Payment Reversal Explained: What Is it and How Does It Work?

Experiencing payment reversals can be extremely frustrating for a business owner. Receiving payments for goods and services is the end goal of every commercial enterprise. Having those payments reversed can thus create a host of problems. The reduction in revenue is but one.

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In this article, we’ll explore what payment reversals are and why they happen. We will go deeper into the different types of payment reversals and finally, we will look at how you can reduce them in your business.

What Is a Payment Reversal?

A payment reversal is the return of funds to a payer. This can happen no matter the payment method, and there are a variety of reasons. Typically it is initiated by the payee—the person receiving the payment (e.g. the merchant)—or the payer’s bank (e.g. the customer’s issuing bank).

A payment reversal can be a significant setback for a business. Your business’s bottom line can take a serious hit, and in some cases, it may also lead to charges being levied against the account of the business.

Why Do Reversals Happen?

There are many reasons why a payment reversal may occur. The most common ones include:

An incorrect or invalid account number was used

Most commonly, reversals happen due to an incorrect or invalid account number being used. This can be due to human error or due to fraudulent activities.

If you are processing payments manually, double-check that the account number is correct before you input it. If you are using an automated system, consider investing in software that can verify the accuracy of account numbers.

The customer disputed the charges with their bank

Often customers will contact their bank to dispute charges. This can happen if they feel they have been overcharged if the goods or services were not as described or if they did not receive what they paid for.

There was fraud involved

Fraudulent activities can also lead to payment reversals. For example, if a customer’s credit card is used without their permission, they may dispute the charges with their bank.

To reduce the risk of fraud, verify the cardholder’s identity before you process their credit card payments. You can do this by asking for identification, such as a driver’s license or passport. You can also verify their identity using their credit card’s security code (CVV).

The payment was for a recurring transaction, and the customer has canceled the service

If you offer recurring services, such as subscription-based products or membership fees, reversals may occur if the customer cancels the service. In these cases, the customer may contact their bank to request a refund.

To reduce the risk of reversals, make sure to clearly communicate the terms of your recurring services to your customers. This way, they will be aware that they will not be able to obtain a refund if they cancel the service.

What Are the Types of Payment Reversals?

There are four different payment reversal types that every merchant should familiarise themselves with. Understanding the type of payment reversal means you can work to reduce their occurrence in your business.

Chargebacks

A chargeback is a type of payment reversal that is initiated by the card issuer (i.e. the customer’s bank). It can occur for various reasons, but typically they happen because the customer disputes the charges. Common reasons for this may be:

• They were unaware of the charges
• They did not receive the goods or services that they paid for
• They feel that they were overcharged

If a chargeback is filed, the card issuer will investigate the transaction. If they find it in favor of the customer, the original credit will be reversed to a debit that goes back to the customer. Merchants will then have the amount withdrawn from their account and also be charged a fee, which is typically around $15. Sometimes more. 

Authorization reversals

An authorization reversal is when a customer contacts their bank to cancel a transaction that has gone through the authorization request but is not yet processed. This pre-authorization limbo is standard in the ACH network process. An authorization reversal request may happen if the customer changes their mind about the purchase or believes they were charged the wrong amount.

As with the chargeback type of reversal, the card issuer will investigate the transaction if an authorization reversal is filed. If they find it in favor of the customer, the funds will be reversed back to them. The amount is then withdrawn from the acquiring bank account, and a reversal fee is charged. Which, again, is most often $15.

Refunds

Unlike the chargeback and authorization reversal, a refund is a type of payment reversal that the merchant initiates. Rather than the issuing bank (customer bank) trying to reverse the payment, the acquiring bank (merchant’s bank) pro-actively processes it. The original payment is kept, and the refund is processed like a separate transaction.

Refunds commonly happen when a customer cancels their order or is unsatisfied with the product or service they received. Unlike chargebacks and authorization reversals, there is no $15 fee. However, merchants still lose other fees already paid, such as interchange fees.

Retrievals

A retrieval is similar to a chargeback, but it is initiated by the merchant (rather than the card issuer). This can happen when a customer disputes a transaction, but the merchant does not agree that a refund is warranted. In this case, the merchant can request a copy of the customer’s sales receipt from the card issuer in order to verify the purchase.

If the card issuer finds it in favor of the customer, the funds will be reversed back to the customer’s account. The amount is then withdrawn from the merchant’s account, and a retrieval fee is charged. But the retrieval fee can sometimes be a little less. On average, merchants are charged between $10-15.

Chargebacks vs. Retrievals: The Key Difference

The key difference between chargebacks and retrievals is who initiates the process. Chargebacks are initiated by the card issuer, whereas the merchant requests retrievals.

