Payment Reversal — 101
Have you ever made a purchase online and then changed your mind? Or received a product that was not up to your expectations? Or noticed an unauthorized charge on your credit card statement? If the answer was yes to any of these questions, then you also would have gone through the experience of immediate credit, refund discussion, and dispute filing with your bank.
Each of these experiences in fact means different things, processes, and outcomes in the payment ecosystem. Each method serves a distinct purpose in rectifying transactional errors, resolving disputes, and ensuring a smooth flow of money. In this blog, we explore what payment reversal means and what are the different types of payment reversal methods.
What is Payment Reversal?
‘Payment Reversal’ is a situation in which funds transacted is returned to the cardholder’s bank. It is also known as ‘reversal payment’ or ‘credit reversal’. Payment reversal includes:
- Authorization reversals,
- Refunds, and
- Chargebacks
Why would a payment be reversed?
Generally, transactions are reversed in one of three ways mentioned above and they could be for any reasons that include but are not limited to:
- When the merchant did not deliver the product or delivered a damaged product
- When the merchant makes a transaction error or was charged a wrong amount
- When the customer added the product to the cart, but it was sold out before completing the transaction.
- When the customer is unsatisfied with the quality of goods delivered
- When a customer’s card is stolen, and fraudulent transactions were made.
- When the customer tries to scam the system, e.g.: friendly fraud.
Forms of payment reversals:
1) Authorization reversal
Authorization reversal happens when a payment is reversed before it is completely processed. In broader terms, it needs to be performed immediately after a transaction, but before the settlement occurs. This is the preferred payment reversal method for merchants as it involves less hassle and doesn’t require to pay interchange fees associated with it and retains customer satisfaction. This method is done when either the customer or the merchant made an error in the purchase/transaction.
For example, a customer made a purchase on an e-commerce website, realized the item quantity purchased was incorrect, and they can request for an immediate credit reversal by cancelling the transaction.
Consider another scenario, when a cardholder uses his debit card to withdraw money from the ATM and the machine displays that the transaction is completed, but the cardholder didn’t receive the money. In this situation, the ideal solution would be authorization reversal. The issuer will credit the debited amount immediately to the cardholder’s account.
2) Refund
Refund is reversing a payment after the transaction has been completed but before the dispute filing by the customer. To understand this better, let’s take the example of online shopping.
We often return some products bought online for many reasons like product delivery issues, or has no longer any use to the buyer, or it is not what was expected, and so on.
The logical solution to this problem is to reach out to the merchant and request a refund. Once initiated, it would require an exchange of product and money between the merchant and the customer.
This situation applies even to wrong or accidental purchases where the timeline for the no authorization reversal has passed. It also helps the merchant to salvage the relationship with the dissatisfied customer. Though this method may sound simple, the merchant still has to pay the interchange fee associated with that payment.
3) Chargebacks
Chargebacks differ from no authorization and refund methods, and it is also commonly known as a forced reversal. Here, the customer requests a chargeback from their issuer rather than the merchant. Chargebacks happen:
- when the valid refund request from the customer was not fulfilled by the merchant in the promised duration.
- When an unauthorized transaction amount reflects on the customer’s account statement.
- When a fraudulent transaction was made with stolen card credentials.
Out of the three payment reversal methods, chargebacks are quite complex as it involves too many outcomes and processes that are still handled manually. The timeline taken for resolving a chargeback can range from anywhere between 30–90 days involving banks, and card networks to resolve the dispute. Also, it comes with the following components and impact like:
- Chargeback fees
- Stringent process and strict timelines
- Damage to the organization’s reputation
- Chargeback than the threshold limit can pull the merchant into the high-risk category.
- Customers abuse the system by committing friendly fraud
In a nutshell, there are different payment reversal avenues available to the involved parties. The best method to resolve the issue will depend on the specific circumstances of the case.
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