A Guide to Avoiding Payment Reversals

It doesn’t matter whether you’re a scrappy startup or a legacy enterprise: Payment reversals are a challenge for organizations of all sizes. So much so, in fact, that many companies even allocate a portion of their monthly budget to payment reversals. And it’s no wonder why: Not only are chargebacks a frustrating part of doing business—they’re expensive. The 238 million chargebacks recorded in 2023 cost an average of $165 each, according to recent data. And, unfortunately, depending on your organization’s services or products, you may have a higher likelihood of experiencing payment reversals.

The good news is that avoiding payment reversals is possible. This guide explores all aspects of payment reversal and solutions your organization can implement to minimize your risk.

Payment Reversals: What Are They and Why Do They Happen?

While a payment reversal can happen for a few reasons, a request by the cardholder is the action that initiates any chargeback from an issuing bank, acquiring bank, merchant or card network. Payment reversals on credit cards are not uncommon. Some reasons why payment reversal happens include:

• Unmet expectations: If consumers feel the product or service doesn’t match what they paid for or expected based on the description, they can submit a payment reversal request.
• Customer-initiated issues: Consumers may change their minds after purchase and no longer want to leverage the products or services.
• Fraudulent reasons: A consumer may reverse a payment in an attempt to make a fraudulent transaction, this is known as friendly fraud or first-party fraud.
• Incorrect charges: A payment reversal may occur as a response to the wrong amount of money being taken from the cardholder’s account.
• Missing information or duplicate transactions: If information is missing or incorrect in any of the many information categories required for a transaction, the charges may be reversed. Reversals may also be necessary in the event of duplicate transactions.
• Stock issues: In e-commerce transactions, items may sell out before they are delivered—so the consumer may need a refund for the unavailable products.

All payment reversals should be a concern for your organization and an opportunity to explore ways to optimize your processes. Payment reversals may indicate:

• Operational failings
• Product or service issues
• Inadequate safeguarding against fraud

Payment reversals go beyond the financial implications of your organization needing to return funds and pay associated fees. Depending on the reasons for the reversal, your business could face reputational harm and lose customer loyalty.

 

Types of Payment Reversals

There are three main categories of payment reversals: authorization reversals, refund reversals and chargeback reversals.

 

1. Authorization Reversal

Authorization reversal is reversing a payment before it has been fully completed. The Automated Clearing House (ACH) network is often slower to authorize than credit card networks, so pre-authorized transactions are conventional.

Authorization reversals can happen in various scenarios, including a merchant spotting a mistake in the amount keyed in or the consumer wanting to change cards or payment methods. Depending on the payment software you use, there is usually a way to stop the transaction from happening. The stop communicates to the issuing bank to reverse the authorized transaction.

In other instances, you may require the customer to pay a pre-authorized amount before they use or consume a product or service. For example, a hotel may ask for a deposit on a room before accepting a reservation. This pre-authorized payment is also known as a security payment. If the consumer does not spend the authorized amount, you must fully or partially refund them.

Remember that the longer the authorization takes, the more complex the reversal becomes. As the transaction clears through the payment process from the issuing bank to the card network and the acquiring bank, reversal fees become more expensive and complicated. Ideally, you want the funds to stay in the customer’s account when processing reversals so you can avoid interchange fees. This is generally referred to as voiding the transaction.

Rapid authorization reversals are cost-effective and fast. Reversals can happen before consumers even know, making this approach the most convenient and customer-centric way to cancel payments. Quick reversals also mean you won’t have to account for the arrival of a payment and return of funds on your balance sheet—something that’s particularly helpful when you process high volumes of transactions for your business.

Pre-authorized funds may take days to transfer from the customer’s account to your bank account. This delay occurs because the customer’s bank needs to authorize the transaction and specify the funds for the payment. The wait provides a window of opportunity to stop a transaction before money leaves the bank account.

 

2. Refund Reversal

Refund reversals are for payments where transactions have already been completed. Refunds often occur because consumers are unsatisfied with a product or service. If the opportunity has passed for an authorization reversal, a refund reversal is your next best option as an organization.

Instead of canceling a transaction, you pay the transaction in reverse. The acquiring bank is now paying the consumer or cardholder in a separate transaction. That means a refund is not a neutral agreement. You will have to pay transaction fees and lose the sale for services rendered or products sold. Still, a refund is preferable over a customer contacting their bank to get their money back.

