The Three Types of Payment Reversals

Payment Reversals

Every merchant knows how their transaction process is supposed to work. The customer gives you money, and you give them your goods or services in return. It’s never ideal when merchants have to give money back to the customer, but of course it happens frequently and is sometimes unavoidable.

When you’re dealing with payment cards, there are three different ways that payment reversals can occur. Each happens for different reasons, with its own special implications for the merchant. What are the three types of payment reversals, and how can merchants minimize the impact reversals have on their revenue?

New call-to-actionPayment reversals are not all created alike. Some have minimal impact on the merchant’s bottom line, and others can be quite costly. A payment reversal isn’t always a bad thing.

When done early enough, a payment reversal can be minimally costly to the merchant, make the customer happy—and more likely to come back for repeat business—and eliminate the chance of receiving a more expensive and damaging form of reversal later on.

These are the three types of payment reversals:

  • Authorization Reversals
  • Refunds
  • Chargebacks

Good policies, processes, and customer service can help you avoid all three types, but of course the ones you really want to avoid are chargebacks. They’re the most costly by far, and they can harm your business in other ways as well.

By applying authorization reversals or refunds at the right time, you can avoid chargebacks and minimize the problems to your revenue and reputation that payment disputes can cause. But first, it’s important to understand how these reversals differ.

What are Authorization Reversals?

An authorization reversal is a payment reversal that can be performed immediately after a transaction, before settlement occurs and money has been withdrawn from the customer’s account. Essentially, it is an electronic communication to the issuing bank, sent through your payment processing system, which instructs them to back out a transaction that was just authorized.

If a customer makes a purchase and changes their mind a short while later because they want to return the item or use a different payment method, you may be able to process an authorization reversal instead of a refund.

This is preferable because you won’t have to pay interchange fees the way you would if you processed a credit to refund a fully settled transaction. If you have the option to provide an authorization reversal, it’s always the cheapest, fastest, and best option for giving the customer their money back.

What are Refunds?

It’s often the case that authorization reversal is not an option, because the customer decided to make a return or raise an issue after the transaction had already settled. In situations like these, you can provide a refund, which is processed as a new and separate transaction that takes funds from the merchant account and credits it back to the customer’s payment card.

Refunds have to go through the same settlement and clearing process as other transactions, which means the customer doesn’t always get their money back instantly. The merchant is also obligated to pay interchange fees on every credit transaction, the same as they would if they were processing a regular charge.

However, when a customer is unhappy, a refund is often the best (and sometimes only) way to resolve the situation to their satisfaction. For this reason, it’s always a good idea to have a generous return and refund policy and to offer attentive and compassionate customer service when a customer comes to you with a problem.

If you provide a refund and give them their money back, you can usually salvage the relationship with that customer.

The alternative, if you rebuff them, is that they might contact their bank, claim that you refused to resolve a legitimate complaint, and convince the bank to grant them a chargeback.

What are Chargebacks?

A chargeback is a forced payment reversal, initiated by the customer’s issuing bank, which takes money from the merchant and gives it back to the customer. Under the Fair Credit Billing Act of 1974, all payment card issuers must offer a chargeback process to remedy fraud and abuse. If a customer brings a valid dispute claim to their bank, a chargeback will result.

Download the eGuide, 4 Reasons to Hire a Chargeback Management CompanyChargebacks are most costly than refunds—they carry additional fees that the merchant must pay. That’s not the worst thing about them, though. The real danger with chargebacks is that they can cause you to lose your merchant account.

The major card networks task their acquiring banks with monitoring chargeback rates and establishing thresholds for “excessive” chargeback activity. This is done to prevent fraudulent and reckless merchants from abusing the system and causing consumers to lose confidence in the safety of payment card transactions.

When merchants exceed acceptable chargeback thresholds, their acquirers and payment processors may terminate their accounts. There are “high risk” processors that will deal with merchants caught in that situation, but they can be very expensive and sometimes unreliable.

Merchants can avoid chargebacks by taking the opportunity to provide authorization reversals and refunds whenever required—but this only works when the customer notifies you of a problem.

Other chargebacks may occur because the customer doesn’t recognize a charge on their bank statement. Clear merchant descriptors, with your phone number and website URL included, can help to avoid this.

Some chargebacks are the result of fraud and can be prevented with AVS and CVV matching, and anti-fraud tools like 3-D Secure.

When customers make false claims and obtain chargebacks that do not have a legitimate basis, this is called friendly fraud.

With the right evidence that disproves these claims, merchants can fight these chargebacks and win back their revenue.


There are situations in which each of these different payment reversal types will be required, but merchants should do everything in their power to avoid chargebacks. Authorization reversals and refunds may cost you some revenue, but they can’t threaten your very ability to process payment card transactions the way chargebacks can.

Every merchant needs a strategy for preventing and fighting chargebacks and the fraud that can lead to them. A big part of that strategy is knowing when to offer voluntary payment reversals to keep customers happy and avoid disputes down the line.

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