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What Are Payment Reversals and How to Avoid Them

Last editedApr 20222 min read

As a business owner, experiencing payment reversals can be very frustrating. However, there are a number of ways to avoid them. In this post, we’ll define what’s meant by the term “payment reversal” and run through the various ways you can tackle them.

Payment reversal definition

Payment reversal is an umbrella term describing when transactions are returned to a cardholder’s bank after making a payment. They can occur for the following reasons:

  • Item sold out before it could be delivered

  • The purchase was made fraudulently

  • The customer changed their mind about the purchase after paying

  • The item differed to the description given

  • The vendor charged an incorrect amount for the item

  • The transaction was duplicated meaning the customer paid twice

Types of payment reversal

There are three common types of payment reversals. These are authorisation reversals, refunds and chargebacks. Let’s explore each in more detail.

Authorisation reversal

Authorisation reversals involve reversing a payment before it has been fully completed. If either a consumer or a vendor notices something is wrong with the payment, they can contact the bank to stop the transaction going through. This is typically the payment reversal type which involves the least hassle for both customers and businesses.

Refund

Refunds involve the reversal of a payment after a transaction has been completed. It is usually carried out because the customer is unsatisfied in some way with the item or service they received. A refund is initiated by a customer in direct communication with the vendor. It requires the acquiring bank to reimburse the cardholder. As well as leading to businesses losing a sale, it also runs up additional fees, such as interchange fees.

Chargeback

Chargebacks involve a customer contacting their bank in order to file a dispute against the transaction. They may do this because they mistakenly believe it was the work of a fraudster, or because the item they ordered never arrives, among other reasons.

Chargebacks are more inconvenient for businesses than simple refunds as they incur extra chargeback related fees and can lead to penalties from card networks.

How to avoid payment reversals

Understanding what causes payment reversals is key to preventing them in future. Below are some tips for keeping reversals to a limit in your business.

If your business is suffering a number of reversals, it can be very helpful to look at what the most common reasons cited for the reversals are.

For example, if you run an ecommerce store and a number of customers are asking for refunds because the item they received either doesn’t fit or match the description online, think about how you can better display the item accurately on your website. You may also want to consider incorporating detailed size guides.

Make sure you ask for feedback or an attributing reason for each refund so that you can use the information to avoid the same thing occurring in future.

Make sure payments are secure

Chargebacks often occur due to fraudulent payments. You can reduce this by having additional payment security measures. This might involve implementing 2-step authentication and 3D Secure.

Be attentive

Authorisation reversals often occur due to human error. For example, when the amount charged to the customer is incorrect, or the item paid for is not actually available. You can avoid this by being attentive to inventory and stock levels, and making sure the correct amount is always charged. Essentially, make sure employees are on the ball when taking payments from customers.

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.

Over 70,000 businesses use GoCardless to get paid on time. Learn more about how you can improve payment processing at your business today.

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