What is the Difference Between Void and Refund in Credit Card Processing?

Businesses across the world process billions of transactions for a variety of products and services daily. These merchants are highly dependent on the seamless processing of payments as most of these transactions are cashless. However, problems can arise in the processing of these payments stemming from systematic errors or mistakes by either the staff of these companies or the cardholders themselves. This is where a voided transaction or a refund is utilized by merchants, both of which are an integral part of the cashless payments’ lifecycle.

In this article, we are going to explore what the different stages of noncash payment processing are. We will explain what a voided transaction is, what a refund is, the difference between void and refund, and how and when each can be utilized by merchants. We’ll also delve deeper into the usual timespan, how different balances show up in customer accounts depending on if they issue a void or refund, and how they are reversed.

What is the credit card transaction process?

When a credit card transaction is made, the following process occurs:

1. The cardholder presents their credit card to the merchant and provides their signature or enters their PIN to authorize the transaction.
2. The merchant’s point-of-sale (POS) terminal, card reader, or payments gateway sends the transaction details, including the purchase amount and credit card information, to the merchant’s acquiring bank or payment processor.
3. The acquiring bank or payment processor verifies the transaction information and sends it to the card issuer, which is the bank that issued the credit card to the cardholder.
4. The card issuer checks to see if the cardholder has sufficient credit available and, if so, sends an approval message back to the acquiring bank or payment processor. Within this step, the issuing bank authorizes the transaction by issuing a six-digit code transmitted to the acquiring bank – effectively earmarking the required amount to be set on hold, known as a preauthorized charge, but not having physically transferred them yet. This step is also known as authorization.
5. The acquiring bank or payment processor sends an approval message to the merchant’s POS terminal, indicating that the transaction has been approved.
6. The merchant completes the transaction and gives the cardholder a receipt.
7. The merchant processes the batch to the merchant service provider. The batch process in a credit card transaction refers to the process of grouping and submitting multiple transactions at once for processing. This is typically done at the end of the business day or at predetermined intervals. It is this specific step that settles the transaction, and the card issuer charges the cardholder’s account for the amount of each purchase in the batch, and the acquiring bank or payment processor pays the merchant for each transaction in the batch. This step is also known as settlement.
8. The card issuer charges the cardholder’s account for the amount of the purchase and the acquiring bank or payment processor pays the merchant for the transaction.
9. The card issuer sends the cardholder a statement showing the transaction and any other charges or payments made to the account during the billing period. The cardholder is responsible for paying the balance on the account by the due date.

What is a voided transaction?

A voided transaction refers to treating the sale as if it never happened. A voided payment is a transaction that was never settled by the merchant because it was promptly identified as an error and never included in the merchant’s batch processing.

When a void is processed, the credit card issuer is notified that the transaction should be reversed, and the funds that were preauthorized or placed on hold from the cardholder’s account at the authorization stage of the credit card processing are released.

Voids are typically used when a transaction is made in error or when the goods or services being purchased are not delivered or are not as expected. For example, if a customer is accidentally double charged on their credit card, they may request a void to reverse the second charge. Or, if a customer orders a product online and it is not delivered, they may request a void of the original transaction.

To process a void, the merchant must have access to the original transaction information, including the transaction number and the amount of the original charge. The void must also be processed before the credit card issuer settles the original transaction, which typically occurs at the end of the business day. If the transaction has already been settled, it may not be possible to void it and the cardholder may need to request a refund instead.

A voided transaction is a great feature in rectifying or correcting team member mistakes or incorrect transactions that have been processed erroneously. It is important to remember that upon voiding a transaction, the client will still have the authorization visible on their credit card, but they will not actually be charged for this transaction. While it may take some time – the authorization will disappear from the customer’s card. Another upside to this feature is that the merchant is not charged for the transaction since the charge is never included in the batch processing. However, it is important to remember that the merchant will still be required to pay the preauthorization charge fee.

How does a voided transaction work?

When a merchant voids a transaction, you are effectively discarding an authorized sale from the batch of sales that the merchant would typically capture at the end of your business day or at specific intervals during business hours. For example, a merchant who processes 25 sales throughout the day and later realizes that one of those was put through mistakenly, that transaction is excluded from the batch. As the merchant processes that batch of transactions, instead of 25 transactions, only 24 are captured. The transaction is voided prior to the settlement phases of the credit card transaction. Hence it is reversed as if it never happened.

