types of payment reversal

The Three Main Types of Payment Reversals

Payment reversals are not the ideal scenario, but merchants sometimes have to deal with them. There are times when mistakes happen and there are also times when the merchant does not meet the standards that the customer has paid for, in which case the customer demands their money back. In addition to this, merchants can also request payment reversals to satisfy unhappy customers if errors occur on their end. This is considered a refund. It’s important to note that this is not the only type of reversal a merchant or customer can utilize.

In this article, you’ll find a detailed breakdown of what a payment reversal is, as well as the three types of payment reversals that exist.

What is Payment Reversals?

An electronic payment reversal occurs when a merchant returns funds to the cardholder who made the original payment after reversing a transaction. Not all payment reversals are the same; some can be very costly for merchants, whereas others have little impact on them.

Customers, merchants, networks, issuing banks, and acquiring banks can reverse payments in a variety of ways, including refunds, chargebacks, and authorization reversals.

In some cases, reversals can actually be beneficial. The merchant maintains the consumer’s satisfaction, while minimizing the risk of obtaining a more costly and detrimental reversal in the future.

While sensible guidelines, practices, and customer service can help you prevent all three types of reversals, it is chargebacks you should really aim to prevent. It could be costly for you to deal with them, and continued chargebacks can impact your standing with the bank.

If you use authorization reversals or refunds at the appropriate time, you can reduce the likelihood of chargebacks and reduce the complications that may arise from payment disputes. 

But to understand how these reversals differ, we must first understand how they are similar.

The Three Types of Payment Reversals

Payment reversals fall into three categories: authorization reversals, refunds, and chargebacks. If you can’t avoid them, you must minimize the damage done to the firm when they do occur. However, some payment reversals are more damaging than others. Keep reading to learn how they differ, and which one you should always stay away from:

Authorization Reversals

An authorization reversal takes place when a transaction is interrupted before it finishes processing. There is a possibility of submitting a transaction with incorrect information, which could cause complications. If there is a problem with a transfer, the receiving bank can be contacted before the transaction is completed to cancel it. This is not the ideal outcome, since it can lead to further issues in the future. This method works quite well when you consider that over 1 billion credit card payments are made every day.

Furthermore, this kind of payment reversal is not without its advantages. 

Because both accounts will not be negatively impacted, this is better for customer satisfaction. In the event of an incorrect transaction, customers are often happier if their account is never debited than if a transaction is completed and then reversed. Additionally, it creates trustworthiness because you can communicate with the consumer immediately and explain the issue to them. In the end, you have no losses in terms of revenue because no amount has left either account.  

Refunds

The concept of a refund is something that many people understand and have even experienced. The customer wants their money back because they are not satisfied with the service or the item they bought. A refund occurs after the transaction has been fulfilled, in contrast to the Authorization Reversal which happens during a transaction.

Instead of stopping the transaction midway, the merchant initiates a new transaction that goes from the merchant to the customer asking for a refund. This depends on the policies of the business but usually, the full amount is transferred back to the customer. 

The most frustrating part about refunds is that you will lose not just the sale, but also the costs you paid for the transaction, such as interchange fees and the cost of return shipping. Moreover, as online marketplaces continue to redefine and fulfill consumer satisfaction, merchants may soon expect “no-return refunds,” i.e. they will lose any product they have already paid for.

Chargebacks 

The most problematic of all three reversals is the chargeback. This is the final alternative when the consumer and the issuing bank are unable to address a problem through other methods. 

This is the most damaging for retailers since it comes with all of the bad effects of other electronic payment reversals, such as lost sales income, merchandise and shipping expenses, and interchange fees. Furthermore, chargebacks will result in chargeback fees (a fee that covers administrative costs), a tarnished reputation, and the possible cancellation of your MID (merchant identification number), rendering your business ineligible for a standard merchant account and preventing it from processing payment cards.

Despite the fact that there are no good kinds of payment reversals, this one is definitely the worst for a merchant to experience.

Conclusion

Payment reversals can impact your business dealings greatly, so it’s best to avoid them at all costs. Reversals can be avoided by merchants submitting transactions on time, avoiding processing mistakes, having clear billing descriptors, and using fraud prevention methods effectively.

To avoid payment reversals, make sure your transactions are filed promptly. After waiting just a few days, the cardholder might discover they do not have sufficient funds after believing they had already completed the transaction, or they may forget what was charged and file a chargeback. Chargebacks can be avoided by reversing authorizations and offering reimbursements, but only if customers report the problem. Reversing authorizations can improve your reputation.

Ultimately, you want to be honest with your transactions in order to prevent these situations.

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