The terms refund and reversal are sometimes used interchangeably, but they are far from synonymous.
As a merchant, it’s crucial that you understand the key difference between these two types of transactions, their role within the payments process, and the effect that they can have on your business. Because, whereas one can be achieved almost immediately with little to no inconvenience, the other presents a financial and administrative challenge that you’d be wise to guard against.
Refund vs. reversal transaction
Below we explain reversal vs refund, give some examples of when they might occur, and give you the lowdown on how you can minimize their impact.
Refund
A refund occurs when a transaction has already been approved and the payment has been taken from your customer and settled in your account. This usually happens when a customer has bought something that they’re dissatisfied with or that is no longer needed.
To initiate the refund, the customer contacts the merchant directly and the acquiring bank reimburses them via the same payment method. This typically takes between 1 and 7 business days to be processed (but can be considerably longer). As well as losing a sale, the downside of a refund for the merchant is that they also have to pay interchange, and often any return shipping fees (depending on the policy they have in place).
Reversal transaction
Unlike a refund, a payment reversal occurs before the customer’s funds have been settled in your account, and can be initiated by either the cardholder, the merchant, the card network, or the issuing or acquiring bank. A reversal can be completed a lot more quickly than a refund, which avoids interchange fees and is a lot less disruptive for both merchant and customer.
Reversals can occur for a number of reasons, usually because either the customer or merchant has noticed an issue with the transaction. For example, if the merchant charges the incorrect amount, the customer suddenly changes their mind about the purchase, or the item is no longer in stock.
Here, we are specifically talking about an authorization reversal - so-called because it takes place in the window of opportunity created by the authorization process and before the funds have left the customer account. Reversal transactions can take place almost immediately, sometimes without the customer even being aware (if the merchant is at fault and spots their error).
Because the charge has to be reversed, refunds can also be categorized as reversals, and so can chargebacks, where a customer disputes a payment taken from their account, which incurs a penalty fee for the merchant.
Examples of refund vs. payment reversal
Below are typical examples of when a refund might take place and when a reversal might take place.
Example of a refund
A customer buys a pair of jeans from your ecommerce clothing store. In the time it takes order to be processed and delivered to their address, the payment has been taken from their account. However, when the jeans arrive and the customer tries them on, they don't fit. The customer then requests a refund directly from you, and the full amount plus interchange and return shipping fees are taken from your account.
Example of a reversal transaction
A customer sees the jeans on your online store and attempts to make the purchase, but is then told that the jeans are no longer available in their size. While the payment is still pending but has not yet been taken, the customer requests to cancel the transaction. No funds are transferred from their account to yours, so none have to be returned and there are no fees.
How Checkout.com can help merchants to reduce the risk of refunds and payment reversals
Refunds and reversals can be costly and disruptive for your business. With a trusted payments partner like Checkout.com, you can minimize the impact of both types of transactions.
We have a range of solutions that can reduce the impact of refunds and reversals, including Fraud Detection Pro, which identifies and stops transactions that are flagged as suspicious in order to prevent chargebacks. You can also use Rapid Dispute Resolution - a Checkout.com product in partnership with Verifi - to automatically resolve disputed Visa transactions before they turn into chargebacks.
However, refunds are usually actuated by the client if they discover that a product or service was unsatisfactory for whatever reason. A reversal transaction, on the other hand, is often initiated by a company for reasons such as a shortage of stock.
In a refund, the merchant returns the money to the customer's account, and the transaction is considered completed. In a reversal transaction, the bank or payment processor cancels the transaction, and the funds are not transferred from the customer's account to the merchant's account.
In the case of a reversal, the original charge drops off the customer's statement, and a separate credit isn't issued. Refunds can fail if the customer's bank or card issuer has been unable to process it correctly. The bank returns the refunded amount to us and we add it back to your Stripe account balance.
Payment reversal (also "credit card reversal or "reversal payment") is when the funds a cardholder used in a transaction are returned to the cardholder's bank. This can be initiated by the cardholder, merchant, issuing bank, acquiring bank, or card association.
However, refunds are usually actuated by the client if they discover that a product or service was unsatisfactory for whatever reason. A reversal transaction, on the other hand, is often initiated by a company for reasons such as a shortage of stock.
A refund is when you send the full or part payment amount back to a customer who placed an order on your online store. A return is when a customer returns an item that they purchased from your online store. You can send return instructions to the customer and provide a return shipping label.
The issuing bank will release funds to the merchant once the dispute is resolved. The outcome of the dispute depends on the bank's investigation, and funds will be released if the bank finds in favor of the merchant. However, if the bank rules in favor of the customer, the charge will be reversed.
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.
A payment reversal is any situation where a merchant reverses a transaction, returning the funds to the account of the customer who made the payment. Different situations call for different types of payment reversals. Some have minimal impact on the merchant's bottom line, and others can be quite costly.
Payment reversal is an umbrella term describing when transactions are returned to a cardholder's bank after making a payment. They can occur for the following reasons: Item sold out before it could be delivered. The purchase was made fraudulently.
the act of changing or making something change to its opposite: He demanded a reversal of the previous decision/policy. a problem or failure: We have suffered a couple of minor/temporary reversals.
Below are the rules associated with the transactions reversal: Only transactions with an empty Void Status can be reversed. Transactions printed on a receipt can be reversed. Transactions that have a non-empty Statement Date cannot be reversed.
The chargeback process lets you ask your bank to refund a payment on your debit card when a purchase has gone wrong. You should contact the seller first, as you cannot start a chargeback claim unless you have done this.
If you attempt to do a Refund and get a decline error, it means the card issuer is indicating that the cardholder's account cannot accept a Refund. When a Refund decline occurs, the cardholder's payment method cannot be refunded. The following are common reasons for declines: The card account has been closed.
A reversal request may be made by the paying agency for an erroneous direct deposit payment that has been transmitted to the automated clearing house (ACH) network. A reversal is an attempt to retrieve the funds; it is not a guarantee the funds will be recovered.
If you entered an invalid bank account number, your bank should be able to reverse the transaction. If the account number you typed in is an invalid account, your bank should be able to reverse the transaction. In this situation you should get your money back within a few business days.
A transaction in which Refunding Bonds are issued and their proceeds are used to pay Principal, Interest or Redemption price on a prior Issue (the Refunded Bond), including Costs of Issuance, Accrued Interest, capitalized interest on the Refunding Bond, a reserve or replacement fund, or similar costs allocable to the ...
Introduction: My name is Francesca Jacobs Ret, I am a innocent, super, beautiful, charming, lucky, gentle, clever person who loves writing and wants to share my knowledge and understanding with you.
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