Payment reversals can drive business owners insane, especially if you’re not sure how to handle them. Here, we’ll tackle the specifics about what they are, what causes them, and how long it takes to rectify the situation. If you want to learn how payment reversals affect your business and what to do about them, keep reading.
A payment reversal is a chargeback that occurs when a customer disputes a charge on their credit card and the card issuer reverses the transaction. It can be initiated by any of the parties in the transaction, including the cardholder, the merchant, and the issuing bank.
Payments Reversals Table of Contents
Typically, the customer contacts their credit card company, files a dispute, and the credit card company reverses the transaction with the merchant. The customer’s account is then credited for the amount of the disputed transaction, and the merchant’s account is debited for the same amount.What are the Three Types of Payment Reversals?
Payment reversals are categorized into three different types. Each one is unique and the first two are less damaging to your business than the third. Here’s an overview:
Authorization Reversal
This type of reversal is best described as a “quick fix” to reverse the transaction before it is completely processed. It can be performed immediately after the purchase is made, and before any real money has changed hands. This is generally the best scenario for both the customer and the merchant.
Authorization reversals are typically used when an error is made during the transaction process. For example, the amount of the transaction could have been entered incorrectly. As a merchant, you can call your bank and immediately stop the transaction, or void it, so you can re-do it. This also happens when a customer changes their mind soon after making a purchase.
In an authorization reversal, the customer and merchant are generally on good terms and have good communication with one another. When your business handles payment reversals in this way, you should have happier customers and less impact on your bottom line. Since the transaction never officially goes through, you also avoid it messing up sales and refund data.
Refund
This is the most commonly known type of payment reversal. Your customers and staff are likely very familiar with the term and how it works. For the record, a refund is a transaction in which the merchant sends money to the cardholder’s account. It is NOT a reversal of the original transaction since that transaction has already been processed and settled. However, a refund is generally processed for the exact amount of the original purchase.
Refunds follow the same process as normal transactions, meaning they go through the settlement and clearing phases. This can take a couple of days, which can be unsettling for your customers. Using a return authorization will allow the customer to see the refund pending in their account, even though it’s not yet fully processed. It may seem like a minor detail to a merchant but can make a big impact on the customer’s perception of your business.
Chargeback
This type of payment reversal is a forced reversal by the cardholder’s issuing bank. It takes the money directly out of the merchant’s account and puts it back into the customer’s account. These types of payment reversals often happen without the merchant knowing about them, which is concerning for obvious reasons.
Chargebacks can have a big impact on your bottom line and are more costly than refunds or authorization reversals. Too many chargebacks can even cost you your merchant account! Many payment processors will suspend or close merchant accounts that are over their chargeback threshold.
A chargeback is initiated when a customer calls their bank to dispute a transaction, rather than coming straight to the merchant for resolution. As a business owner, you can’t do much about it once it’s processed, other than dispute it and have excellent documentation to prove your case. Many chargebacks are the result of poor customer service or communication, but can also be fraudulent, which is an even larger concern.
What Causes Payment Reversals?
A payment reversal can occur for a variety of reasons. Sometimes, there is a simple oversight on the part of the merchant. Other times, it is more complicated than that. The customer may have made a purchase they didn’t like, or the charge may have been for something that was not delivered.
Here’s an overview of some key reasons that payment reversals occur:
- The customer may have been charged an incorrect amount
- The customer may not have authorized or consented to be charged
- The card was charged twice for the same purchase or the same amount
- The customer doesn’t recognize the charge
- The product or service may not have been delivered in accordance with what was promised by the merchant
- A product or service might not be as described on its website or other marketing materials
- A product might be faulty or damaged upon delivery
- The customer, or someone else, is trying to commit fraud
Some of these can be difficult to manage if you’re the merchant in the situation. For example, if a customer doesn’t like the product or has buyer’s remorse from their purchase, there’s not much you can do. In the other instances, there are a number of steps you can take to protect your business from an overabundance of payment reversals.
How to Prevent Payment Reversals
Being a great merchant who is easy to contact is the first step in avoiding payment reversals. When customers feel like they can trust your brand, they are more likely to reach out to you with their concerns, rather than initiate a payment reversal. Here are some tips on how to limit your payment reversals as much as possible.
Be Easy to Contact. The first step to pretty much anything in business is clear communication. If you clearly communicate on your website, in your online store, and on your payment receipts, customers will feel more comfortable contacting you. Be sure to have your returns and exchanges policies prominently displayed in all these areas.
Offer Exceptional Customer Service. When a customer reaches out to your business with a concern, respond to them in a timely manner. We live in a world of instant gratification, so the time in which you respond to concerns is critical.
Be Transparent. Be sure that your advertising is transparent about the products you sell. The product received by the customer should be exactly as described on your website. In other words, under promise and over deliver (not the other way around)!
Optimize Your Delivery Processes. Review your order fulfillment process and find ways to improve it. The more efficient your delivery is, the less likely a customer will be to dispute the transaction. As mentioned previously, in this Amazon age, customers want their products delivered as quickly as possible. Hiccups in that process can cause payment reversals.
Use Optimal Security in Your Payment Gateway. Most payment processors offer a variety of security features for their clients. Many merchants skimp in this area because customers don’t like too much “friction” during the checkout process. Finding a balance between the two is important. Using AVS or CVV security features can help protect your business and customers from potential fraud, which in turn can reduce payment reversals.
Settle Transactions Quickly. Ideally, you should settle transactions within 24 hours of when they are processed. This helps customers by deducting the funds from their account immediately, rather than waiting several days or weeks. By that time, the customer might’ve forgotten about the purchase and is more likely to initiate a payment reversal.
Use Clear Billing Descriptors. Have you ever seen a charge on your card statement that you didn’t recognize, only to find out it was legitimate? This is often because the billing descriptor on the credit card statement is confusing to the customer and can result in payment reversals. Be sure that your billing descriptor conveys the name of your business or online store so the customer will see it and recognize it.
Conclusion
Payment reversals can be a pain for your business but can be reduced by following the strategies above. Always put yourself in the customers’ shoes and consider their experience from the other end of the computer. The more you communicate and offer excellent service, the less likely they are to initiate payment reversals without your knowledge. If they trust you enough to come to you with a concern, you’re doing something right!
