The Difference Between Refund and Reversal Transactions

Saturday, January 03, 2015

There are a couple of different methods for a customer to get their money back after a credit card transaction. Two of them (refund and reversal transactions) sound similar, but are distinct processes that are important to understand for a business owner who will inevitably be faced with both. Here, we’ll walk you through the differences between a refund and a reversal, when they occur, how they happen, and what they mean for your business.

What is a refund?

Simply put, a refund is the process of returning funds from a completed transaction to the purchaser. The key here is that the transaction itself has been completed, so the money that was spent in this case is coming out of the merchant account and back to the cardholder. In many cases, this is as simple as sending money back to their bank account.

Some people consider refunds, chargebacks, and transaction reversals (also known as authorization reversals) as different types of payment reversals due to the fact that the payment is not accepted or received by the merchant for various reasons, and instead returned to the customer. With this in mind, we’ll walk you through what each of these reversals mean, the differences between them, and how they can affect your business.

For example…

If a shopper buys a set of mugs from Amazon using a Discover card and their transaction is approved and completed by the credit card issuer and the merchant bank, and a week later they realize that they purchased the wrong color and want a return, a refund process would be initiated to help them get their money back.

It may take a few business days for the shopper to get their money back into their account, and this may come at the cost of an interchange fee for Amazon; but because the transaction was settled when the customer made the purchase, the process of getting the shopper’s money back is slightly more complicated.

Common reasons for a refund

Refunds can be requested from a business for many reasons, although, depending on the business and product being sold, they can vary widely. Refunds can be initiated by a customer, a merchant, or an issuing bank. Although each business will have its own refund policy in place, here are some common reasons a refund may be initiated:

  • Product is damaged
  • Product is missing
  • Product is defective
  • Wrong product was purchased

Refund versus chargeback

Although refunds and chargebacks both involve the customer getting their money back for different reasons, the two processes are not exactly the same, and they mean slightly different things for a business.

In the case that, for any reason, a refund cannot be obtained, a customer can go through their card issuer to request a chargeback. In these cases, the issuing bank will give credit back to the customer first and then come to the merchant to collect the amount that is owed to them. Due to card user protection laws that exist today, it is becoming easier for a customer to dispute charges as fraudulent even if they knowingly made the purchase themselves.

In cases of a chargeback, a business is more likely to be out of the money and the product, where sometimes refunds can be disputed or the product returned. This is why it’s important to understand the difference between a refund and a reversal.

How refunds affect businesses

Long turnaround times

There are a few inconveniences to refunds on both sides of the transaction. For one, it usually takes around 5 to 14 business days for the funds to be completely returned to the client once a refund is initiated. This can make it difficult to fulfill customer needs in a timely manner. In the case where these refunds take longer than 14 days, this is often a sign of a larger issue, and the merchant needs to be contacted in these cases.

Poor profit projections

Another issue with refunds is that they negatively impact a business’s profit projections. When a business conducts a customer profitability analysis (CPA), different kinds of data is studied to find profitability, including:

  • Average number of returns
  • Average shipping costs
  • Marketing costs

So, the more returns a business processes, the higher the average number of returns is, and the weaker their CPA score will be. If a business deals with many more returns than profits, it means the business costs more than it brings in. In other words, it’s not profitable.

What is transaction reversal?

If a refund entails the customer getting their money back after a transaction, what exactly does transaction reversal mean? The biggest difference is that the card transaction itself is never completed, meaning that in many cases the funds never leave the customer’s account. This means that if caught in time, a bank can reverse the payment made before the transaction is complete and the payment is posted.

For example…

If a customer uses their Visa card to purchase an item from an online store, and the product they checked out with is no longer available for the purchase being completed, the transaction is reversed and their money is automatically sent back to that Visa account before the transaction completes.

Common reasons for a transaction reversal

Transaction reversals have less to do with customer satisfaction than a refund due to the fact that the purchase is made and reversed before the transaction is even approved or the product arrives. Here are some common reasons for a transaction reversal:

  • A product is out of stock
  • The customer was charged the wrong amount
  • Merchant suspects that fraud has occurred
  • An accidental duplicate purchase was made
  • Customer does not want the product upon paying

This means that most often a transaction reversal is initiated by the merchant or card issuer based on the stock that is available and suspicions of fraud. However, reversals can also be initiated by the cardholder, acquiring bank, card network, or card association. In some cases, transactions are voided; but these situations differ from reversals.

Reversal versus void transactions

Reversals are different from void transactions, although they both involve a transaction being halted before the settlement occurs. We’ll describe the difference between the two of them here.

Similar to reversals, void transactions are those that are stopped by the merchant before the credit or debit card transaction is settled; that is, before the money is exchanged between the parties’ bank accounts.

The two differ slightly. When a reversal happens, the funds used to make a purchase are looped back to the cardholder before settlement occurs, whereas in the case of a void transaction, the merchant actively cancels (voids) the transaction.

Refunds vs reversals

Ultimately, if a merchant or other party involved in a transaction is able to catch an issue in the transaction prior to the settlement, reversals are the preferable way to handle a financial loss. This is because no money has been exchanged, so there are no interchange fees involved in that exchange to fix the issue. In the case of refunds, a business may end up without their product and both the profit and cost of that product.

Overall, it is important for business owners to understand the differences between all of the ways that a transaction can be voided, reversed, canceled, or charged back so that they can stay on top of their revenue.


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