Last editedNov 20212 min read
When it comes to transactions, lots of people struggle to grasp the difference between refund and reversal transaction. The two terms might seem similar, but they possess some slight but significant differences.
In this post, we’ll clearly outline the difference between refund and reversal transaction.
Brief definition
Before we get started, let’s define our terms.
A refund is the process of reimbursing somebody for a transaction which has already been completed. This means that the money has already been received by the merchant and therefore must be returned.
Reversal transaction refers to situations where a client has sent the money but it is yet to be received by the merchant’s account. While it is still being processed, the transaction can be reversed.
Now, let’s explore refunds and reversal transactions in a little more depth.
Refund
A refund is a frequently used term in the transaction world, with thousands taking place globally each day.
From a business perspective, refunds are bad news because they affect profit projections. It’s therefore in the interest of a company to ensure their products will satisfy customer’s needs and in doing so keep refunds to a minimum.
As we already mentioned, a refund is required when the transaction has already gone through, i.e., the customer’s money has been processed and has been deposited in the merchant’s account.
With refunds, the money is always returned using the same method used to make the payment. So, if you paid for a pair of shoes with a credit card, the refund for the shoes will be deposited on the same credit card. If you used a debit card, the funds will be reimbursed to your bank account linked with the debit card used to pay.
It usually takes 5 to 14 days for a refund to be processed. If you are left waiting more than 14 days for your refund, you should contact the merchant to follow up.
Reversal transaction
A reversal transaction is made before a transaction has been fully processed, i.e., before the funds have arrived in the merchant's account. This means it is usually relatively straightforward to reimburse the funds issued.
Below is a list of common reasons for a reversal transaction:
The product is out of stock or sold out
The merchant suspects a customer of fraud
The customer has changed their mind about a purchase
The customer was charged an incorrect amount
The transaction was mistakenly carried out twice
A customer quickly realizes their dissatisfaction with a product after paying
Customer sent payment to the wrong account
In order to receive reimbursement via a reversal transaction, you must contact your bank to cancel and reverse the payment. You can also contact the merchant to confirm that they have not yet received the payment and to explain your reasons for seeking a reversal transaction.
Examples of refunds and reversal transactions
To further clarify refund and reversal transaction meaning, below are some examples illustrating the terms respectively.
Refund example
Margaret ordered a dress on Amazon, it took over a week to arrive in which time her payment for the garment had been processed. When it was delivered, she realized it was the wrong size. She then took action to request a refund with the Amazon merchant. As the payment had already gone through, she was only required to contact the merchant and not her bank.
Reversal transaction example
John ordered a new kettle from an online store. After filling in his payment details and confirming the order, he was told by the merchant that the kettle had sold out. Noticing that the payment was still pending on his online banking, he contacted his bank to cancel the transaction.
Who initiates a refund or reversal transaction?
A refund or a reversal can be initiated by either the client, the merchant or an issuing bank.
However, refunds are usually actuated by the client if they discover that a product or service was unsatisfactory for whatever reason.
A reversal transaction, on the other hand, is often initiated by a company for reasons such as a shortage of stock.
If you ever intend on disputing a transaction, you need to be aware of the difference between refund and reversal transaction.
We can help
GoCardless helps you automate payment collection, cutting down on the amount of admin your team needs to deal with when chasing invoices. Find out how GoCardless can help you with ad hoc payments or recurring payments.
