A “payment reversal” is a term that encompasses any instance in which funds from a transaction are returned to the cardholder’s bank account. Sometimes referred to as “credit reversals” or a “reversal payment,” this process includes authorization reversals, refunds, and chargebacks.
Essentially, a payment reversal is exactly what it implies: the undoing of a prior payment, usually related to a credit card transaction. There are multiple ways to achieve a credit card payment reversal. Some are initiated by a cardholder, while others may be started by a merchant or the bank itself.
Although transaction reversals can be frustrating, they are not always negative. When handled properly, they can be advantageous and lead to improved customer satisfaction and loyalty. Conversely, some situations may be more detrimental: for instance, credit card reversals imposed by chargebacks generally favor other parties at the expense of merchants.
Why Would a Payment Be Reversed?
The justification for a credit card payment reversal generally relates to the party that initiated the action. For example, an issuer might pursue a reversal due to an error on the merchant’s part, while a customer may seek one because they are dissatisfied with the purchase. There are legitimate grounds for reversing a charge, as well as those that are not justified.
A payment reversal might happen because:
- The product is unavailable
- The retailer made a mistake
- The buyer is dissatisfied
- The cardholder doesn’t recognize the transaction
- The buyer was denied a refund
- The customer is trying to subvert the system
What is an Authorization Reversal?
In certain cases, a transaction can be halted before it is fully processed, which is known as an authorization reversal. This represents the quickest and simplest form of payment reversal.
In this scenario, the transaction is nullified before any money is moved from the buyer to the seller. While not the ideal approach, for a merchant, an authorization reversal usually causes the least disruption.
By responding promptly, you can initiate an authorization reversal, as these holds are an inherent initial step in the card payment transaction process. Authorization reversals do not incur interchange, shipping, or chargeback fees. It effectively nullifies the temporary hold placed on the cardholder’s payment method. Unlike refunds or chargebacks, no exchange of funds, products, or services is required.
What is an Refund?
Most individuals are familiar with the fundamental idea of a refund.
When a customer is unhappy with a purchase, they seek to regain their money. Typically, this involves the buyer returning the product to the merchant in order to receive a reimbursement.
The process is straightforward; instead of reversing the original transaction, the merchant initiates a new transaction with the same amount, but this time as a credit rather than a debit. It’s essentially similar to executing a normal purchase, albeit in the opposite direction. The acquirer returns the funds that were initially transferred to the cardholder’s account, treating it as a distinct transaction.
What is a Chargeback?
Among the three methods for reversing a payment, chargebacks are the most detrimental for merchants. They’re forced payment reversals, carried out at the bank level.
Chargebacks encompass all the adverse effects linked to other forms of credit card payment reversals, such as losing sales revenue, merchandise, shipping expenses, and interchange fees. Furthermore, chargebacks inflict additional collateral damage.
For each chargeback received, the merchant is forced to pay a chargeback fee. Plus, banks track your chargeback rate over time. Excessive chargebacks can lead to serious consequences like reputational damage, MID cancellation, and being placed on the MATCH List.
Tips to Avoid Payment Reversals
So, how do merchants go about preventing payment reversals? Here are a few tips that can help:
Verify Payment Details
One of the most effective methods for avoiding payment reversals is to validate the accuracy and security of all payment information supplied by customers. This means using fraud detection tools like address verification service (AVS), card verification value (CVV), and 3-D Secure.
Clear Return Policies & Refund Procedures
Well-defined return policies and refund procedures can help reduce instances of refunds and chargebacks. When customers are aware of your policies, they are more likely to follow them when seeking a refund or returning a product.
Timely Communication
In situations where an order may experience delays or other issues, it’s important to maintain open lines of communication with customers. Providing them with timely updates and addressing any concerns they may have can help mitigate the likelihood of chargebacks.
Secure Payment Processing
Ensuring that your payment processing is secure can significantly reduce the risk of fraudulent transactions and subsequent chargebacks. Implementing robust fraud detection measures, such as IP geolocation or device fingerprinting, can help identify potential fraudulent activity and prevent it from occurring.
In Conclusion…
While payment reversals can be a frustrating aspect of accepting credit card payments, there are steps that merchants can take to minimize their occurrence. By verifying payment details, having clear policies and procedures in place, maintaining communication with customers, and prioritizing secure payment processing, businesses can help protect themselves against payment reversals and protect their revenue.