What are payment reversals and how can you avoid them?

Why would a payment need to be reversed?

Sometimes payments need to be reversed after a sale is completed as a result of a genuine merchant error, while other payment reversals occur at the customer’s discretion.

Reasons for payment reversals include:

• The merchant requested the wrong amount of money
• The transaction was duplicated
• The customer is returning a product due to a misleading or inaccurate description
• The item is now out of stock
• The customer changed their mind after ordering
• The customer is making a fraudulent claim.

Types of payment reversals

There are three common types of payment reversal: authorisation reversal, refund and chargeback. Let’s look at how each one works.

1. Authorisation reversal

When a customer makes a card purchase, the transaction is pre-authorised by the issuing bank. This confirms to the card processor and merchant that the appropriate funds are available within the card account. If the merchant or customer notices an error or problem with the purchase, the merchant can contact their acquiring bank to initiate a reversal of the authorisation, which cancels the transaction before it is completed.

While not ideal for the business, an authorisation reversal is preferable to the other types of payment reversal. That’s because the further along the transaction process a payment progresses, the more complicated it becomes to reverse, as it involves more parties — the card issuing bank, the card network as well as the acquiring bank.

Authorisation reversals save chargeback fees and avoid complicating sales data with revenues that are not retained. They also result in a better customer experience as they quickly release the funds to the cardholder, reinforcing the retailer as a trustworthy brand. 

Depending on the reason for the reversal, the customer may still choose to complete the purchase later in the future.

2. Refund

Once a transaction has been processed, the merchant can no longer request an authorisation reversal and a refund may need to be made. 

A refund is a new transaction that sends funds from the merchant to the cardholder’s account as a credit for the amount of the original sale.  

Under UK law, a merchant must refund online, postal and phone sales if the customer wants to cancel the order within 14 days of receipt. The customer must return the goods to the merchant within another 14 days and the merchant must process the refund within 14 days of receiving the goods back. 

Refunds follow the same settlement process as other types of transactions, so they can take several days to complete. But using a return authorisation assures the customer that a credit has been added to their account and that they will receive the funds. 

Refunds carry a cost to the merchant as they have to pay interchange fees on the credit transaction and often cover the cost of shipping the goods back from the customer.

3. Chargeback

Chargebacks are the least desirable form of payment reversal from a merchant’s perspective. A cardholder can initiate a chargeback by contacting their card issuing bank to dispute the transaction. 

The customer may request a chargeback if: 

• An item does not arrive
• They do not recognise the transaction on their card statement
• They believe the transaction was fraudulent
• They are unhappy with the purchase
• There is a disagreement with the merchant over their right to a refund
• They are committing fraud.

Chargebacks are negative for business — not only do they result in lost revenue, return shipping costs and interchange fees as with refunds, but they also mean lost merchandise if the customer does not return what was purchased. Merchants also have to pay additional chargeback fees in this situation. 

The process of challenging a chargeback — known as chargeback representment — can be complicated, and it can be difficult to differentiate between a reasonable chargeback and a case of fraud. 

Chargebacks pose an additional risk as they can be flagged by card network monitoring programmes. Card schemes such as Mastercard and Visa monitor the chargeback rates of merchants that use their networks and charge monthly penalties if the rates move above a certain threshold. 

How to avoid payment reversals

Your business may not be able to eliminate payment reversals, but there are best practices and tools you can use to reduce them if you can.

Payment systems incorporate useful functions like transaction identifiers, reference numbers and billing descriptors that can help customers to remember purchases and inform them when a transaction is being processed. But it is also important to monitor transactions closely to avoid human error.

Here are 10 ways you can avoid payment reversals on your sales:

1. Ensure billing information populates correctly
2. Ensure payments are secure
3. Be attentive to avoid errors in charging customers
4. Submit transaction data promptly
5. Use transaction identifiers
6. Track and confirm the projected clearing date
7. Use clear billing descriptors
8. Use incremental and estimated authorisations when appropriate
9. Process authorisation reversals quickly
10. Analyse reversal trends.

If you find that your business deals with payment reversals regularly, look for trends in the reasons they are needed. 

Consider asking customers for feedback on why they are requesting a refund so that you can analyse the information. For example, if customers frequently request refunds because a product does not match the description on your website, improving the way the product is presented could help to make it clearer — avoiding customer dissatisfaction and the payment reversals that follow.