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Payment Reversal

Payment Reversal

3 Different Types of Payment Reversal: What’s the Difference?

Not every transaction goes as planned. All merchants experience the occasional sale that will end in a payment reversal. The question in each case: how will the overturned transaction play out? How can you ensure that you achieve the best result?

Why Would a Transaction Be Overturned?

There are many reasons why you might experience a credit card payment reversal. Some are the result of a genuine merchant error, while others are at the customer’s discretion.

There are three primary methods by which a transaction can be reversed: an authorization reversal, a refund, or a chargeback. Each of these methods has disadvantages, but some are significantly worse than others. We’re going to look at each, weigh the pros and cons, and determine the best option.

Method #1: Authorization Reversal

Due to the limitations of the ACH (automated clearing house) network, it’s standard for a transaction to be pre-authorized when a cardholder makes a purchase. The funds are then cleared and transferred from the cardholder to the merchant. However, it’s possible that the transaction could have incorrect information when submitted.

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, preventing that transaction from going through and leading to greater problems down the road. While this is not ideal, it does present certain benefits:

  • Better Customer Satisfaction: The average customer will be annoyed by a transaction declined due to authorization error. However, you can expect more than minor annoyance if that customer’s bank account is negatively impacted by someone else’s mistake.
  • Clear-Up Organizational Confusion: With quick authorization reversals in response to errors, you avoid accounting for revenue that won’t be around a few days later. This gives a clearer impression of your available funds.
  • Retain Revenue: You miss out on a potential sale by initiating an authorization reversal. However, you also avoid the risk of additional fees, lost merchandise, and the long-term threats to business sustainability that are associated with chargebacks.
  • Establish Trustworthiness: By releasing the funds and communicating the reason the for an authorization reversal to the customer, that person will be more inclined to appreciate your trust and attempt the purchase again.

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Method #2: Refund

Between an authorization reversal and a payment reversal is a refund. This occurs after a transaction clears, but before the customer files a dispute. All merchants will have some familiarity with the basic idea: a customer was dissatisfied with a purchase for one reason or another, and that person wants the money back.

While an authorization reversal cancels the sale outright before any money changes hands, a refund simply traces the transaction’s path in reverse. Now, the acquirer returns the funds from the transaction to the cardholder’s account. Rather than nullifying the sale, the merchant is simply creating a new transaction to transfer an amount equal to the total of the original transaction.

The downside: not only will you lose the sale, you will also lose the interchange fees spent on the transaction and the cost of return shipping. Plus, as mega-retailer Amazon continues to redefine consumers expectations, it may not be long before customers start to expect “returnless refunds,” meaning that you could lose any merchandise shipped as well.

Method #3: Chargeback

If an issue cannot be resolved by either of the first two methods, your customer—and the issuing bank—will often resort to a chargeback to enforce a payment reversal.

A chargeback involves all the negative consequences associated with other forms of a credit card payment reversal like lost sales revenue, merchandise, shipping costs, and interchange fees. With chargebacks, though, you experience several other very unpleasant effects:

  • Chargeback Fees: The bank accesses a fee for each chargeback to cover administrative costs.
  • Reputational Damage: Each chargeback increases the likelihood of subsequent disputes.
  • Threats to Sustainability: Excessive chargebacks could result in cancellation of your MID.
  • MATCH Listing: You’ll be ineligible for a standard merchant account and may be unable to accept payment cards.

Make no mistake: chargebacks are undeniably worse than other forms of payment reversal. That’s why you need to act to minimize your chances of experiencing chargebacks.

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6 Tips to Minimize the Threat of a Reversal

Of course, it’s always best that an initial transaction stand as it was originally intended. With these best practices incorporated in your day-to-day operations, you will substantially minimize payments reversal instances and the problems they cause:

Ensure Information Populates Correctly

Certain information fields identify and track data with each authorization. These can include:

  • Transaction Identifier (TID): Links authorization request to subsequent transaction messages.
  • Surface Trace Audit Number: Identifies all messages associated with a cardholder transaction.
  • Retrieval Reference Number: Links incremental/estimated sales to original authorization request.
  • Authorization Characteristics Indicator: Specifies an incremental/estimated transaction total.
  • Duration Field: Number of days projected during which charges will be tabulated.

Getting all transaction data in the right information field before submitting is vital. Otherwise the sale might end up with the wrong cardholder, or will be impossible to complete.

Submit Transaction Information Promptly

Don’t let cardholder transactions go for several days without being submitted. Each transaction should be sent along for clearing as soon as all information can be collected and confirmed so the cardholder is not caught off-guard with insufficient funds. Even worse, the cardholder might forget about the transaction and request a chargeback, believing it to be fraud.

Confirm Projected Clearing Date

It’s standard practice to send an email confirmation after an order as a kind of digital receipt. It could be a good idea to include in that same email a rough timeframe in which the customer can also expect that the funds will transfer. That way, they have a reminder when the funds do eventually move.

Use Clear Billing Descriptors

Default billing descriptors are created with brick-and-mortar retail in mind. They traditionally feature the business’s address, which can confuse eCommerce buyers. Instead, your billing descriptor should rely the business’s name, URL, and a brief description of the product purchased.

Use Incremental & Estimated Authorizations When Appropriate

Businesses like hotel booking and car rentals will do much better to employ incremental or estimated authorizations. These are requests for authorization on a projected or suspended basis for charges that will accumulate over a set period. Then, the business can submit a final authorization once the total is known.

Process Authorization Reversals Quickly

An authorization reversal is the best option to avoid a chargeback if you detect any transaction errors. In those cases, you want to complete the process as soon as possible and get the funds back in the customer’s account. This will prevent a chargeback, and improve the odds that the customer will submit another order.

Act Quick—Save Revenue

Authorization reversals and refunds aren’t great, but they’re far from the worst option. Remember to act quickly, and you may be able to salvage a sale…or at least avoid the ramifications of a payment reversal via chargeback.


Prevent Chargebacks.

Fight Fraud.

Recover Revenue.