Payment Reversal

Payment Reversal

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

Payment reversals are a fact of life for merchants. Even the most conscientious retailers experience the occasional sale that doesn’t go as planned, with the transaction amount being refunded to the customer.

Not all payment reversals are created equal, though. The reversal itself is one thing, but there are also different collateral effects, depending on the situation. The question in each case: how will the overturned transaction play out? How can you, as a merchant, ensure that you achieve the best result?

Payment Reversal

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A payment reversal is a situation in which funds from a transaction are returned to the cardholder's bank account. A payment reversal can be carried out by several different methods and can be initiated by a cardholder, merchant, acquiring or issuing bank, or the card network.

Why Would a Transaction Be Overturned?

Where do payment reversals come from? What circumstances would lead a bank to take money from the merchant’s account and return it to the cardholder? Actually, there are multiple reasons why you might experience a credit card payment reversal. Some are the result of a genuine merchant error, while others occur at the customer’s discretion.

A few examples that could lead to a transaction being overturned:

  • The merchant requested the wrong dollar amount when submitting a transaction.
  • The transaction was accidentally processed more than once.
  • The product description was misleading or inaccurate.
  • The item purchased is backordered or out of stock.
  • The customer decided against the item after ordering.
  • The customer is trying to get something for free.

There are three primary methods by which a transaction can be reversed: an authorization reversal, a refund, or a chargeback. Obviously, none of these are ideal, but some methods are significantly worse than others. By looking at the pros and cons of each, we can weigh one method against the others to determine the best option.

Method #1: Authorization Reversal

The first form of payment reversal to discuss is the authorization reversal.

Due to the limitations of the ACH (automated clearing house) network, it’s standard practice for a transaction to be pre-authorized when a cardholder makes a purchase. The issuing bank sends a message informing both the card processor and the merchant that the cardholder has the necessary funds or credit available.

An authorization hold is placed on the amount of the transaction. While the merchant has not yet received the funds, the cardholder can no longer use the transaction amount. After settling the transaction, the cleared funds transfer from the cardholder to the merchant.

Authorization Holds? Payment Reversals? Chargebacks?

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Considering that more than 1 billion credit card transactions happen each day, this process works remarkably well overall. However, it’s possible to submit a transaction with incorrect information…and that causes problems.

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:

Better Customer Satisfaction

Better Customer Satisfaction

It’s one thing to have a transaction declined due to an authorization error, but another thing entirely to negatively impact a customer’s bank account with your An authorization reversal can preempt a lot of fallout from the cardholder.

Clear-Up Organizational Confusion

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 available funds.

Retain Revenue

Retain Revenue

Unless the customer wants to re-submit an order, initiating an authorization reversal will lead to the loss of a potential sale. At the same time, however, you’re also lowering the risk of additional fees, lost merchandise, and long-term sustainability threats associated with chargebacks.

Establish Trustworthiness

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 is necessary, it’s better for the customer to hear it from you what happened, how you resolved the issue, and how that person stands to benefit.

Method #2: Refund

Most people understand the basic concept of a refund; a customer was dissatisfied with a purchase for one reason or another, and that person wants the money back. This occurs after a transaction clears, but before the customer files a payment dispute.

An authorization reversal cancels the sale outright before any money changes hands. In contrast, refunds involve fully-processed transactions.

Rather than nullifying the sale, the merchant simply creates a new transaction to transfer an amount equal to the total of the original transaction. The process is similar to a purchase but in reverse. Now, the acquirer is transferring previously received funds back to the cardholder’s account.

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

Method #3: Chargeback

If your customer—and the issuing bank—can’t resolve an issue through either of the first two methods, they may resort to a chargeback to enforce a payment reversal.

Of the three methods for reversing a payment, chargebacks are the worst for merchants. A chargeback involves all the negative consequences associated with other forms of a credit card payment reversal, including lost sales revenue, merchandise, shipping costs, and interchange fees. Unlike a return, though, chargebacks come with several other unpleasant effects:

Chargeback Fees

Chargeback Fees

The bank accesses a fee for each chargeback to cover administrative costs.

Reputational Damage

Reputational Damage

Each chargeback increases the likelihood of subsequent disputes.

Threats to Sustainability

Threats to Sustainability

Excessive chargebacks could result in the cancellation of your MID.

MATCH Listing

MATCH Listing

After MID cancelation, you could be ineligible for a standard merchant account and may be unable to accept payment cards altogether.

As we mentioned earlier, there’s really no “good” payment reversal, but chargebacks bring the most negative consequences. That’s why it’s important to do whatever you can to minimize chargeback risk.

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6 Tips to Minimize the Threat of a Reversal

The best way to avoid chargebacks—and payment reversals in general—is by doing everything in your power to ensure that transactions stand as originally intended. This involves implementing several best practices into your day-to-day operations:

Ensure Information Populates Correctly

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

Transaction Identifier (TID)

Transaction Identifier (TID)

Links authorization request to subsequent transaction messages.

Surface Trace Audit Number

Surface Trace Audit Number

Identifies all messages associated with a cardholder transaction.

Retrieval Reference Number

Retrieval Reference Number

Links incremental/estimated sales to the original authorization request.

Authorization Characteristics Indicator

Authorization Characteristics Indicator

Specifies an incremental/estimated transaction total.

Duration Field

Duration Field

Number of projected days 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 believe it to be fraud, which could lead to a chargeback.

Confirm Projected Clearing Date

It’s standard practice to send an email confirmation after an order as a kind of digital receipt. That same email could also include information that not only establishes a rough timeframe for shipping/delivery but also suggests approximately when the customer can expect funds to be transferred. That way, buyers have a reminder when the funds do eventually move.

Use Clear Billing Descriptors

Default billing descriptors are often 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 relay the business’s name (or brand name, whichever is more recognizable), URL, and a brief description of the product purchased.

Use Incremental & Estimated Authorizations When Appropriate

Businesses like hotel booking and car rentals are better off employing incremental or estimated authorizations. These are requests for authorization on a projected or suspended basis for charges that could accumulate over a set period; room service orders during a hotel stay, for example. You 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 error. In those cases, you want to complete the process as soon as possible and get the customer’s funds returned or released. This will prevent a chargeback, and improve the odds that the customer will submit another order.

Act Quickly—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 consequences of a payment reversal via chargeback.

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