Payment reversals occur when a transaction is canceled and the funds are returned to the original payment method. They can happen for a variety of reasons and lead to consequences for the business involved. Payment reversals in the US retail industry amounted to a total of $743 billion USD in 2023, accounting for 14.5% of sales.

Below, we’ll discuss the different types of payment reversals, how they work, how they impact businesses, and how to avoid unnecessary payment reversals.

What’s in this article?

• Types of payment reversals
  
• How payment reversals impact businesses
  
• How to avoid unnecessary payment reversals
  

Types of payment reversals

Payment reversals can occur due to customer dissatisfaction, product or service issues, errors in the transaction process, or simply a customer changing their mind. Here are the different types of payment reversals a business might experience.

Authorization reversal

An authorization reversal is the process of canceling a pending transaction before it finalizes into a post. The business sends a reversal request to the issuer (customer’s bank) via their acquiring bank, and the issuer then releases the hold on the funds, making them available again in the customer’s account. This helps free up the credit limit or available balance on the customer’s card.

• Use case: If a customer decides to cancel an order shortly after placing it and the transaction has not yet been settled, they can issue an authorization reversal to prevent the transaction from completing.
  

Refund

A refund is the process of a business returning money to a customer for a transaction that has already been completed and settled. The business processes the refund through its point-of-sale (POS) system or payment gateway, returning funds to the customer’s account using the original payment method. Refunds can take several days to appear in the customer’s statement, depending on the processing times of the involved banks.

• Use case: If a customer returns a product due to dissatisfaction, defects, or receiving the incorrect item, the business can issue a refund. If the customer was overcharged, the business can also issue a refund for the extra amount charged.
  

Chargeback

A chargeback is a forced transaction reversal initiated by the cardholder’s bank after a cardholder disputes a transaction. The bank issues a chargeback, debiting the business’s bank and crediting the cardholder. The business can then dispute the chargeback with proof of purchase or fulfillment, leading to a potentially complex arbitration process.

• Use case: In the event of an unauthorized transaction, nonreceipt of merchandise, goods not as described, or dissatisfaction that the business didn’t resolve, a customer can file a dispute and request a chargeback.
  

Reversal adjustment

A reversal adjustment is a correction made to a transaction that was processed incorrectly. It can include both financial corrections for things such as incorrect amounts and nonfinancial corrections such as changes in the transaction details. As with a refund, the business makes adjustments through its processing system to correct the transaction details.

• Use case: If a business mistakenly processes the same transaction twice or charges the wrong amount, it can process a reversal adjustment.
  

Void transaction

A void transaction is similar to an authorization reversal but occurs before the transaction batch is settled at the end of the business day. The business processes a void through its payment system, which sends a request to halt the transaction process.

• Use case: If a business catches a mistake (e.g., wrong billing amount) immediately after a transaction has been authorized, it can void the transaction to prevent it from being processed further.
  

How payment reversals impact businesses

While payment reversals are sometimes necessary, too many can have a major impact on operations. Here’s how payment reversals affect different aspects of a business.

• Financial impact: When funds are returned to customers, there’s a direct reduction in revenue, which can be particularly damaging for businesses with thin margins. Reversals can also disrupt cash flow, complicating budgeting, operational financing, and financial planning. There can be additional fees associated with processing chargebacks and other reversals, and reversals that involve product returns can create further costs if the returned products cannot be resold at the original value or at all.

• Administrative costs: Handling payment reversals takes time and administrative work, from returning and restocking inventory to dealing with payment disputes and processing refunds. This creates additional labor costs and can potentially divert resources from other important business activities such as sales and marketing efforts or customer acquisition.

• Customer relationships: If handled effectively, payment reversal management can strengthen customer trust and loyalty, boosting the brand’s reputation. However, mishandled reversals can lead to negative customer reviews and bad publicity.

• Fraud risk: Payment reversals can be a target for fraudulent actors. For example, customers might falsely claim transactions were unauthorized. Businesses need systems in place to detect and prevent these fraudulent activities.

• Customer insights: Payment reversal data can provide valuable insights into customer behavior, product performance, and service quality. This can guide strategic adjustments in product offerings or customer service.

• Market position: Businesses that effectively manage and minimize payment reversals can strengthen their market position. By ensuring a smoother customer experience and fewer financial disruptions, companies can stand out from competitors.

How to avoid unnecessary payment reversals

Your business can employ a few strategies to prevent payment reversals. Here are a few.

• Billing descriptors: Use clear and recognizable billing descriptors on customer statements. This can help customers identify the charges and reduce their chances of disputing the transaction.

• Customer communication: Foster open communication with your customers and encourage them to contact you directly if they have any questions or concerns about their purchase.

• Payment reversal data: Your payment reversal data can help you identify patterns and trends. Analyze this data to pinpoint areas to improve your processes and reduce future reversals.

You can prevent specific types of payment reversals with the tactics below.

Prevent chargeback fraud

• Product descriptions: Provide accurate and detailed descriptions of your products or services. Include images, specifications, and any relevant disclaimers. This will set clear expectations for customers and reduce the likelihood of dissatisfaction.

• Return and refund policies: Clearly state your return and refund policies on your website and during the checkout process. Make sure customers understand the terms and conditions before making a purchase.

• Customer service: Provide prompt and helpful customer support to address any concerns or issues that customers may have. Resolving problems quickly can prevent them from escalating into chargebacks.

Prevent legitimate chargebacks

• Payment processing: Use a reputable payment processor with fraud prevention tools such as address verification service (AVS) and card verification value (CVV) checks. These tools can help detect and prevent fraudulent transactions.

• Authentication: Implement strong customer authentication methods such as two-factor authentication to ensure that the person making the purchase is a legitimate cardholder.

• Monitoring: Regularly review your transaction history for any suspicious activity. If you notice any unusual patterns or discrepancies, investigate them promptly.

Prevent authorization reversals and refunds

• Order confirmations: Send clear order confirmation emails to customers immediately after their purchase. Include all relevant details such as order number, items purchased, billing and shipping addresses, and expected delivery date.

• Inventory management: Ensure that you have sufficient inventory to promptly fulfill orders. If an item is out of stock, communicate clearly with the customer and offer alternatives or a refund.

• Shipping notifications: Update customers on their order status, including shipping confirmations and tracking information. This helps manage expectations and reduce the likelihood of cancellations or returns.