Payment Reversal: Understand What It Is & How to Protect Your Business

Payment reversal sucks, regardless of the rationale behind it.

When a customer reverses a charge, all your efforts to create the business opportunity go to waste. It leaves you without the payment you were expecting and possibly without the product or service you provided. More so, you might incur additional expenses trying to counter the payment reversal.

This guide will explore key strategies to help prevent payment reversals and keep your transactions smooth and secure. We’ll also look at the various types of payment reversals and how to handle each scenario.

What Is a Payment Reversal on A Credit Card?

Payment reversal, also known as "credit reversal" or "reversal payment" is when transaction funds are forcefully return to the cardholder's bank account.

To understand payment reversal meaning in simple terms, think of it this way: a payment reversal is the undoing of an initial payment in credit card transactions. It’s a blanket name for different techniques customers use to get their funds back after completing a transaction. The cardholder instigates some of these strategies, while the merchant or bank initiates others.

The various payment reversal methods include a) authorization reversal, b) refunds, and c) chargebacks.

Despite the well-known inconveniences associated with transaction reversal, they can benefit both parties (i.e., merchants and their customers) and improve customer satisfaction and loyalty when applied thoughtfully. However, credit card reversal does cause more harm than good, especially when they're initiated by the customer's bank.

What Causes a Payment Reversal?

There are several reasons for a card payment reversal. While some payment reversals are due to actual issues, like a misstep on the merchant's side, others are baseless and unnecessary.

Below are some of the prominent reasons for credit card payment reversals:

• The merchant charged an incorrect amount or multiple times for the same transaction.
• The customer is unhappy because the seller's product did not match the description on their website.
• The purchased order was out of stock.
• The transaction was unauthorized.
• There was an incident of buyer's remorse or online shoplifting.

Understanding these causes of payment reversal on a credit card is only one side of the coin. The other side is getting a good grip on the application processes and the rules governing each reversal method. We’ll dissect those rules in the subsequent section.

Types of Payment Reversals

As we noted earlier, there are three types of payment reversals, which includes:

1. Authorization reversals
2. Payment refunds
3. Chargebacks

Each of these techniques for reversing credit card payments has a distinct effect on your finances and business sustainability. Let’s examine how they work and what you must do to limit risk exposure.

1. Authorization Reversal

An authorization reversal happens when a merchant cancels a transaction before settlement and funds' withdrawal from the cardholder’s account. In other words, authorization reversal occurs when a payment is reversed before it’s fully processed. This payment reversal method is the quickest option and involves less hassle for merchants and customers.  

An ideal case study of authorization reversal is when a merchant (or buyer) finds out there's a problem with a particular payment and reaches out to the cardholder's bank to prevent the transaction from going through. Upon receiving the electronic message from the acquiring bank, the issuing bank will reverse the payment and release any applied authorization hold. An authorization hold is a principle that helps ensure the customer has enough funds to cover the transaction.

Another typical scenario is when a seller accidentally charges incorrect amounts but swiftly reverses the charge to remedy the situation without the customers knowing about the error.

Reversing an authorization is a more convenient option for merchants as it doesn't require them to pay interchange fees usually associated with refunds. Also, merchants do not have to worry about order return hiccups since the transaction hasn’t gone through.

2. Payment Refund

Payment refunds are easy to understand. Customers use refunds to reverse payments when products or services do not meet their expectations. Hence this payment reversal happens after transaction processing but before the buyer initiates a formal payment dispute.

The process usually starts with the buyer contacting your company through phone, email, or online chat. When you reach a refund agreement, your acquirer will reimburse the buyer, and you must receive the product back from the buyer.

Unlike authorization reversals, payment refunds take time. Your acquirer handles it as a separate transaction (i.e., a reverse payment of the original transaction). They essentially take money from your account and remit it back to the customer’s original form of payment. This process takes about three to 10 business days.

The ancillary cost of payment refund includes lost sales, interchange fees, return shipping costs, etc. These bills can accumulate over time.

