Payment Reversals Hurt, but Some Hurt More Than Others. (2024)

Refunds, Authorization Reversals & Chargebacks: How Do Different Payment Reversal Methods Impact Merchants?

From the smallest mom-and-pop store to the biggest, most recognizable retailers in the world, all merchants share a common frustration: payment reversals.

You might have perfect products, flawless processes, and impeccable customer service. Even then, there will always be the occasional customer who is unhappy with a sale, and wants to reverse the charge.

That said, not all payment reversals are created equal. The fallout you experience from a credit reversal will differ depending on the situation. It all depends on how you — and your customer — approach the situation.

In this post, we’ll look at the three basic types of payment reversals. We’ll see why they happen, and how the retailer should respond. Finally, we’ll give you some tips to help avoid reversals in the future.

What is a Payment Reversal?

Payment Reversal

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“Payment reversal” is a blanket term for any situation in which transaction funds are returned to the cardholder's bank account. Payment reversals are also known as “credit reversals” or a “reversal payment.” Authorization reversals, refunds, and chargebacks are all forms of payment reversals.

In simple terms, a payment reversal is just what it sounds like: a reversal of a previous payment, most often referring to a credit card transaction. There are several different methods for obtaining a credit card payment reversal. Some are initiated by a cardholder, while others are initiated by a merchant or bank.

Transaction reversals can be frustrating, they aren’t always a bad thing. Done correctly, it can be mutually beneficial and lead to greater customer satisfaction and retention. Other scenarios, however, can cause more damage: credit card reversals forced by chargebacks, for example, typically benefit other stakeholders at the merchant’s expense.

Why Would a Payment Be Reversed?

The reason behind a payment reversal on a credit card is usually linked to which party initiated the process. An issuer might request a reversal due to a merchant error, for instance, whereas a buyer may simply be unhappy with the purchase. There are valid reasons to reverse a charge, as well as invalid ones.

A payment might be reversed because:

• The product is unavailable:The customer made a purchase, but the merchandise is backordered, out of stock, or unavailable for some other reason.
• The retailer made a mistake:The merchant made an error in the transaction process, such as requesting the wrong dollar amount or accidentally processing the order total more than once.
• The buyer is dissatisfied:The customer may have a legitimate issue with the order. Perhaps the wrong item was sent, or the description was misleading or inaccurate.
• The customer is trying to subvert the system:The buyer may want to secure a refund without going through the return process, or could be deliberately trying to get something for free (cyber shoplifting).

Learn more about reasons for chargebacks

Transactions are generally reversed in one of three ways: an authorization reversal, a refund, or a chargeback. Obviously, none of these are ideal, but some methods are significantly worse than others, especially for merchants. We’ll start with the method that should probably have the least impact on your bottom line.

Payment Reversal Method #1 | Authorization Reversal

In some instances, a transaction can be stopped before processing. An authorization reversal cancels a sale outright, before any money changes hands (or is transferred between accounts).

In the US, electronically moving money between bank accounts is handled by an automated clearing house, or ACH. This process is somewhat slow, so it’s standard practice for transactions to be pre-authorized at the time of purchase.

When you receive authorization, it means you’ve gotten a message from the issuing bank. The authorization message informs you, as well as your payment processor, that the cardholder has the necessary funds or credit available. An authorization hold is then placed on the amount of the transaction. These funds are locked in the buyer’s account and cannot be used, but you haven’t actually received the funds yet.

Most debit card transactions have a hold time between one and eight business days. For credit card transactions, though, the hold might last as long as a month. Once the transaction is settled, the cleared funds transfer from the cardholder to the merchant.

It may seem like a roundabout process, but it works remarkably well overall. That said, more than five and a half billion credit card transactions happen each day; in at least a few cases, something is bound to go wrong. So what happens if some of the transaction information is incorrect? Or, if the customer changes their mind before the transaction is settled?

If you notice an error, such as a duplicate transaction, or if the customer requests a cancellation, the acquiring bank may be able to initiate an authorization reversal. This effectively voids the sale and prevents that transaction from going through.

As with a refund, it’s not an ideal solution. From your perspective as a merchant, though, an authorization reversal typically does the least amount of damage. No money has been transferred, which means no interchange fees. And, since the order was (presumably) never shipped, there are no return hassles or fees to worry about.

Learn more about authorization holds

Payment Reversal Method #2 | Refund

Most people understand the basic concept of a refund. A customer is dissatisfied with a purchase and wants their money back. In most cases, the buyer will be required to return the product to the merchant, but they will get their funds returned to them. Simple enough.

Of course, the customer won’t know they’re dissatisfied until they receive the order. That means refunds occur after a transaction has been fully processed and cleared.

Rather than try to “undo” the original transaction, the merchant processes a new one for the same amount, but as a credit, not a debit. Essentially, it’s the same as handling a purchase, but in reverse. The acquirer is transferring previously received funds back to the cardholder’s account as a separate transaction.

Processing refunds can be costly. Not only do you lose friends from the sale, you also lose the interchange fees spent on the transaction, as well as the cost of return shipping. Plus, as huge online retailers like Amazon continue to redefine consumer expectations, shoppers may soon start to expect “returnless refunds.” If so, you could lose the revenue from the order, plus the merchandise itself.

Payment Reversal Method #3 | Chargeback

If you and the cardholder 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. They come with all the negative consequences associated with other credit card payment reversal forms (i.e. lost sales revenue, merchandise, shipping costs, and interchange fees). But, on top of that, chargebacks add a lot more collateral damage.

You’ll get hit with:

• Chargeback Fees:Your bank assesses a fee for each chargeback to cover their administrative costs.
• Reputational Damage:Each chargeback increases the likelihood of subsequent disputes.
• Threats to Sustainability:Excessive chargebacks could result in MID cancellation.
• MATCH Listing:MID cancellation will make it considerably harder to open a standard merchant account. It could even cost you the ability to accept payment cards altogether.

Learn more about chargebacks

No payment reversal is pleasant. However, you need to make it a top priority to avoid as many chargebacks as you can. But how?

As we’ll see below, one of the best ways to minimize chargeback risk is by doing everything possible to prevent reversals of any type.

6 Tips to Minimize the Threat of a Reversal

As we’ve stated, even the most foolproof payment system in the world can’t eliminate payment reversals completely. Reversals are often the result of mistakes — made by either the merchant or the cardholder — which are impossible to predict.

Little can be done about customers’ actions, but you can prevent a good number of payment reversals through vigilance and best practices. For example:

Learn more about preventing chargebacks

Manage Payment Reversals. Save Revenue.

Authorization reversals and refunds aren’t great, but they’re certainly not the worst option.

You have to do what you can to mitigate the risk of reversals, and respond quickly to any inquiries that do get through. You may be able to salvage a sale, or at least avoid the consequences of a payment reversal via chargeback.

Already having problems with disputes? Chargebacks911® offers a comprehensive management platform for prevention and revenue recovery. Contact us today to see how much ROI you can expect.