Authorization ReversalWhy Payment Reversals are NOT Always a Bad Thing

November 4, 2022 | 11 min read

Authorization Reversal

In a Nutshell

Did you know that a credit card authorization can be reversed in certain circumstances? In this article, we’re delving into the topic of authorization reversals — how they work, why they happen, and why they may actually be a much better result than other possible payment reversals.

Merchant Tips & Best Practices for Processing Authorization Reversals

Seeking authorization is a crucial part of the transaction process. It lets you verify that a customer’s bank account is active and has funds prior to completing a sale.

Of course, not all transactions are final. In many cases, you may need to cancel or reverse a payment. In these situations, requesting an authorization reversal may be the best option for both you and your prospective buyer.

What is an Authorization Reversal?

Authorization Reversal

[noun]/ô • thər • ə • zā • SHən • rə • vər • səl/

An authorization reversal is a message initiated by a merchant, intended for a cardholder’s issuing bank. The message notifies the issuer that a transaction (in full or in part) has been canceled, and that an authorization hold should be removed.

As you probably know, the funds from a transaction do not go to your account immediately when you charge a buyer’s card. The message sent to the buyer’s issuing bank is a request for authorization. The bank verifies that the buyer’s account is active, and that it has funds in it. If so, the bank replies with an authorization message, letting the transaction go forward.

The amount available for other purchases in the buyer’s account diminishes with each purchase. That is why, after an authorization, a portion of the available balance is held in reserve until settlement. This is called an authorization hold.

Transactions can't be processed instantly because of the limitations of the ACH (automated clearing house) network. This makes the authorization request a necessary and standard practice.

Sometimes, though, there may be a problem with the transaction. Or, perhaps the buyer wants to cancel the purchase. When this happens, an authorization reversal may be necessary.

Issuing an authorization reversal means the transaction is effectively canceled. After receiving this message, the bank will promptly remove the hold and release the funds so that the buyer may use them for something else.

Is an Authorization Reversal the Same as Voiding a Transaction?

As a merchant, you may have the option to “void” a transaction during the authorization process. This effectively undoes a transaction, making it as if it never happened.

Voided transactions never get sent to the cardholder’s issuing bank for payment. Regardless, the cardholder will probably still see the charge appear as “pending” on their online statement for a day or two.

In many ways, voiding a transaction and issuing an authorization reversal are the same thing. There are a couple of key differences, though. For instance, an authorization reversal involves an extra step, as you have to communicate to the issuer that you want to release an amount that was previously being held. Regardless, because you’re communicating with the issuer directly via an authorization reversal message, the hold will probably be released much faster.

You will be able to avoid a discount fee in both cases. The funds in question were never batched and submitted for payment, so no funds ever actually changed hands. Regardless, you may be charged another transaction fee instead.

Why Do Authorization Reversals Happen?

Like we discussed above, authorization holds will put a portion of a buyer’s funds in reserve to cover a pending transaction. This process works remarkably well, considering that more than 100 million credit card transactions happen each day in the US alone. Of course, not all authorizations will ultimately get settled. 

It’s possible to submit a transaction with incorrect information, or a charge could be processed more than once for the same purchase. It’s also possible that a service was simply no longer necessary, and so the buyer wanted to terminate it. 

If there’s still an authorization hold in place for the amount in question, that can cause problems for the cardholder. The money being held under an authorization hold is tied up and cannot be used for other necessary purchases. The best course of action in these situations is to issue an authorization reversal message.

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If you detect an error, you can contact your acquiring bank to initiate an authorization reversal before the transfer is complete. This effectively cancels the sale and prevents that transaction from going through. It can lead to other problems down the road, so it’s not the best outcome. However, a merchant-initiated authorization reversal does offer certain benefits, as we'll see in the next section.

According to Visa network rules, you should process authorization reversals under the following circumstances:

  • The transaction was incomplete: You must reverse the entire authorized amount within 24 hours of becoming aware that that transaction would not be completed. Alternately, it could be at the end of the authorization validity period (whichever comes first).
  • Authorized amount exceeds final amount: The cardholder completed a transaction that included an estimated authorization. For example, at a vehicle rental outlet, a hotel, or a cruise line. However, the authorized amount, plus all incidentals, exceeds the final transaction amount 15% or more*. The difference must be reversed within 24 hours of the transaction.

    *20% including tips for Taxicabs.

Benefits of Issuing an Authorization Reversal

Undoing a transaction is never ideal. In many ways, though, an authorization reversal is the best outcome compared to other payment reversals.

Learn more about payment reversals

By issuing an authorization reversal, you can:

Authorization Reversal

Ensure Better Customer Satisfaction

It’s one thing to have a transaction declined due to an authorization error. It’s another thing entirely to negatively impact a customer’s bank account with your actions, even if it’s not your fault. An authorization reversal can preempt a lot of fallout for the cardholder. This will help ensure you maintain a good reputation among your customer base.