3. Chargebacks

Generally speaking, cardholders resort to chargeback when the above scenarios are impossible. A chargeback happens when a cardholder disputes a transaction to their bank or card issuer. While chargebacks differ from refunds regarding the application processes, parties involved, and consequences, both scenarios ultimately lead to transaction payment reversal.

Again, chargebacks attract significant baggage like chargeback fees, lost revenue and merchandise, sales cannibalization, shipping costs, interchange fees, and possibly other penalties, conditional to each case and your chargeback rate. It's equally vital to mention that credit card chargebacks follow a strict process and timelines. Not adhering to those stringent procedures means trouble for your business.

Therefore, you must work to prevent all payment reversal triggers and protect your business from the cost of issuing transaction refunds. Take the steps below to achieve that objective.

How to Avoid Payment Reversals Without Hurting Your Business

The causes of credit reversal listed above give you some ideas of preventive measures to protect your business from funding reversals.

Granted, you can’t possibly eliminate all forms of payment reversals. But you can take careful steps to prevent internal errors leading to disputes and chargebacks and shield your business from scammers.

Here are eight actionable ideas to consider:

1. Before submitting transactions, Quality Assure (QA) all details, including Transaction Identifier Numbers (TID) and Retrieval Reference Numbers.
2. Send orders for clearing immediately after you've QA'd all relevant details to avoid cardholder confusion on transaction authorization.
3. Make your billing descriptors accurately display the name, URL, and a brief description of the purchased product to avoid any confusion.
4. Use your order confirmation email to confirm shipping/delivery dates so everything is clear about the order status.
5. Use incremental authorization for strategic advantage if your business model requires periodic customer billings.
6. Process any authorization reversal promptly and immediately release the customer's funds to pre-empt disputes.
7. Use Surface Trace Audit Number (STAN) to track the status of a refund, prevent fraudulent charges by tracing unauthorized transactions, giving your customers peace of mind.
8. Prevent chargeback fraud with secure payment systems and anti-fraud tools.

Payment Reversal vs. Refund vs. Chargeback

If you’re wondering: Is a chargeback a reversal? Is a payment reversal a refund? The answer to both questions is NO. Chargeback and refund are a type or subset of payment reversal.

That means refund and chargeback are legally binding techniques for cardholders to annul a completed transaction a reclaim their money. Consumers using chargeback for payment reversal must appeal to their card issuer, while payment reversal through refunds is a mutual agreement between the seller and the buyer.

With that on the back burner, let’s also touch base on what you must do in times of credit reversal.

How to Handle Payment Reversals Like A Pro

While handling authorization reversal and refunds is no big deal, payment reversal by chargebacks is a sore tooth for eCommerce businesses – big or small.

Thankfully, Chargeflow’s automated chargeback solution helps eCommerce businesses fight disputes without lifting a finger. Automating chargebacks with Chargeflow streamlines dispute handling, safeguarding resources and customer relations while being cost-effective. This approach significantly lowers the risk of alienating genuine customers. Additionally, research shows that merchants using automated chargebacks experience an impressive ROI increase of 800 to 1,500 percent, marking a substantial improvement over traditional methods.

Chargeflow's Advanced Automation Features

Chargeflow offers a sophisticated chargeback automation solution, equipped with several key capabilities:

• Transaction Tracking: Utilize advanced order insights and AI-generated analyses to effectively track suspicious transactions.
• End-to-End Management: Manage the entire chargeback process efficiently. From the initial dispute to its resolution, everything is handled on autopilot, backed by insights from over 50 data points.
• Behavior Analysis: Gain visibility into user transaction behaviors. This feature helps in identifying patterns, plugging loopholes, and predicting future chargeback-prone transactions.
• Revenue Management: Streamline your revenue management process. By foreseeing potential chargebacks, you can take proactive measures to mitigate risks.
• Strategic Alignment: Align your business strategies with evolving fraud dynamics. This proactive approach ensures you stay ahead in the dynamic eCommerce landscape.

Our data shows that merchants using our fully automated chargebacks get an average of 75%-win rate instead of the industry average of 12%. To secure your sales revenue and prevent scammers from taking your business under, you should talk to the Chargeflow team today!