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Payment Reversal

What Is Payment Reversal?

Whenever a merchant finds themselves returning a customer’s money that has already changed hands, this is considered a reversed payment. There are different types of payment reversal, all of which exist to maintain a healthy customer-vendor relationship – in both an economic and customer satisfaction sense.

Naturally, no merchant opens their storefront, digital or physical, with the intention of processing reversed payments, but there will inevitably be cause for them. Depending on the type of reversed payment that is being carried out, there is also a different burden that the merchant must shoulder. 

The impact that reversals – especially chargebacks – can have on bottom lines is reason enough to have a clear understanding of what kinds of payment reversals exist, and how each of them intersects with your business model.

Why Would a Customer Want to Reverse a Payment?

There are a number of reasons why an unsatisfied customer might initiate a complaint that would want their money back. Some of the most common include:

  • accidental purchase
  • damaged or undelivered products
  • unsatisfactory fulfillment process
  • card theft
  • items or services that differ from expectations

Why Would a Merchant Want to Reverse a Payment?

Reasons why a merchant would want to reverse a payment include:

  • item out of stock
  • accidental overcharge
  • inability to fulfill order
  • customer mistake
  • process failure

Naturally, there are several other scenarios in which a customer might be owed their money back, but different transactions call for different kinds of processes that lead to different payment reversals.

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How Does Payment Reversal Work?

Whenever a customer decides that they need their money back for a good or service, the merchant will (or should) offer a way to start a reversal process. There are different methods of reversing that payment depending on the context of the purchase, such as time elapsed, the quality of the good or service rendered, and the language surrounding these policies.

Is the reversed payment a released hold, a refund or a chargeback? The type of reverse payment also affects who initiates it and the steps that are taken.

3 Types of Reversed Payments

There are three kinds of reversed payments. Ranked by speed and convenience for the merchant, they are authorization hold reversals, refunds and chargebacks. Some of these methods are light in terms of their stress on a merchant’s ROI and exist to keep both parties happy and responsible. Others indicate either a lapse in the merchant’s infrastructure that results in negligence or abuse from fraudsters.

Authorization Reversals

When a short enough time has elapsed since the money has been charged, but nothing else has been triggered on the merchant’s end in terms of fulfilling that order, reversing a card payment authorization is the quickest and cleanest kind of payment reversal. Put simply, the exact same funds that have been transferred to the merchant are sent back directly, with only some inconvenience on both sides. 

This is common and very useful in cases where the purchase was accidental – let’s say the customer selected the wrong item but realized it too late, or their child makes an unauthorized purchase on a device that was pre-loaded with a payment card.

People who use ridesharing apps may notice a version of authorization hold when they first request a ride. The amount of the trip is pre-charged to a person’s bank account before the ride is confirmed, to make sure the rider has their payments set up and available. Should the ride be canceled before any driver picks up the call, the funds are reversed back into the account. In reality, no money ever changed accounts.

Refunds

A refund differs from an authorization reversal insofar as it is the easiest option after the payment has been processed and fulfillment has been started. At a certain point after payment is received, the company may have little or no option to reverse the fulfillment process, so authorization reversal is no longer possible. 

Whereas authorization reversals are the same exact funds that were being held moving back into the purchaser’s account, refunds are an entirely independent transaction from the original payment. Most often, the refund will be the same amount as the original payment, perhaps minus some processing fees.

Compared to authorization reversals, refunds represent a bigger dent in the merchant’s bottom line, owing to the additional transaction processing fees. Also, a refund is always preferable to a chargeback, owing to the fees and hassle associated with the latter.

Note that today, in the era of enterprise-scale automated fulfillment, goods are often shipped with a no-return policy, meaning that the companies have done some math and are willing to refund money to the buyer while also letting them keep the shipped item – a cheaper option than processing the defective or otherwise disappointing item.

Chargebacks

Chargebacks differ from the other two forms of reversal in that a customer requests a chargeback from their bank rather than the merchant. On paper, chargebacks are a last resort for a customer, in cases where a legitimate refund is not being fulfilled in a timely manner, or when a fraudulent transaction was made with stolen card credentials. 

This form of reversed payment is most financially punitive for the merchant. This is because, with a chargeback, the merchant will have the following repercussions:

  • They will have to return the money.
  • They still lose the shipped item.
  • They will pay to the issuer per-chargeback fees, ranging from $20 to $100 per chargeback.
  • Merchant staff will have to put in the time to process and handle the chargeback.
  • The seller suffers a rise in their chargeback rate – if high enough, this results in higher bank transaction fees, always.
  • The merchant will still potentially suffer reputational damage, as it is the card issuer who is viewed as helping the customer, not the merchant.

Chargeback fraud is also a key pain point for merchants. Compared to fraudulent refunds, which only cost companies the item (if at all) and processing time, the chargeback system is more easily exploited by fraudsters.

When an unauthorized purchase appears on their bill or statement, consumers whose card data was stolen will have to contact their issuing bank and request a chargeback. This puts the responsibility to catch fraudsters with stolen PII and credit card numbers on the merchant, although the fraudster would be technically stealing from the cardholder.

