In the world of digital payments, understanding the lifecycle of a transaction is essential for protecting your business and enhancing customer experience. Two commonly used but often misunderstood terms are Reversals and Refunds. Though both involve returning funds to a customer, they occur at different stages in the transaction process and have distinct operational procedures.
Let’s break them down clearly.
What is a Reversal?
An Authorisation Reversal — often referred to simply as a Reversal — is the process of cancelling a transaction before it is settled.
When a card transaction is initiated, an authorisation hold is placed on the customer’s account to reserve the necessary funds. If the merchant chooses not to complete the transaction (due to an error, cancellation, or other reasons), they can send a reversal request to release the funds back to the customer.
Key characteristics of a Reversal:
- Initiated before settlement, usually on the same business day.
- Requires an authorisation reversal request from the merchant.
- In systems using batch processing, a void transaction can be used before transmitting data to the acquirer.
- Must be linked to the original authorisation.
- Once approved, the customer’s funds are released immediately.
What is a Refund?
A Refund occurs after the transaction has been settled. It is the process of returning money to the customer, usually because of a product return, service cancellation, or post-settlement error correction.
Unlike reversals, refunds involve creating a new transaction to send funds back to the customer.
Key characteristics of a Refund:
- Occurs after the original transaction is settled, typically on a different business day.
- Is not directly linked to the original transaction.
- Should be issued to the same card used in the original payment.
- The funds are not returned instantly and may take several business days to reflect in the customer’s account.
Reversal vs Refund: Comparison
| Feature | Reversal | Refund |
|---|---|---|
| Timing | Before settlement | After settlement |
| Linked to Original Transaction | Yes | No |
| Speed of Funds Release | Instant | May take several days |
| Request Method | Authorisation reversal or void | Refund transaction |
| Same Day Execution Required | Yes | No |
| Same Card Required | Yes | Yes |
Final Thoughts
Understanding the difference between Reversals and Refunds is essential for merchants, financial institutions, and consumers alike. Reversals allow businesses to cancel pending transactions cleanly, while refunds are used to correct settled transactions.
When handled properly, both methods can help improve customer satisfaction, minimize disputes, and enhance the overall payment experience.
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