 

3. Friendly Fraud

Friendly fraud, also known as first-party fraud, occurs when a customer willingly makes a false claim to reverse a payment. It can be particularly challenging for businesses, as it often involves legitimate transactions that are later disputed by the customer. To combat chargebacks resulting from friendly fraud, businesses must keep detailed records of all transactions, including receipts, communication logs and any other relevant documentation. Having a robust platform like Dex that makes these records visible and easy to manage can significantly improve your chances of winning claims against friendly fraud. Dex’s user-friendly interface and comprehensive record-keeping capabilities ensure that you have all the necessary evidence at your fingertips, making the difference between losing or winning claims.

 

4. Chargeback Reversal

Chargeback reversals are the worst-case scenario for your business. These reversals involve a customer contacting their bank to file a dispute against the transaction. A consumer may file a dispute if they believe fraud has occurred or if they never received an item or service they paid for.

Chargebacks are more than an inconvenience for your business. These reversals incur in additional chargeback fees and penalties from card networks.

You can dispute chargeback requests if you provide evidence that the consumer is wrong. A dispute can take weeks or months and cause a substantial administrative burden for your team. Even if you win the dispute, if you receive high rates of chargebacks, your organization may be flagged by card networks , leading to stricter security thresholds.

When a chargeback reversal occurs, your organization can face a range of challenges:

• Paying for shipping fees if you’re selling products or goods
• Recovering or forfeiting items sold or services rendered
• Submitting a claim and disputing the chargeback reversal

Chargeback reversal can also leave you with revenue loss and transaction fees associated with fraudulent payments. Excessive chargeback reversals may lead to reputational damage and card networks suspending your ability to transact.

The best way to combat chargeback reversals is to identify fraudulent transactions proactively. Internal system checks will help you reduce the number of chargebacks and help you easily distinguish between legitimate and unauthorized transactions.

 

How to Minimize Payment Reversals

Your organization will face payment reversals from time to time. You can and should take steps to minimize refunds and optimize your processes to mitigate the risks when they do happen. Some ways you can prevent payment reversals include:

• Making payments secure: Use additional payment security measures like two-step authentication and tokenization to reduce the risk of fraudulent transactions.
• Being vigilant: Authorization reversals are often due to human error, like a staff member typing in the incorrect amount. Encourage your employees to be attentive while processing payments, explaining the cost and implications of reversals, refunds and disputes.
• Leveraging automation and technology: Implement an innovative payment processing platform that manages all your payments in one easy, user-friendly interface. CSG Forte verifies transactions, helps you make payments secure, and streamlines recurring and ad hoc payments. The cloud-based platform will support your employees, minimize admin and help you provide first-rate payment experiences for customers.

 

Reversal vs. Refund

An essential difference between reversals and refunds is what happens to the funds. During the former, payment reverses, meaning the bank or payment processor cancels the transaction—the funds aren’t transferred from the customer’s account into your account. A refund means that after a transaction is completed, you need to refund the amount and pay it back to the consumer, incurring transaction interchange fees.

 

Example of a Reversal Transaction

In the context of e-commerce, one example of a reversal transaction is a consumer wanting to purchase running shoes online. The consumer attempts to buy running shoes and, during the transaction, receives notice that the shoes are no longer available in the correct size. While the payment is pending, the consumer cancels the transaction. No funds are transferred from the cardholder’s account to yours, meaning no fees are incurred during reversal.

 

What Happens After a Purchase Refund?

After a purchase refund, the business returns funds to the consumer’s bank account. It is an entirely separate transaction from the original payment. The amount is the same, but the business must pay transactional and processing fees, and standard settlement time applies.

 

Reasons Companies May Reverse a Payment

A company might reverse payment if:

• A customer is trying to commit a fraudulent transaction
• An item or product is sold out before delivery can occur
• A consumer changes their mind after ordering a product

 

Verify Payments With CSG Forte

Scale your business and provide frictionless customer payment experiences with CSG Forte’s award-winning payment solutions.

One of the add-on services that organizations leverage to verify payments is Validate. With Validate or Validate+, your organization can process ACH payments with confidence. Both solutions use an innovative ACH database with hundreds of thousands of millions of records, ensuring funds are in good standing. Validate provides:

• Updated data sources
• Instant, actionable responses on each transaction
• Extensive routing and bank account (DDA) validation over multiple data sources
• 100% real-time reporting for invalid transaction routing numbers and check totals

With Validate, your organization can proactively minimize and simplify payment reversals to save money and provide customers with seamless payment experiences.

 

CSG Forte Will Streamline and Verify Your Payments

Our company delivers innovative end-to-end payment solutions for businesses of all sizes. Our full-service payment processing, customizable platform and enhanced security and compliance management, CSG Forte will help you optimize revenue and streamline payment processes with our quick, easy integrations.

Contact us to learn more.