in such situations. Additionally, a reversal payment or void transaction can occur with pre-authorised payments, such as hotel bookings. If the prepaid amount isn't utilised, the merchant can reverse it and refund the customer. Another scenario where an authorisation reversal might occur is if the customer returns purchased goods, for example, if the size of clothes does not match or if they booked a service but changed their order.
In eCommerce, authorisation reversals happen when a customer cancels an order before it's shipped or if the merchant notices that an order can't be fulfilled due to out-of-stock items. In such cases, merchants may initiate an authorisation reversal to release the hold on the customer's funds, ensuring they aren't charged for unfulfilled orders.
Overall, authorisation reversals benefit businesses by promptly correcting errors without inconveniencing customers. They streamline accounting processes, particularly for high-volume merchants who typically handle a large number of transactions. By initiating authorisation reversals promptly for transactions that won't be completed, merchants can release funds back to customers more quickly, thereby reducing the chances of chargebacks and improving cash flow.
Therefore, opting for this type of reversal is often the most cost-effective and efficient way to refund a customer but authorisation reversal may not always be possible. However, timing is crucial. Visa recommends that merchants need to request an authorisation reversal within 24 hours to avoid additional fees.
Refund reversals
When a payment settles and an authorisation reversal or void isn't feasible, the refund reversal takes effect. This occurs when the merchant returns funds to the customer's account, processed as a subsequent transaction crediting the customer's payment card or bank account.
Refund reversals undergo the standard settlement and clearing process, meaning that instant refunds are not guaranteed. Merchants are also responsible for interchange fees on each credit transaction, similarly to regular charges. These reversals commonly occur when customers have valid reasons to cancel received orders or return products.
Additionally, if the original transaction was fraudulent, for example if there was identity theft, a refund reversal may be necessary.
If a refund is denied by the merchant, customers may accept it or escalate by requesting a chargeback through their issuing bank, which can be costly for merchants.
Chargeback reversal
A chargeback is a form of payment reversal initiated by the cardholder through their bank or credit card issuer. It occurs when a customer disputes a transaction on their account statement, asserting that they did not authorise the transaction, did not receive the goods or services, or engaged in friendly fraud (If you want to find out more about friendly fraud, read our article).
As a result of the dispute, the funds from the original transaction are reversed and returned to the cardholder, while the merchant may be debited for the disputed amount, along with any associated fees. While chargebacks serve as a mechanism for consumer protection, they can be a source of concern for merchants because it poses significant risks to businesses, as merchants with high chargeback rates may face account suspension by card networks, impeding their ability to conduct transactions.
With this in mind, understanding the cause of chargeback claims is crucial for merchants and their acquirers to effectively dispute them, when feasible.
How long do payment reversals take?
The time it takes for a transaction to be reversed depends on the type of reversal. An authorisation reversal can happen instantly, often without the customer realising it.
On the other hand, a refund reversal takes longer because the funds need to be returned to the customer's bank account. The speed of the refund reversal can vary depending on how it's processed – whether it's transferred to the customer's bank account or credited back to the original payment card.
Chargeback reversals take even longer, especially if the merchant responds to the claim and disputes it. Although disputes can take weeks or even months to resolve, customers can expect their issuer to provide a refund while the dispute is ongoing.
Common reasons for payment reversals
Now that we have a clear understanding of the types of payment reversals, let's transition to strategies that merchants can adopt to mitigate their impact on their businesses. Alongside this discussion, we'll revisit some of the reasons why payment reversals are initiated.
Fraudulent and unrecognised payments
Fraudulent and unrecognised payments often go unnoticed until a customer initiates a chargeback, causing harm to the merchant, especially in card not present transactions where verifying the customer's identity is challenging. With this in mind, merchants must prevent fraudulent payments at the transaction stage.
Fortunately, various solutions can help reduce chargeback risks. Online businesses can utilise 3D Secure 2 (3DS2), an authentication protocol mandated by the PSD2 regulation. Authenticated transactions through 3DS2 are generally protected against chargebacks due to fraud reasons
.During card present transactions, mobile-enabled payments such as eWallets like Apple Pay and Google Pay™ can offer additional layers of security through tokenisation and biometric authentication. This can mitigate the risk of fraud for both merchants and customers.
Incomplete payment data
A payment transaction involves a lot of information, including customer details, transaction specifics and payment credentials. To prevent payment reversals from incomplete data, implementing robust payment processing systems can be an alternative. Require customers to provide complete and accurate payment details during checkout. Utilise security measures like address verification systems (AVS) and card verification codes (CVV) to validate payment card validity before finalising transactions.
Additionally, incomplete or incorrect data can also disrupt the reversal transaction process, leading to prolonged holds on customer's funds. To prevent confusion among cardholders, merchants must ensure all necessary fields are correctly filled out.
Merchant error
Mistakes in payment processing, like entering the wrong amount, can occur. Hence, speed is crucial. Swiftly reversing an authorisation error in online transactions spares customers from notification, safeguarding your business's reputation. Additionally, having a convenient POS device for in-store card payments enables the merchant to operate quickly when a reversal transaction is necessary.
Customer complaints
A refund reversal, triggered by customer complaints, may stem from various issues such as product unavailability or unmet expectations. Systematically analysing customer dissatisfaction can reveal patterns and offer insights to minimise future complaints.
Actions to address these issues may involve transparent policies, providing accurate product descriptions for realistic expectations and investing in reliable customer support.
By implementing these strategies, merchants can not only minimise the frequency of payment reversals but also protect their businesses against potential fraudulent payments.
How emerchantpay can help you?
Every merchant requires a solution to minimise revenue loss from payment reversals. With our advanced payment solutions and expertise in risk management, we can help you reduce the risk of reversal transactions, streamline your payment process and resolve disputes effectively.
At emerchantpay, we're committed to safeguarding your business from fraud with data-driven insights tailored to your unique needs, including advanced fraud monitoring and prevention tools. With our comprehensive payment services, we empower you to manage refund reversals while continuing to grow your business.
Curious about managing reversal transactions effectively in your business? Contact our team of payment specialists today.