What are Payment Reversals?
Payment reversals are transactions where funds are returned to a customer after an initial sale. They can be initiated by either the business or the customer’s bank for reasons such as customer dissatisfaction, error correction, or fraud concerns. Understanding how payment reversals work, their types, and their potential impact on business operations can help business owners take preventive steps and minimize their occurrence.
Payment reversals come in a few forms, each differing in its process and implications:
1. Authorization Reversal
Authorization reversals happen right after a payment is initiated but before the transaction is finalized, meaning no funds have been captured by the merchant yet. This type of reversal is typically issued when:
- A customer immediately cancels an order after placing it.
- A business identifies and corrects a transaction error, like an incorrect amount.
- Duplicate authorizations are detected, and one needs to be voided to prevent overcharging.
Example: A customer accidentally orders two items but quickly requests one to be canceled. An authorization reversal is then issued for the duplicate authorization, preventing the charge from going through.
2. Refund
Refunds return funds to the customer after a payment is completed. They are often used in response to product returns or service cancellations and may be issued for either the full or partial amount.
Example: A customer receives an item but decides it doesn’t meet their needs, so they return it. Once the return is processed, a refund is issued, restoring the funds to the customer’s account.
3. Chargeback
Chargebacks are forced reversals initiated by the customer’s bank, usually due to disputes over the transaction. Chargebacks can occur when:
- A customer reports an unauthorized transaction, often due to fraud or card misuse.
- A transaction did not meet expectations, or the product/service was not received.
- There is a perceived violation of the terms of sale.
Chargebacks are generally the most challenging type of reversal for businesses, as they oftenresult in additional fees and require time to resolve.