Moreover, a consumer may abuse the chargeback system to commit friendly fraud. For example, they could lie about a fraudulent or unauthorized payment from their card, to request their money back from the bank. If they do so, they get to keep their money as well as the item, while the merchant suffers the above repercussions – so, merchants have good reason to want to stop fraudulent chargebacks.

Authorization Reversal vs Refund vs Chargeback

Authorization ReversalRefundChargeback
Parties involvedmerchant, sometimes customercustomer, merchantcustomer, merchant, acquiring bank, issuing bank, intermediaries/processors
Initiated bymerchantcustomer, via merchantcustomer, via issuing bank
Resources usedpayment gateway/softwarecustomer support teamcustomer support team, chargeback management team resources/time
Cost to merchantlost sale (potentially)lost sale, potentially lost item, sales processing fees – but can boost reputationlost sale, lost item, chargeback fee, rise in chargeback rate, reputational damage, potential damage to relationship with bank
Result to customercost of purchase recovered, needs to buy item again (or elsewhere)cost of purchase recovered, often satisfied with merchantcost of purchase recovered, time investment, very likely to be disgruntled at merchant

Why Is Payment Reversal Important?

Payment reversals are an important mechanism of a healthy payment ecosystem, as they promote trust in it, encouraging consumers to engage in card not present (CNP) and other types of payments with less worry.

  • Reversed payments act as a failsafe in place for cardholders to recover their funds if their card was stolen.
  • They encourage consumers to trust merchants. In a world where fulfillment issues are commonplace – packages arriving late, damaged, or otherwise incorrectly – customers need to have a lever to press when justified. 

How to Optimize Payment Reversals

It is important for shops to be on top of their payment reversal infrastructure, as incurring too many chargebacks can be punishing to their bottom line. The below advice should define your strategy:

  1. Leverage authorization holds: Firstly, leverage the potential of authorization holds where possible. Place a hold on the customer’s funds instead of charging them until you are confident you have the stock and resources to fulfill their order. If anything goes wrong, you can simply release the funds, which is quick and painless for all parties and does not involve the bank.
  2. Encourage refunds: Ensure that you have in place easy ways for your customers to contact you to request a refund, and that they are encouraged to do so. This will help prevent some chargebacks.
  3. Invest in customer service: Customer service teams should have all the resources they need to handle reversal workloads, with teams for both rapid-response refund handling and investigative teams for chargebacks, in order to attempt chargeback recovery when the claim is believed to be fraudulent. 
  4. Keep meticulous records: Efficient, detailed record-keeping can help immensely with chargeback disputes, when a request is believed to be fraudulent, as well as provide unique insight into reversal trends and ways to minimize issues in the future.

If customers are satisfied with the customer service in cases where a refund or chargeback is legitimate, and the merchant is providing satisfactory service, there is no reason why reversed payments need to disproportionately affect bottom lines. Keeping a well-oiled customer service program in place keeps customers returning, with little to no reputational damage.

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How to Protect Against Payment Reversals

Fulfilling the orders of customers is a challenge for any business, and there are inevitable and unforeseeable circumstances that may stand in the way of a smooth delivery. At some point, payment reversals are an inevitability.

However, some forms of reversals are costlier to a business, both in terms of revenue and resources. You will thus want to encourage customers through the lower-cost channels of reimbursement, rather than suffer the damaging impact of regular chargebacks.

To control the impact of chargebacks on revenue, resources, and reputation on the financial landscape, consider fine-tuning these points in your fulfillment processes:

  • Customer service should have adequate resources to handle refund requests in a timely manner so customers don’t turn to chargebacks instead.
  • Products should have specifications clearly detailed and accurately represented so that it is not likely they are below customer expectations.
  • Supply and delivery chains should have working conditions conducive to delivering products safely and on time.
  • All customer interactions should be logged, from transaction to customer service support. This way, when a fraudulent chargeback gets requested, the merchant has ample proof of quality service during a potential chargeback dispute mediation.
  • Payment processes should be kept running smoothly to keep customers happy with their experience and also to prevent transactions lost to bugs, and to provide immediate authorization reversals when possible.

How Does Payment Reversal Combat Fraud?

A smoothly-operating payment reversal team fights fraud by keeping fraudulent chargebacks to a minimum. To protect a company’s bottom line, customer support should be able to help customers get authorization reversals or refunds as often as possible, avoiding the costly chargeback process. 

Acquiring banks and marketplaces monitor the rate of chargebacks processed by individual merchants. When the chargeback ratio is too high, it is a result of either a consistently unsatisfactory fulfillment process or sub-par fraud prevention software or strategies in place. 

In all cases, a merchant would do well to make their language around refund and chargeback policies crystal-clear, as well as monitor accounts for unusual behavior shifts that may indicate an account takeover – as this could lead to unauthorized purchases, and then the accompanying victim chargeback.

By knowing when to leverage each type of reversed payment and how to promote those less harmful to the business, merchants can balance customer satisfaction and profit.

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