When the merchant voids a transaction, the authorization still appears on the cardholder’s account as that step of the credit card transaction was completed. The merchant will be subject to the cost of that step. However, since the transaction was not included in the batch processing, that authorization will reverse without ever having to pay the payment processing rate, and the customer isn’t charged.

The payments gateway or the POS terminal communicates the merchant’s intent not to settle the authorized payment to the issuing bank, the issuing bank releases the funds reserved from the cardholder’s account as part of the authorization stage.

If a merchant needed to process a voided transaction but accidentally included the transaction for batch processing to be settled, the only option is to process a refund.

What is a refund?

A refund is a transaction that involves returning money to a customer whose card or account has been erroneously charged. This can occur for various reasons, such as returning a product, canceling a service, or issuing a credit for a mistake or error.

To process a refund, the merchant initiates the transaction through their payment processor. The transaction will appear on the customer’s credit card statement at first being charged and then as a refund. The merchant will be charged the payment processing rate for the amount that was initially processed. The merchant may also be charged a nominal fee for processing the refund.

It’s important to understand that once a transaction has been settled, the merchant has no other alternative but to process a refund, according to card network guidelines. Before initiating a refund, there are a few steps the merchant should be aware of:

• The vendor is still charged the payment processing rate by the merchant service provider for the sale that was authorized. This is because the transaction has gone through and is at the next stage, where it is open to dispute from the client. From the perspective of sale and payment processing, that step is complete and subject to the processing fees.
• The customer’s funds are in limbo as the refund is considered a separate transaction and is processed as an independent, second offsetting sale. All this means is that the money is first withdrawn from the clients account, and upon completion of the refund process, they are provided the equivalent amount of refund. How long these steps usually take are a source of annoyance for some customers, for which the consumer may also be subject to credit card interest and fees.

What is the difference between void and refund?

The difference between void and refund of the transaction is based simply upon the criteria of whether it has undergone step two of the credit card transaction process – was it is settled or not. A void is a type of transaction that cancels a credit card payment before it is settled, while a refund is a transaction that returns money to a customer after a transaction has been settled.

Here is a breakdown of the key differences between voiding a transaction and issuing a refund:

• Timing: A void must be initiated before a transaction is settled, while a refund can be issued at any time after the transaction has been settled.
• Purpose: A void is typically used to cancel a transaction that was made in error, such as when a customer realizes they were charged twice for the same item. A refund, on the other hand, is used to return money to a customer for a variety of reasons, such as returning a product or canceling a service.
• Effect on the customer: When a transaction is voided, the customer’s credit card account is not affected, and a fully authorized, the charged transaction does not appear on their statement. When a refund is issued, the customer’s credit card account is credited with the refund amount, and the transaction will appear on their statement as a credit.
• Fees: Merchants may be charged a fee by the merchant account provider for issuing a refund, but they generally will not be charged a fee for voiding a transaction.

How long do voided payments and refunds continue to show on a customer’s accounts?

Typically, a voided transaction will not appear on a customer’s credit card statement at all since it is a cancelation of the payment before it is settled. However, it’s possible that a record of the attempted transaction may appear on the statement, with a notation indicating that it was voided. The typical expected timeline for such voided transaction to appear on the statement is within 24 hours.

A refund, on the other hand, will appear on a customer’s credit card statement as a credit. The length of time that the refund appears on the statement will depend on the billing cycle of the credit card issuer. For example, if the refund is issued during the same billing cycle as the original transaction, it may appear on the same statement as the original transaction. If the refund is issued after the billing cycle has closed, it will appear on the customer’s next statement.

In general, it’s a good idea for merchants to keep records of voids and refunds for their own accounting purposes, even if they do not appear on the customer’s credit card statement. This can help with reconciling accounts and tracking financial transactions.

Conclusion

Once a transaction has been processed, it is not yet deposited into the merchant’s account – the funds are simply reserved on the customer’s account as part of the issuing bank’s duties in a credit card transaction. The funds are only deposited once the transaction is settled once the merchant processes a batch. Voiding a sale is the action of stopping the transaction from being settled. If a merchant needs to void a transaction but has sent the batch for settlement, the only alternative is to process a refund. Merchants generally prefer to void transactions rather than process a refund since a voided transaction isn’t charged a processing fee and involves less hassle for their customers.