One of the best examples of how the payments industry favors the cardholder over the merchant is how they reverse payments. Then there are three ways to reverse a transaction and only one way to prevent them. Transactions can be reversed by Authorization Reversal, by Refund, or by Chargeback. Meanwhile, merchants can only hope to counteract a reversal through Representment. Let’s take a look at each of the three ways a transaction can be reversed.
When a transaction comes through, it has to be pre-authorized. Otherwise, we’d all be waiting around for days to complete basic transactions. In the meantime, the issuing bank will place an authorization hold on the funds needed to complete a pre-approved transaction. Debits transactions hold for 1-4 days, while credit cards hold for up to 30 days. In that period of time, if a merchant catches an error, they can do an authorization reversal. This is initiated through the merchants acquirer if the acquirer supports such a reversal. This is the best way to reverse a transaction as it does not incur fees of any kind, and it has no impact on the merchant’s processing ratios.
Refunds are the next option, once the transaction has been settled and the money actually changes hands. A refund is basically a second transaction generated to undo the first. The merchant will have to eat any transaction fees charged on the initial transaction. But refunds do preempt cardholder disputes from becoming chargebacks and impacting the merchant’s processing ratios.
The reversal of last resort is the chargeback. The transaction has been processed, to the issuer must reverse the charges to obtain the initial transaction’s funds. Everybody hates the chargeback, except the cardholder because they get what they want the same as with any other reversal. But for the rest of us, a chargeback means extra work and tacked-on fees. And as you may well know, chargebacks can endanger your ability to process transactions with certain issuers and card associations.