Payment Reversals Explained (And 10 Ways to Avoid Them)

If you’ve been in business longer than a month, you’ve probably experienced a payment reversal of some kind. Certain payment reversals are so prevalent that business owners have to budget them into their expenses every month.

The frequency of payment reversals is tied to an interesting intersection of technology, law, and product/market type. If your online store doesn’t do a good job with its descriptions, you may deal with more payment reversals. Or if your product is expensive and highly bespoke (think high-end mattresses or musical instruments), returns may be more common.

Some payment reversals are just normal business. Others can be exploitations of fraudulent customers, but the burden of payment reversals is often placed on businesses. The major credit card networks (Mastercard, Visa, etc.) have more incentive to favor their customers, and it’s up to you to fight back when appropriate. The more systems and processes you have in place, the better you’ll be at proving when a reversal is wrong.

Experiencing consistent payment reversals can be super frustrating. Fortunately, there are ways to combat payment reversals, and understanding the different types and how they occur is your first step to doing so.

What does payment reversal mean?

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.

Common reasons why payment reversals occur include:

  1. The item ended up being sold out.
  2. The customer is trying to commit fraud.
  3. The customer changed their mind after ordering.
  4. The product wasn’t what the customer expected due to bad descriptions or shady selling.
  5. The wrong amount was charged.
  6. The transaction was duplicate.

There are three common branches that payment reversals fall into:

Payment reversal type 1: Authorization reversal

Authorization reversals reverse a payment before it officially goes through and is the "quick fix" of payment reversals.

The ACH (automated clearing house) network is slow and limited, so it’s normal for transactions to be pre-authorized. In other words, a transaction can be initiated even if the address or other information is incorrect.

If you or your employees notice something incorrect after submitting the authorization request, you can call your bank to stop the transaction from occurring. This is known as an authorization reversal, and it’s highly preferable over a future chargeback or refund. The further a payment gets along it’s path to completion and the more entities it communicates with (issuing bank, card network, etc.), the more of a hassle it is to take back.

Authorization reversals are better for the customer, won’t mess up your sales data, and reduce fees associated with chargebacks by stopping the payment early.

Usually, authorization reversals are quick and in stores mentioned in front of the customer. If you address the problem immediately and let the customer know that any charges they see will be gone shortly thereafter, you have a better chance of them just swiping and trying the transaction again with the correct information. Be quick, and be courteous!

Payment reversal type 2: Refund

Refunds reverse a payment after the transaction has completed but before the customer has filed an official dispute.

We all know refunds. This is when something is wrong with the product or purchase and a customer calls your business to get their money back.

Instead of just canceling the transaction like an authorization request, a refund completes the transaction in reverse. It’s like the acquiring bank is now paying the cardholder instead of the other way around. It’s treated like a new, separate transaction.

Keep in mind that refunds are not a neutral agreement. Not only do you as the business owner lose the product sale, you also have to pay the fees (interchange, etc.) that incur along the way.

Payment reversal type 3: Chargeback

Chargebacks are when a customer calls their bank and files a dispute against your transaction.

If authorization reversal and refunds are out of the picture, or if a customer just decides to go directly to their bank, you will have to deal with a chargeback. Not only do chargebacks make you lose revenue on the product, the fees, the shipping, etc., but you also have to pay extra, chargeback-specific fees.

Chargebacks are arguably the bane of many business owners' existence. They’re not easy to fight, they’re expensive, and the process can be confusing and frustrating. It’s difficult to figure out what is a fair chargeback and what is fraud, and you’re responsible for fighting back against chargebacks.

As a business owner, you’ll have to deal with:

  • Losing revenue
  • Paying for shipping fees
  • Recovering or forfeiting sold products
  • Eating transaction fees incurred during the fraud.
  • Filing a claim and disputing chargebacks.

If you incur enough chargebacks, you may be flagged by the card networks and be unable to accept credit cards, so there’s a sustainability and reputational threat inherent within each chargeback.

Your best bet is to be proactive and take the fight to them, developing an internal system of processes and best practices to reduce the number of chargebacks and easily identify which ones are fraudulent.

10 ways to reduce payment reversals

Don’t count on eliminating payment reversals from your business, but reducing your payment reversals can be achieved through a combination of thorough payment technologies and best practices from your employees.

Just having a foolproof payment system isn’t enough since a lot of chargebacks and payment reversals are due to human error.

With that in mind, here are ten ways you can make a big dent in yours. For the first six, check with your POS provider to make sure your software has these systems set in place.

  1. Link your authorization request to future transaction messages. A transaction identifier or (TID) makes sure that particular requests and their related messages stay with each other.
  2. Use a surface trace audit number. This attaches a number to all the communication regarding a particular transaction.
  3. Make sure your system delivers retrieval reference numbers. This ties estimated sales to the customer’s original authorization request.
  4. Make sure your system has an authorization characteristics indicator. Notes an estimated incremental/estimated transaction total.
  5. Keep track of your duration field. This is the total number of days when charges will be tabulated. It helps you be able to inform your customers of what to expect and when.
  6. Submit transaction data promptly. Clear your transactions as soon as possible to make sure you don’t run into empty checking accounts or people forgetting what certain charges are.
  7. Use clear billing descriptors. A billing descriptor appears on a customer’s statement as the name of a transaction. Make sure yours is easily read, something like BELGACOFFEE instead of 35030BE.
  8. Confirm the projected clearing date. Set up an automated email that confirms a customer’s purchase and when they can expect those funds to withdraw. This helps the customer remember when and what they purchased and helps them properly prepare for the withdrawal.
  9. Use incremental and estimated authorizations when appropriate. If your business is in rentals or anything that the final rate is determined by time instead of upfront, you should consider using incremental authorizations. These basically continue to set up transactions over time instead of waiting until the end to slap a big charge on a card — reducing the pain of a chargeback.
  10. Process authorization referrals quickly. If you detect any type of error during the transaction, don’t wait for a chargeback to occur. Go ahead and reverse it as an authorization reversal. This will help return the funds to the customer’s account quickly and encourage them to try the transaction again.

The bottom line on payment reversals

Payment reversal or credit card reversal is somewhat of a broad term, but whether you’re dealing with authorization reversals, refunds, or chargebacks, they all have different applications and consequences for your business.

Above all, be quick, and be smart. Don’t wait for the problems to come to you!

With Tidal, we actually devote an official chargeback assistant to your team when you use our merchant services. Instead of spreading yourself super thin and picking up extra responsibility, why not get an expert to help you fight while saving up to 35% on processing fees?

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Providing our merchants with the latest tools to get the job done, from cutting edge payment solutions to award-winning technical support available 24/7/365. With Tidal Commerce you have a payments partner that will be there from your first dollar to your millionth.

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