Payment Reversal

Payment reversal refers to the action initiated in situations where funds from an initiated transaction are returned to the cardholder's bank account. This process can also be referred to as credit reversals or payment reversals. Payment reversals can take the form of refunds, authorization reversals, or chargebacks.

Either the company or the customer can initiate a reversal request. Payments may be reversed for various reasons, such as an erroneous purchase or dissatisfaction with the product or service delivery. Reversing payments can benefit a company by enhancing its brand reputation, increasing customer satisfaction and retention, and potentially leading to revenue growth.

Payment reversals are transactions that return the funds credited in an earlier transaction. They occur after payment has been transferred between two parties, with the bank (or processor) reversing the original transaction and returning the funds to the customer's account.

There are various reasons for payment reversals, including disputed charges, fraudulent transactions, and errors. Reasons might include late delivery, damaged or defective goods, incorrect billing, or hasty customer purchases. Other reasons include fraudulent purchases (unknown or by a family member), technological glitches, misconceptions about product descriptions, or dissatisfaction due to incorrect descriptions. While payment reversals disrupt the normal flow of business, they are crucial for protecting both customers and merchants from potential losses.

For customers, payment reversals safeguard against erroneous or unauthorized transactions. For merchants, they help mitigate reputational loss by allowing them to correct mistakes, mainly if misleading information was provided or errors occurred in order fulfillment. Reversals also highlight the importance of proper safety measures. By addressing these issues, companies can maintain their public image and build a loyal customer base, ultimately driving sales and revenue growth.

Generally, the reversals are categorized into three types and they are:  

#1 - Authorization Reversal

There shall be options given to a customer to stop a transaction before it transfers the funds. The sales outright are canceled here before the exchange of money happens. They are possible, especially if the seller takes two to three days or any delay period for taking an order. Here, the issuing bank sends an authorization to the customer, and the payment processor that necessary funds are available, and an authorization hold is placed on the transaction's amount. The funds are then kept in the buyer's account and cannot be used. Still, the merchant would receive ten customers requesting an authorization reversal, and the acquiring bank does so, voiding the sale and preventing transactions from going through. 

#2 - Refund 

Customers can become dissatisfied with the products due to their appearance, quality, or durability. In such cases, the buyers will initiate a return request, and the payment will be returned to them. This is called refunding. It is not undoing a transaction but instead sending back the credited amount as a new transaction.  

#3 - Chargebacks

They are charges on debit or credit forcefully reversed by an issuing bank. It happens when a cardholder claims the initiated transaction as fraud or abuse. They are tools used to resolve credit card payment disputes and benefit the cardholders. Chargeback fees on merchants can be financially damaging. 

Let us look into some examples to understand the concept better:

Example #1

Imagine Dan is a customer who purchased shirts from a website. The product description mentioned that the fabric was made of cotton. However, upon receiving the shirts, he realized they were made of polyester instead. He did not like the look, feel, or quality of the material, so he decided to return the shirts and initiated a refund request. The company accepted the request and sent back the amount he paid.

Example #2

Suppose Sarah ordered a new laptop online, expecting it to be delivered within a week as promised. However, two weeks had passed, and she had yet to receive an update on the shipment, so she contacted the seller and initiated a refund request due to the delay. The company acknowledged the issue and processed a payment reversal, returning the funds to Sarah's credit card account. This payment reversal resolved the issue promptly, maintaining customer satisfaction and trust in the company's service. 

Given below are steps that help to avoid the reversal of payments

• Reduction of errors - Companies shall have systematic procedures to follow when delivering the products. This also helps them double-check the transactions before submission. Manual typing errors shall also be monitored to avoid silly mistakes that make the customer unhappy and put in additional efforts to rectify them. 
• Prompt submission of transactions - cardholder transactions shall be sent for clearance as soon as they are received. Delays may lead to customer dissatisfaction and may lead to them withdrawing the transaction or order. They may also forget the purchase made and initiate a chargeback. This can be avoided by prompt submission. 
• Confirmation of dates - The industry standard practice includes informing the purchaser of the estimated delivery date. The details mentioned in the communication shall include the date and costs involved in the purchase. Hence, the customer expects the order and is not dissatisfied due to the delivery delay. 
• Avoid misleading information - provision of complete and transparent information is critical to customer satisfaction. The customer purchases what they see on the product description and hence has to be true to their roots. This avoids disputes.
• Implementation of fraud detection and prevention measures - In the age of digital media and transactions, it is only fair for companies to keep measures against fraud in place. This may involve simple steps such as entering a captcha or clearing a human or robot test. The system shall identify unusual transactions.

Below are some of the differences between the two concepts.

• Payment reversals are transaction funds reversals initiated by the customers.   Refunds are an act of returning the money through a new transaction rather than undoing the same transaction. 
• Reversals of payments may be due to customer dissatisfaction, erroneous purchases, or other reasons. Refunds are also initiated due to customer dissatisfaction. 
• Reversal of payments are transaction funds reversed after they have been completed. They stop the problem early and cost less.   
• Refunds can happen before or after the transaction takes place.