Everything You Need to Know About Payment Reversal

Payment reversals are the last thing a business owner wants to see on their end-of-month reports. Making a sale and seeing those numbers go up can be a huge victory for anyone who owns a business. But the problem is, sometimes those sales just don’t stick. Causing those shiny projected revenue goals to become harder to obtain.

What does reversing a payment mean? There are many reasons for a payment reversal. And there are a few different types of reversals that merchants have to deal with. Depending on the reason and the type, it can affect a merchant in different ways.

This article is a deep dive into the world of transaction reversals. What they are, why they happen, how they affect merchants, and how merchants can prevent them.

Who Initiates a Payment Reversal?

Any player in the transaction can initiate a reversal. Including the cardholder, the issuing bank, the card network, the merchant, or their acquiring bank.

What Does a Payment Reversal Mean For Credit Cards?

So what is a reversal transaction? And what does reversal credit mean? In its simplest form, a payment reversal is a blanket term for a refund or reversal of funds back to the customer’s bank

Crediting them for a transaction that they no longer agree with. A transaction reversal can happen for credit card transactions, debit card transactions, and even ACH (Automated Clearing House) transactions.

Payment reversals can occur for a variety of reasons. We will discuss these further down in the article for a clear understanding. But first, let’s further dissect what payment reversals are.

What Are the Types of Payment Reversals?

The term payment reversal typically refers to any situation where a customer receives funds credited back that had not yet settled to the merchant’s account. As opposed to a chargeback, retrieval, or refund, those funds have been settled to the merchant. So the merchant would receive a debit to return the funds to the cardholder.

In some cases, the term payment reversal is used interchangeably between the typical authorization reversal (funds not settled) and chargeback, retrieval, and refund situations.

To best understand how to minimize any type of repayment to a customer, it is best to familiarize yourself with the different types of payment reversals.

Authorization Reversals

An authorization reversal is standard when discussing a payment reversal. It occurs when a cardholder contacts their issuing bank, such as Wells Fargo, right away to cancel a transaction. So Wells Fargo reverses the charge prior to the funds settling to the merchant.

The transaction would have received approval at the terminal level. This means the authorization has gone through and the funds are on hold. However, the funds had not yet hit the merchant account.

This type of limbo for the transfer of funds can happen with credit card and ACH transactions. This is because the money is not debited from the payer’s account instantly, the way it is with debit. Debit is like digital cash, the minute the transaction goes through, the customer receives a debit.

Conversely, payment reversal on credit card networks and the ACH network is a more lengthy process. Approvals and bank-to-bank communication make for more steps before the customer receives the debit and the merchant receives the credit.

Because of this, merchants are not debited from their accounts when an authorization reversal occurs. Instead, they simply are not funded for that transaction amount. In these situations, merchants should look over their batch reports for the details. Because their numbers may not add up, concerning transactions completed and the settlement totals.

Men sitting down looking at the numbers on the back of a credit card

Chargebacks

Another type of payment reversal that a merchant will experience would be due to a chargeback. A cardholder’s issuing bank initiates this when they file a dispute for their charges.

Charge disputes can be for a plethora of reasons, including:

  • The cardholder is claiming the transaction was fraudulent
  • The cardholder was charged the wrong amount
  • The cardholder does not recognize the merchant on their statement
  • The cardholder tried returning the item with no luck
  • The cardholder was unsatisfied with the service or product
  • The cardholder never received the service or product
  • The cardholder paid by other means
  • Etc.

When a cardholder files a dispute to their issuer, the bank will open an investigation on the transaction. The merchant receives a notification and is forcibly debited for the transaction amount.

Though the transaction is reversed at the time of the chargeback initiation, it may not be the final result. Merchants have an opportunity to fight the chargeback and prove the legitimacy of the card transaction. They would do so by submitting transaction receipts and letters to the bank.

If the cardholder’s bank finds the cardholder’s claim to be valid, they will keep the funds. If the merchant is able to appropriately dispute the credit reversal, they will be re-credited the transaction amount.

Unfortunately, even if a merchant can prove the legitimacy of the transaction, they are still charged a fee every time one of their customers files for a chargeback. This fee is typically around $15 every time. It pays for the facilitation of the chargeback process between the acquiring bank, issuing bank, card networks, and payment processor.

Retrievals

Next, a retrieval is similar to a chargeback in that a customer may not recognize a transaction. Or the issuing bank may want more information on a suspicious charge. When this occurs, the cardholder’s acquiring bank issues a retrieval request to the merchant. The merchant must provide further details on the transaction.

Unfortunately, if the merchant fails to respond to the request with the appropriate information, or if the information provided is not recognized by the cardholder, a chargeback will ensue.

Merchants typically have between 10 to 20 days to respond to retrieval requests. But either way, they will most likely be charged a fee every time their cardholder’s bank initiates a retrieval request. If the request turns into a chargeback, the merchant will again, receive further fees.

Woman taking money from a cash register

Refunds

Lastly, refunds differ from both chargebacks and authorization reversals. Refunds are merchant initiated. They side with the customer and believe it is best to credit them. With refunds, the customer completes a purchase, then for any number of reasons, contacts the merchant or returns to the store, and requests a refund.

Rather than a reversal of the original transaction, there is a new transaction that takes place (for the same amount). But as a debit to the merchant, rather than a credit.

A customer can request a customer for any reason:

  • They didn’t like the product
  • They got the wrong size
  • It was a gift and the receiver didn’t want it
  • There was something wrong with the product
  • The product or service was never received
  • The customer decided they did not have sufficient funds in their budget
  • etc…

 

Luckily for merchants, there is no fee when a customer requests a refund. But the merchant will still have to pay their regular interchange and merchant processing fees. Regardless if a transaction is refunded or not. Additionally, since the refund is a new separate transaction, they will pay additional interchange fees.

Why Do Payment Reversals Occur?

There are numerous reasons why a payment reversal may happen. Below are some of the most common reasons:

Incorrect Account Numbers

For ACH or card-not-present transactions, it is entirely possible to enter the wrong account number.

This could simply be due to human error such as a typo, or misreading or mishearing of the number. Or it could potentially be purposely fraudulent. Meaning the clerk or customer is using the wrong information for malicious purposes.

This is why card-not-present (keyed) transactions run merchants’ higher interchange fees. When keying in card information, there is the potential for a higher risk involved. And a number one reason for chargebacks. Card-not-present transactions have a difficult case when attempting to prove legitimacy to issuing banks.

If you do have to process manual payments, make sure to always double-check that the card or account number is correctly entered before submission.

The Issuing Bank Believes the Transaction is Obscure

If a cardholder’s issuing bank sees a transaction come through that is concerning, they may automatically reserve the transaction. Concerning transactions could be obscure or inconsistent with the usual account activity. Or the bank may notice the particular merchant is high on their chargeback ratio and the transaction seems risky or fraudulent.

The Customer Disputed the Transaction with Their Issuing Bank

Reversals in the form of retrievals and chargebacks occur when a cardholder raises a dispute with their bank. The dispute can happen when a cardholder does not recognize the charge, remember the charge, agree with the charge, or the goods or services were not received or received differently than described. Which could also include damages or incomplete.
Hacker holding up a stolen credit card