Payment reversal is a term used when a transaction amount is returned to a cardholders account, after a sale. It can also be referred to as credit reversals or reversal payments. Payment reversals could be initiated by the merchant or the bank, or they could be initiated by the cardholder.
There are several reasons why a payment could be reversed, such as:
The purchased item is unavailable.
In this case the customer would have made a purchase, but the merchant would not be able to supply. If the customer does not wish to wait for a backorder, or if the item becomes unavailable the merchant could return the customers payment.
The customer is unhappy with the purchase.
The buyer could have a reason for being dissatisfied with their purchase, for example:
- The incorrect product was shipped
- The product was damaged on arrival
- The product was not as advertised
- The product never arrived
- The incorrect variant of the product was shipped
- The product information was misleading or inaccurate
In this event the merchant could return the customers payment as part of their customer service policy.
The merchant made an error.
Sometimes merchants make mistakes when processing payments, such entering the wrong amount or applying an incorrect currency, not cancelling a subscription when instructed to do so, or even duplicating the payment. When these mistakes happen the merchant should reverse the payment.
Fraud has been committed.
In this case the cardholder did not authorise the transaction. The credit card information could have been stolen, or the users account could have been accessed by criminals. Once this is discovered, the cardholder usually requests a payment reversal.
The customer is cyber shoplifting.
Not all customers are honest, and they may attempt to get goods for free by claiming that they did not authorise the transaction, when in fact they did. They could also falsely claim that goods were damaged on arrival or never arrived at all. The customer will usually request a payment reversal from their bank directly in these instances.
The customer forgot about a purchase.
If goods take weeks or even months for delivery and the card is only billed on dispatch, the customer could forget that they placed the order in the first place, and could think that the transaction was fraudulent. Or the customer could forget that they have a recurring subscription payment, or not recognise the billing name if it is different to the service. The cardholder usually requests a reversal in these cases.
Payment reversal scan be made in one of three ways – an authorisation reversal, a refund or a chargeback. All of these affect the merchant in some form or another, whether it be in terms of time, or money, or both.
Sometimes a transaction can be stopped before processing. This type of reversal cancels a transaction before any money is transferred between accounts. As credit card transactions are a several step process and not usually instant, there can be time to stop the transaction in some cases. When a merchant receives authorization for a transaction, it is just a message saying that the transaction can go ahead to the next step, which is processing. Money only changes hands in a different third step called settlement. If the merchant realises an error in time, or if the customer makes a mistake and requests that the transaction is stopped, it may be possible to initiate an authorisation reversal with the acquiring bank. This voids the sale and the transaction does not go any further. Although this obviously takes time and resources, this type of reversal has the least impact on merchants financially, as there are no interchange fees and presumably the goods were never shipped. There could possibly be a charge for the authorisation reversal itself.
A refund happens when the merchant returns money spent on a transaction to a customer. This happens once a transaction has been completed, and usually the goods have been shipped. Refunds happen because customers are unhappy with their purchases for whatever reason, and the merchant initiates the reversal as part of their customer service policy. The refund is done as a new transaction, only instead of a debit transaction it is done as a credit. Apart from time spent, refunds do cost the merchant, as they lose the revenue from the sale, and will pay fees for both the original transaction and the reversal. In addition to this, they would lose the shipping fees for the delivery, and they may need to pay for the return freight as well, depending on the returns policy. This is assuming that they even get the goods back to resell. However, refunds do foster customer goodwill, especially if they are processed timeously and the customer is happy. Happy customers are return customers.
A chargeback happens when a customer approaches their bank and asks for a charge to be returned to them. This is most likely to happen if fraud has been committed, or if the customer is cyber shoplifting, or if the customer cannot get satisfaction from the merchant directly. This type of reversal has the worst impact on merchants. Not only do they lose revenue from the sale, shipping and interchange fees, but they are also hit with chargeback fees and the costs associated with disputing the chargeback if needed. In addition, every chargeback increases the merchants chargeback ratio, which can result in even more problems, such as being classified as a high risk merchant, or even losing the ability to accept payment cards altogether.
In summary, payment reversals are an inevitable part of doing business. Merchants must take all possible steps to ensure that they have as few reversals as possible, especially when it comes to chargebacks.
At Baer’s Crest we help our customers minimize their risk of chargebacks with our suite of affordable yet secure payment solutions. Talk to us about the best solutions for your business.
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