What are payment reversals and how to avoid them

The e-commerce market is expected to total more than US$8.1 trillion by 2026, up from US$6.3 trillion in 2023.¹ That’s why it’s more important than ever to understand the ins and outs of payment reversals.

Payment reversals happen when your buyer files a complaint with their bank. In this guide, we’ll answer questions like:

• What is a payment reversal?
• What are the major types of payment reversals?
• How to avoid payment reversals?

Learn what you need to do when a bank reversal has been filed against you, plus why these reversals can occur and how to prevent them from happening in the future.

Equipped with the right tools and strategies, you’ll be able to confidently handle payment reversals, take control of your transactions, and secure your business' success in the dynamic world of digital payments.

What does payment reversal mean?

A payment reversal or bank reversal happens when a request is made for a merchant to reverse a transaction and return the funds back to the method of payment. This request may come from the customer or the bank and is usually filed because of suspected unauthorised use of a bank account.

Payment reversals can pose significant challenges for merchants by disrupting operations, straining financial resources, and potentially damaging a merchant's reputation — that’s why it’s important to address and mitigate these issues before it’s too late.

Why might a payment reversal occur?

So, what is a reversal transaction? A reversal may occur if a customer or their bank suspects or discovers that someone has accessed the customer’s account or financial information without their permission. The following events may trigger a reversal:

• The buyer's bank account was used without their permission to purchase an item fraudulently.
• The buyer does not recognise the transaction.
• The item that was purchased didn’t arrive.
• The buyer was charged twice for the same item.
• The item that was purchased is no longer in stock.
• The buyer changes their mind and no longer wants the purchase.
• The buyer claims the product is defective or has discrepancies between advertised and actual product attributes.

Types of payment reversals

When it comes to reversing transactions and returning funds, not all payment reversals are the same. As a merchant, there are three major types of payment reversals you should know about:

• Authorisation reversals
• Refunds
• Chargebacks

Authorisation reversal

An authorisation reversal is a way to reverse a transaction. That’s because it happens quickly after a transaction is initiated and before money has been withdrawn from the customer’s account and into the merchant’s account.

In other words, an authorisation reversal allows the merchant to reverse the transaction without issuing a refund and paying interchange fees that would otherwise occur after a transaction is fully settled.

By promptly responding to a buyer's request for an authorisation reversal, merchants can demonstrate their commitment to customer satisfaction and expedite the resolution process.

There are many reasons why this type of payment reversal may occur, such as if a customer:

• Is accidentally charged the wrong amount or more than once for the same purchase
• Changes their mind and wants to cancel their purchase
• Wants to change their payment method

Payment refund

Once a transaction is settled, the next option for a payment reversal comes in the form of a payment refund. This occurs after the transaction has been completed but before the customer has filed an official dispute.

During a payment refund, funds are taken from the merchant account and credited as a new or separate transaction back to the customer’s original form of payment. In this case, the merchant is required to pay interchange fees on the refund.

It’s important to note that a payment refund is not instantaneous like an authorisation reversal. This process requires the credited funds to settle and clear, which, on average, can take anywhere from three to 10 business days.

Chargebacks

Finally, what is a chargeback reversal? A chargeback happens when a customer files a dispute regarding a completed transaction, requesting the issuing bank to reverse the payment. However, chargebacks can only be filed with a card issuer (not the payment processor) and are only available to those who have made a purchase or payment with a credit or debit card.

That said, chargebacks are initiated with and handled by the credit/debit card issuing bank, so the process is confined to the issuer’s regulations and time frame.

Chargebacks can be a worst-case scenario for merchants as they involve the issuing bank reclaiming funds from the merchant's account. This results in an immediate loss of funds, disrupting cash flow and straining the business’ cash flow. Not only that, but high chargeback ratios can also damage a merchant’s reputation, leading to increased scrutiny, penalties, or even account suspensions.

How to reduce payment reversals

Understanding how to reduce payment reversals is key to preventing them later. The good news is there are ways to keep claims and chargebacks to a limit in your business by implementing various prevention methods, such as:

Submitting transaction information properly

By ensuring that all transaction information is correct — from the buyer’s name to the product item and price — merchants can establish clear expectations and avoid discrepancies that might trigger a payment reversal.

Using clear billing descriptors

This can help buyers recognise and remember their transactions accurately, minimising the chances of unwarranted disputes or chargebacks. For instance, if the company name is “Julie’s Jewels”, the merchant name for the transaction should be something similar.

Processing authorisation reversals quickly

When merchants promptly address authorisation reversals, it ensures that funds are returned to the buyer's account in a timely manner, which can help increase customer satisfaction.

Confirming the projected clearing date

By communicating the expected date when funds will be available, merchants can ensure transparency and provide clarity to both themselves and their customers.

Using incremental and estimated authorisations when appropriate

Incremental and estimated authorisations are useful when the total cost of a purchase is uncertain or subject to change. Instead of authorising the full amount upfront, it allows merchants to obtain authorisation for partial amounts initially and request additional authorisations as the transaction progresses.

Using a surface trace audit number

This unique identifier, often associated with card-present transactions, provides an additional layer of verification and tracking to help increase security.

Linking your authorisation request to future transaction messages

When a merchant submits an authorisation request, it’s beneficial to establish a connection between that initial request and subsequent transaction messages. This allows for seamless communication with customers regarding the status, updates, or changes related to their transactions.

Manage bank reversals and save revenue

One of the best way to reduce disputes and chargebacks is to follow security and seller protection guidelines and review orders for suspicious activity or fraud.

Here are some steps you can take to help identify and prevent potential risks of fraud:

• Analyse transactions and orders for potentially suspicious activity: Make note of transactions that include unusually large orders or situations where the customer requests to modify the shipping address after payment.
• Clearly indicate your company name on invoices: This helps customers easily recognise a charge or settled transaction.
• Reach out to the customer before the order ships: By confirming order information, you allow the customer to catch a mistake or error.

Discover more tips to identify fraud and help prevent cases based on Unauthorised Transactions.