How to avoid payment reversals

What does a payment reversal mean for your online business? With the e-commerce market predicted to surpass $8 trillion by 2027, the rise in transactions will likely bring a higher likelihood of these unforeseen disruptions.¹

Knowing how to prevent payment reversals is key to safeguarding your brand’s financial health. Read on as we explore the payment reversal meaning, what you need to do when a bank reversal has been filed against you, and why these reversals occur in the first place.

What are payment reversals?

A payment reversal occurs when funds from a completed transaction are returned to the payer in the original form of payment. This can happen for several reasons, including customer disputes, suspected fraud, or merchant-initiated cancellations (like authorization reversals).

In general, payment reversals can pose significant challenges for merchants. They may strain financial resources and potentially damage a merchant's reputation — which is why it’s essential to address and mitigate these issues quickly.

Why might a payment reversal occur?

Some common events that can trigger a payment reversal include:

• The buyer's bank account was used without their permission to purchase an item fraudulently.

• The buyer doesn’t recognize the transaction.

• The purchased item didn’t arrive.

• The buyer was charged twice for the same item.

• The purchased item is no longer in stock.

• The buyer changes their mind and no longer wants the item they purchased.

• The buyer claims the product is defective or has discrepancies between the 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. There are three major types of payment reversals merchants should know about: authorization reversals, refunds, and chargebacks.

Authorization reversal

An authorization reversal occurs immediately after a transaction is initiated, before money has been withdrawn from the customer’s account and deposited into the merchant’s account. It allows sellers 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 authorization 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 multiple times for the same purchase
• Changes their mind and cancels their purchase
• Wants to change their payment method

Payment refund

Once a transaction is settled, the next option for a payment reversal is 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 authorization reversal. This process requires the credited funds to settle and clear, which often takes an average of three to 10 business days.

Chargebacks

A chargeback reversal is the final type of payment 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 prevent payment reversals

Understanding how to avoid payment reversals is key. The good news is you can implement various prevention methods to keep claims and chargebacks to a limit in your business.

Submit information properly

Ensuring all transaction information is correct — from the buyer’s name to the product item and price —can help establish merchant expectations and may avoid discrepancies that could trigger a payment reversal.

Use relevant billing descriptors

This can help buyers recognize and remember their transactions accurately, reducing 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.

Confirm an estimated clearing date

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

Provide a transaction ID number

A transaction ID is a unique identifier assigned to a sale. This number allows the merchant or customer to track transactions and refunds.

Estimate authorizations when appropriate

Incremental and estimated authorizations are useful when the total cost of a purchase is uncertain or subject to change. An example is a hotel stay where incremental costs may be added after booking. So instead of authorizing the full amount upfront, a merchant can obtain authorization for partial amounts initially and request additional authorizations as the transaction progresses.

Establish clear communication

When a merchant submits an authorization request, it’s beneficial to establish communication between the authorization amount and the final amount, so the cardholder knows what to expect.

Steps to take when a payment reversal is filed against you

It’s frustrating when a payment reversal happens, but swift and decisive action can increase your chances of a positive outcome.

Follow these steps:

1. Gather all relevant documentation: This includes the transaction details (date of transaction, amount, customer name, order number), any communication records (including emails or chat logs with the customer), shipping and delivery information, product details, and your store’s terms and conditions.
2. Understand the reason for the reversal: Was it a PayPal payment reversal, a chargeback through their credit card company, or another type of dispute? The reason will determine your next steps.
3. Contact your payment provider: Reach out to your payment processor (for example PayPal or Stripe) to understand their specific process for disputing reversals. Fill out any forms they provide.
4. Submit evidence: Clearly explain why the reversal is unwarranted using the documentation you gathered to support your claims. For example, if the customer claims they didn't receive the item, provide shipping confirmation as evidence.
5. Explore additional tools:  PayPal’s Seller Protection program, for example, can help safeguard against unauthorized transactions and claims that items weren't received.
6. Keep detailed records: Don’t delete records of communication, documentation, and actions taken throughout the reversal process — even after the case has closed. Use these to identify patterns and areas for improving your business operations to prevent future disputes.

Payment reversal prevention tools

While dealing with payment reversals may be inevitable, there are tools to help reduce their occurrence:

• Fraud detection and monitoring tools: These systems use sophisticated algorithms and real-time analysis to flag suspicious activities like unusual purchase amounts, multiple card attempts, or mismatched billing and shipping addresses. They also allow you to set alerts for large transactions, frequent refunds, or unusual patterns. By identifying and blocking potentially fraudulent transactions early, you can prevent reversals before they happen.

• Secure payment gateways: It’s essential to choose a reputable payment gateway with robust security features. Look for gateways that offer:
• Address Verification Service (AVS): Verifies the billing address provided by the customer against the address on file with the card issuer.
• Card Verification Value (CVV): Requires the customer to enter the three- or four-digit security code on the back of their card for an extra layer of authentication.
• 3D Secure Authentication: Adds another authentication step where the customer is redirected to their card issuer's website to verify their identity.

• Analytics and reporting: Data analytics can identify trends and patterns in your transactions. From there, you can pinpoint areas of vulnerability, such as specific products or customer segments more prone to payment reversals. By understanding these trends, you can adjust your strategies and policies to minimize future risks.

Key takeaways for managing payment reversals

Payment reversals are an unavoidable reality of doing business in today's digital world. That said, by learning about the different types of payment reversals and their causes, you can take proactive steps to reduce disputes and chargebacks while simultaneously minimizing their impact.

Remember, prevention is key. Make sure to follow security and seller protection guidelines and review orders for suspicious activity or fraud. When a payment reversal does occur, respond promptly and professionally. Gather all necessary documentation, understand the reason for the reversal, and explore resources like PayPal's Seller Protection program to safeguard your business.

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