Another difference is that retrievals typically have a lower fee than chargebacks. Chargebacks usually have a flat $15 fee, while retrievals can range a little more depending on the payment processor. On average, retrieval fees are somewhere between $10-15 fee.

Finally, retrievals are only available for a limited time after the transaction is processed, while chargebacks can be filed up to 540 days after the transaction.

What Are the Consequences of Payment Reversals for Merchants?

Payment reversals can have a significant impact on businesses, especially if they happen frequently. The fees charged by card issuers can quickly add up, and it can also damage your reputation if customers see that you have a lot of chargebacks.

Beyond reversal fees, additional fees are lost. Interchange fees, for example, are taken by the card networks (Visa, Mastercard, etc.) whenever a transaction is processed. That means merchants lose more than $15 in penalties.

Some payment processors will also impose restrictions on merchants who have a high number of chargebacks. For example, they may require you to pre-authorize all transactions over a certain amount or only ship orders to the billing address.

How to Reduce the Risk of a Reversal

Although there are a few different types of payment reversals, the tactics to prevent them are all the same. In a nutshell, merchants need to tighten communication and fraud prevention activities.

Better communication

Many reversals are requested when customers are shocked by their charges. Reinforcing what they can expect throughout the sales process can help reduce surprises and limit reversals. This includes:

• Listing the total charges before checkout
• Sending an order confirmation email after the purchase, which confirms the projected clearing date
• Sending notifications before payments are taken
• Using clear billing descriptors (e.g. add your business or brand name, URL, and a brief but clear product description)
• Using a surface trace audit number for all transactions. This number should then go on all communications about that transaction.

Clear communication and warning ahead of transactions also limit canceled transactions due to insufficient funds.

You should also clearly state your refund policy to customers, both on your website and receipts.

Reduce fraudulent activities

Another major reason for payment reversals is fraud. By using tools like AVS and CVV verification, you can verify that the customer is who they say they are and that they’re using a legitimate card. This can help to prevent situations where someone makes a purchase with a stolen credit card and then requests a refund later.

Other fraud prevention tactics you can use include:

• Checking shipping addresses against the billing address provided by the customer
• Reviewing large or out-of-the-ordinary orders for fraud
• Keeping an eye out for red flags like multiple returns or refunds, the same card used for multiple orders, etc.

Friendly fraud is expected to rise. Vigilance is the best strategy to fight it.

The Bottom Line

Payment reversals can be a major headache for both brick-and-mortar and eCommerce businesses. While they will always be a part of business life, understanding what they are and taking steps to prevent them can minimize their impact and save a ton on fees.

The bottom line is ultimately the biggest concern for SMBs. Your credit card processing provider will play a big role in helping you offer the best payment services while keeping your processing costs low.

At Payment Depot, we don’t markup interchange rates, and we don’t charge a percentage on your sales. Instead, we offer wholesale rates and give you access to direct, real-time interchange rates. Our membership model is structured on a month-to-month subscription and can be canceled at any time.

Learn how Payment Depot can save you credit card processing fees today.

FAQs

Now that you’re up to date on what they are and how to avoid them, let’s address a few of the most frequently asked questions about payment reversals.

How long does a reversal payment take?

The time it takes for a reversal to be taken from your merchant account and returned to the customer’s card issuer can vary. In most cases, it happens within a few days. However, if there are any complications or disputes, it could take longer.

How many reversals are too many?

As mentioned, too many reversals can send a red flag to your payment processor and could lead to stricter terms. There’s no specific number of reversals that will trigger penalties from your payment processor. However, having a high chargeback rate (the number of chargebacks you have divided by the total number of transactions) is a major concern.

Generally speaking, a chargeback rate above 1% is cause for alarm. If your chargeback rate is consistently above this threshold, your payment processor may start to impose restrictions. This could include requiring pre-authorization for all transactions or limiting the types of cards you can accept.

How do I dispute a payment reversal?

If you believe a payment reversal is unwarranted, you have the right to dispute it with the customer’s card issuer. To do this, you’ll need to provide documentation that proves the charge was legitimate. This might include a signed contract, delivery confirmation, or other proof that the customer received what they paid for.

The card issuer will review your evidence and determine if the reversal should stand. If they side with you, the funds will be returned to your merchant account or acquirer. If they side with the customer, the reversal will go to their bank account.

Is a reversal automatic? Or do I have a chance to dispute it before the charge is taken?

In most cases, you’ll have a chance to dispute the charge before the funds are taken from your account. This is why it’s important to keep an eye on your bank statement and merchant account and act quickly if you see a potential reversal.

If you don’t dispute the charge within the specified timeframe, the payment will likely be reversed automatically.

Can an approved reversal be reversed?

If the customer’s bank approves the reversal, it’s final, and you won’t be able to get the funds back.