Payment reversals occur when a transaction is cancelled and the funds are returned to the original payment method. Reversals include everything from chargebacks to refunds, and all of them can affect a business's revenue, cash flow, and customer relationships. Globally, disputes are projected to hit 359 million transactions annually, with a value of US$46.1 billion by 2029.

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

Key Takeaways

• Reversals can include authorisation reversals and voids, which cancel pending charges before batch settlement, as well as refunds, adjustments, and bank-enforced chargebacks.

• In addition to refunded sale amounts, excessive reversals incur non-refundable processing fees, chargeback penalties, administrative dispute overhead, and potential inventory loss.

• Minimising reversals requires combining automated verification tools with clear billing descriptors, accurate product listings, and proactive shipping updates to prevent friendly fraud and customer disputes.

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.

Authorisation reversal

An authorisation reversal is the process of cancelling a pending transaction before it finalises into a post. The business sends a reversal request to the issuer (the customer's bank) via their acquiring bank, and the issuer 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 credit 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 authorisation reversal to prevent the transaction from completing.
  

Refund

A refund is when a business returns money to a customer for a transaction that has already been completed and settled. Unlike a cardholder-initiated chargeback, a refund is always initiated directly by the business, even when prompted by a customer request. 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, such as a credit card. 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 fulfilment, leading to a potentially complex arbitration process. This entire workflow is strictly governed by the rules of major card networks like Visa and Mastercard. Chargebacks are a growing operational challenge for businesses, with global chargeback value estimated to hit US$46.1 billion in 2029.

• Use case: In the event of an unauthorised 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 non-financial 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 authorisation 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 authorised, it can void the transaction to prevent it from being processed further.
  

How payment reversals impact businesses

While payment reversals are sometimes necessary, a business that experiences too many can face negative consequences. 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. Average merchants lose US$128 for each chargeback. 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.

• Payment network penalties: If a business's chargeback ratio climbs too high, it can be placed in stringent network monitoring programmes, such as Visa's VAMP or Mastercard's Excessive Chargeback Program (ECP). Beyond standard chargeback fees, these programmes incur hefty monthly fines and, if left unresolved, can ultimately threaten a business's ability to process card payments.

• 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 labour costs and can potentially divert resources from other important business activities such as sales and marketing efforts or customer acquisition. Payment reversals can also be a lengthy process, with reversal timelines ranging from minutes to weeks, and in the cases of formal bank disputes, possibly months.

• Customer relationships: If handled effectively, payment reversal management can strengthen customer trust and loyalty, boosting a 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 unauthorised. Businesses need systems in place to detect and prevent this type of fraud.

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

How to avoid unnecessary payment reversals

Here's how to reduce payment reversals across your business:

• Billing descriptors: Use clear and recognisable billing descriptors on customer statements. This can help customers identify the charges and reduce their chances of disputing the transaction. Unclear billing descriptors cause around 35% of transaction disputes.

• 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. According to 2024 data, 53% of cardholders will dispute a transaction with their bank without ever attempting to contact the business first.

• Payment reversal data: Your payment reversal data can help you identify patterns and trends. Analyse 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 chargebacks

• Payment processing: Use a reputable payment processor with fraud prevention tools such as address verification service (AVS) and card verification value (CVV) checks.

• Authentication: Implement Strong Customer Authentication (SCA) methods, such as 3D Secure (3DS), which prompts the customer to complete a two-factor authentication step with their card issuer at checkout. These methods ensure the person making the purchase is the legitimate cardholder.

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

Prevent authorisation 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 fulfil 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.

How Stripe Payments can help

Stripe Payments provides a unified, global payments solution that helps any business – from scaling startups to global enterprises – accept payments online, in person and around the world.

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Learn more about how Stripe Payments can power your online and in-person payments or get started today.