Authorization Reversal

Clear-Up Organizational Confusion

With quick authorization reversals in response to errors, you avoid accounting for revenue that won’t be received until later (if at all). This gives you a clearer picture of your available funds. You also can keep better records more generally, which is crucial for healthy business finances.

Authorization Reversal

Prevent Chargebacks

Unless the customer wants to re-submit an order, initiating an authorization reversal will lead to the loss of a sale. At the same time, however, you’re also lowering the risk of additional fees, lost merchandise, and long-term threats associated with chargebacks. This is important, as the average chargeback will cost you $3.75 for every $1 of the initial transaction value.

Authorization Reversal

Prevent Other Unnecessary Fees

As we discussed above, you may still have to pay a transaction fee for a payment reversal. However, you also prevent money from moving, and that saves you from being charged a discount rate on that sale. The funds in question were never batched and submitted for payment, so no funds ever actually changed hands.

Authorization Reversal

Establish Trustworthiness

You’re more likely to keep the customer — and perhaps recapture the order — by releasing the funds and communicating the situation to the cardholder. If an authorization reversal happens, it’s better for the customer to hear about it from you directly. You get the chance to explain how you resolved the issue, and how that person stands to benefit because of what you did.

Process Authorization Reversals Properly by Populating All Fields Correctly

So, there’s clearly a lot of value to be had in processing authorization reversals promptly. Of course, if you don’t provide the necessary information along with the reversal notice, the bank may not be able to remove the authorization hold in a timely manner.

This could cause big problems for you. A cardholder might file a chargeback out of frustration. You should strive to avoid this at all costs.

You can avoid this by working with your acquirer to ensure that all information fields are being populated correctly. For example:

  • Transaction Identifier (TID): This field must match the Transaction Identifier (TID) generated by the card network and returned as part of the response message to the original authorization request. The TID is a key element that links original authorization requests to subsequent messages, like reversals.
  • System Trace Audit Number: This is a number assigned by the merchant that identifies a cardholder transaction and all the message types it comprises. The same trace number is used in an estimated authorization request and response, in an incremental authorization request and response, and in a subsequent reversal request and response.
  • Retrieval Reference Number: This field must contain the value from the original authorization request message. The Retrieval Reference Number is used with other key data elements to identify and track all messages related to a given cardholder transaction. It is usually assigned by the acquirer, but it may be assigned by a merchant or by an individual electronic terminal.
  • Transaction Amount: Authorization reversals (full or partial) should always contain the original transaction amount in this field. In the case of authorizations which have been incremented, this field should contain the total amount authorized (sum of all original and incremental authorizations).
  • Replacement Amount: Contains the corrected amount of an authorization transaction.

Best Practices for Authorization Reversals

Ultimately, issuing an authorization reversal can help you avoid disputes that might otherwise devolve into chargebacks. The two keys to accomplishing this are speed and compliance with card network and bank rules. You need to move fast, but make sure you’re doing every step properly.

Consider the fact that an authorization reversal is not an instant, automatic process. The issuer needs time to receive and process the request before they can remove an authorization hold. Even then, the funds may not be released immediately. So, the slower you move, the more likely it becomes that your buyer will simply file a dispute to get the money back.

Different acquirers, banks, and PSPs may have different requirements and exceptions in place concerning the use of authorization reversals. However, there are several best practices that you should follow regarding authorization reversals, including (but not limited to):

  • You should send the authorization reversal transaction using the same submission method (batch or online) as used for the capture transaction.
  • For batch transactions, you should send an authorization reversal in a session separate from both the associated authorization and capture transactions.
  • When following an authorization with a reversal notice in an online transaction, you should allow a minimum of one minute between the transactions.
  • Specify an amount to be reversed (if different from the total amount of the associated authorization).
  • Avoid sending an authorization reversal against an expired authorization. This is redundant; when an authorization expires, the hold amount is automatically released.
  • If reversing an authorization for a gift card, use a gift card authorization reversal. Do not use a standard payment card authorization reversal.

End-to-End Coverage Against ALL Chargeback Sources

Of course, even if you move fast and follow best practices, there’s still a chance that things might go badly.

Card network regulations require merchant banks to support authorization reversals. But, like we mentioned above, there are currently no consistent rules laid out by Visa, Mastercard, or any other card brand requiring that issuers process the reversal. As a result, you have no guarantee that an authorization hold will be released, or that your buyer won’t file a chargeback to correct a perceived error.

In the end, the only real defense against a chargeback tied to an authorization hold is to address them as part of a broader chargeback management strategy.

Chargebacks911® offers the industry’s most comprehensive, end-to-end solution for chargebacks, regardless of dispute source. Our merchant-focused platform helps you eliminate disputes at every stage of the transaction process, from pre-purchase to long after fulfillment.

Ready to take the next step in combating all types of chargebacks and recovering more revenue? Contact us today for a free chargeback analysis to diagnose your business’s risk level.

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