What is a payment reversal (and ways to avoid them) (2024)

Small BusinessOperationsFraud and Risk Management

What are payment reversals?

A payment reversal occurs when funds from a completed transaction are returned to the payer in the original form of payment. This can happen for several reasons, including customer disputes, suspected fraud, or merchant-initiated cancellations (like authorization reversals).

In general, payment reversals can pose significant challenges for merchants by straining financial resources and potentially damaging a merchant's reputation — that’s why it’s essential to address and mitigate these issues before it’s too late.

Why might a payment reversal occur?

Some common events that may trigger a payment reversal include:

• The buyer's bank account was used without their permission to purchase an item fraudulently.
• The buyer does not recognize the transaction.
• The item that was purchased didn’t arrive.
• The buyer was charged twice for the same item.
• The item that was purchased is no longer in stock.
• The buyer changes their mind and no longer wants the purchase.
• The buyer claims the product is defective or has discrepancies between advertised and actual product attributes.

Types of payment reversals

When it comes to reversing transactions and returning funds, not all payment reversals are the same. As a merchant, there are three major types of payment reversals you should know about: authorization reversals, refunds, and chargebacks.

Authorization reversal

An authorization reversal occurs immediately after a transaction is initiated and before money has been withdrawn from the customer’s account and into the merchant’s account. It allows sellers to reverse the transaction without issuing a refund and paying interchange fees that would otherwise occur after a transaction is fully settled.

By promptly responding to a buyer's request for an authorization reversal, merchants can demonstrate their commitment to customer satisfaction and expedite the resolution process.

There are many reasons why this type of payment reversal may occur, such as if a customer:

• Is accidentally charged the wrong amount or more than once for the same purchase
• Changes their mind and wants to cancel their purchase
• Wants to change their payment method

Payment refund

Once a transaction is settled, the next option for a payment reversal comes in the form of a payment refund. This occurs after the transaction has been completed but before the customer has filed an official dispute.

During a payment refund, funds are taken from the merchant account and credited as a new or separate transaction back to the customer’s original form of payment. In this case, the merchant is required to pay interchange fees on the refund.

It’s important to note that a payment refund is not instantaneous like an authorization reversal. This process requires the credited funds to settle and clear, which, on average, can take anywhere from three to 10 business days.

Chargebacks

Finally, what is a chargeback reversal? A chargeback happens when a customer files a dispute regarding a completed transaction, requesting the issuing bank to reverse the payment. However, chargebacks can only be filed with a card issuer (not the payment processor) and are only available to those who have made a purchase or payment with a credit or debit card.

That said, chargebacks are initiated with and handled by the credit/debit card issuing bank, so the process is confined to the issuer’s regulations and time frame.

Chargebacks can be a worst-case scenario for merchants as they involve the issuing bank reclaiming funds from the merchant's account. This results in an immediate loss of funds, disrupting cash flow and straining the business’ cash flow. Not only that, but high chargeback ratios can also damage a merchant’s reputation, leading to increased scrutiny, penalties, or even account suspensions.

How to reduce payment reversals

Understanding how to reduce payment reversals is key to preventing them later. The good news is there are ways to keep claims and chargebacks to a limit in your business by implementing various prevention methods.

Submit information properly

By ensuring that all transaction information is correct — from the buyer’s name to the product item and price — merchants can establish expectations and may avoid discrepancies that could trigger a payment reversal.

Use relevant billing descriptors

This can help buyers recognize and remember their transactions accurately, reducing the chances of unwarranted disputes or chargebacks. For instance, if the company name is “Julie’s Jewels,” the merchant name for the transaction should be something similar.

Confirm an estimated clearing date

By communicating the expected date when funds will be withdrawn, merchants can ensure transparency and provide clarity to both themselves and their customers.

Provide a transaction ID number

A transaction ID is a unique identifier assigned to a sale. It allows the merchant or customer to track transactions and refunds.

Estimate authorizations when appropriate

Incremental and estimated authorizations are useful when the total cost of a purchase is uncertain or subject to change. An example is a hotel stay where incremental costs may be added after booking. So instead of authorizing the full amount upfront, a merchant can obtain authorization for partial amounts initially and request additional authorizations as the transaction progresses.

Establish clear communication

When a merchant submits an authorization request, it’s beneficial to establish communication between the authorization amount and the final amount, so the cardholder knows what to expect.

Manage bank reversals and save revenue

One of the best way to reduce disputes and chargebacks is to follow security and seller protection guidelines and review orders for suspicious activity or fraud.

Here are some steps you can take to help identify and prevent potential risks of fraud:

• Analyze transactions and orders for potentially suspicious activity:Make note of transactions that include unusually large orders or situations where the customer requests to modify the shipping address after payment.
• Clearly indicate your company name on invoices:This helps customers easily recognize a charge or settled transaction.
• Reach out to the customer before the order ships:By confirming order information, you allow the customer to catch a mistake or error.

Discover more tips to identify fraud and help prevent cases based on Unauthorized Transactions.

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