The Truth About Payment Reversals: What Your Bank Can and Cannot Do

With technology making things more convenient, many customers are now going cashless and prefer to pay using their cards – credit or debit. However, no matter how handy bank cards and online banking are, not all transactions go smoothly.

This is where payment reversal comes to play: any transaction that sends a charge back to the cardholder’s bank. Continue reading below to learn more. 

Can a Bank Reverse a Payment?

Yes. In most cases, banks can set up a reversal for any payment made on your debit or credit cards – even if the transaction was settled or not. 

Payment reversals can be initiated by the cardholder, merchant, financial institutions that distribute the card and acquire the charges, or card association.

Types of Payment Reversals

To understand how payment reversals work, it’s necessary to know what payment reversal you need as a customer. There are three types of payment reversals: 

Authorization Reversal

An authorization reversal is a payment reversal that can be processed right away. Businesses made it their best practice to set up pre-authorizations before payment is entirely processed by an ACH Automated Clearing House (ACH) or wiring network. 

Preauthorizing payments became vital to the point of sale (POS) process – whether online or offline. This step ensures the cardholder has enough account balance to cover the order total, and it gives time for the business owners and employees to cross-check order details. 

Authorization reversal works best for the following situations: 

• if a buyer needs to quickly change something about their purchase (i.e., size, item, shipping address, payment method) 
• if a customer wants to cancel their entire order
• if a consumer was charged more or less than they were supposed to be
• if the transaction was fraudulent or unauthorized

This method is the cheapest, fastest, and most convenient way of canceling a payment for customers and business owners. 

You no longer have to settle interchange fees as a merchant since the transaction is still incomplete. Customers would not have to worry about waiting days for the amount returned to their account. 

Note: Authorization reversals work only for ACH or wire transfers. Orders completed through Real-Time Payments are excluded. RTP transactions are considered instant payments, which means all charges are definitive and irreversible. 

Refund

Another type of payment reversal is a refund. It is a new and separate transaction that takes funds from the account balance of the merchant and returns it to the cardholder.

Refunds are necessary when a customer requests payment reversal, but the payment is already settled. A refund is best initiated in the following scenarios: 

• the customer no longer wants the item/s
• they disliked what they ordered 
• when the item is out of stock, but the payment is already completed

Somehow, refunds are not favorable or practical for most business owners as they would have to pay interchange fees. 

Chargeback

If the two types mentioned above are not applicable, you must resort to the most expensive and time-consuming type of payment reversal – the chargeback.

According to the Fair Credit Billing Act of 1974, financial institutions that serve as creditors should provide a chargeback process to protect customers against unfair or incorrect billing methods. 

While this is helpful to consumers, this type of payment reversal puts business owners at many disadvantages. When facing a chargeback, they have to pay for related fees, lose revenue, and file a dispute. It uses and wastes their money, resources, and time. 

Payment Reversal Timeframe

It depends on what type of payment reversal was requested for your transaction. Generally, authorization reversals are processed within 2-4 business days. 

More time is needed to complete a refund since merchants usually need to wait for the return of the items ordered. It can take days or weeks, depending on the shipping time. However, some businesses now offer returnless refunds to save on shipping costs and offer a more customer-centric service. 

On the other hand, chargebacks can take up to 90 days since proof-gathering and investigation need to take precedence to identify if the amount for the reversal should be sent back to the cardholder. 

Tips on How to Avoid Payment Reversal

Payment reversals are a pain in the neck for merchants. But there are ways to reduce encountering any payment reversal. For example: 

Tip #1: Pay Attention

Make sure to double-check all necessary details before they are submitted. Faultless transactions lead to a higher chance of successful POS. 

Tip #2: Attend to Authorization Reversals Quickly

Before you incur many fees and the simple authorization reversal becomes a chargeback, reverse and process it immediately. 

Tip #3: Add Additional Security Measures

More often than not, fraud charges become a reason for chargebacks. Try to reduce this by investing in extra security measures. 

Wrap Up

Payment reversal seems like a concept that’s super easy to understand, but it’s a lot more than that. Whatever form it may take – authorization reversal, refund, or chargeback, it always affects both a business and a customer.