Everything You Need to Know About Payment Reversals (and How to Avoid Them)

Payment reversals can be a nightmare for any merchant. Not only do they lead to lost revenue, but they can also damage your company’s relationships with payment processors and banks. 

Whether it’s an authorization reversal, refund, or a dreaded chargeback, payment reversals can disrupt your cash flow and waste valuable company resources.

On the bright side, most payment reversals are preventable if you understand their causes and take proactive steps against them—which is exactly why we wrote this guide. 

We’ll cover everything you need to know about the different types of payment reversals, what triggers them, and how to avoid payment reversals by following our best practices. You’ll also have actionable tips to significantly reduce your risks associated with the worst types of payment reversals and protect your bottom line. 

What is a Payment Reversal?

Payment reversals occur when funds from a previous credit or debit card transaction are returned or “reversed” from a merchant’s bank account back to the customer’s account. This happens after the initial payment has already been accepted and processed by the merchant.

While the concept seems straightforward, payment reversals can actually take several different forms with varying processes and implications for each one. The reasons behind a reversal also vary significantly—ranging from simple billing errors to outright fraud. 

Regardless of the cause, payment reversals essentially “undo” a prior transaction—pulling money back out of the merchant’s account.

While certain types of payment reversals are unavoidable and simply part of doing business (like a refund associated with a return), others can seriously threaten a merchant’s standing with payment processors and banks. Processors can even blacklist you and terminate your merchant file for excessive chargebacks or excess fraud. 

Types of Payment Reversals

There are three main types of payment reversals that merchants need to be made aware of: authorization reversals, refunds, and chargebacks. Let’s take a closer look at each one so you can understand the process and potential impacts of them.

1. Authorization Reversal

An authorization reversal occurs when a payment authorization originally obtained by the merchant expires before the merchant can complete the transaction and capture the funds. 

With a typical credit card authorization, funds are essentially reserved prior to being processed and pulled from the cardholder’s account. But if the merchant doesn’t follow through and capture those funds within the predetermined time frame (typically 3-7 days), the authorization automatically reverses and releases the funds on hold back to the customer. 

Compared to other types of payment reversals, authorization reversals only impact the temporary hold of funds, not an actual transfer of money. So while they don’t directly cost the merchant money or pull any funds directly from the company’s bank account, they can still create confusion and lead to extra administrative work if they’re not handled properly. 

2. Refund

Refunds are voluntarily initiated by a merchant. In this scenario, the merchant willingly returns funds to the customer for a previous transaction, which can happen for a wide variety of reasons, including:

• Merchandise returns
• Cancel services
• Overages or pricing errors
• Remediate a customer issue

While refunds can translate to lost revenue for a company, they are a standard part of running any business and are expected to deliver quality customer service. As long as refunds are issued correctly to customers for valid reasons, they can help build trust and retain relationships.

But if a business doesn’t have an efficient refund process, it could lead to another type of payment reversal that is far more damaging. 

Additional Reading: How Refunds Impact Credit Card Processing Fees

3. Chargeback

A chargeback is a forced reversal of funds, occurring when a customer disputes a transaction directly with the issuing bank. The bank then forcibly reverses the charge for the merchant’s account back to the customer’s account.

This typically happens when a customer claims they did not authorize the purchase, there was a billing error, or potentially a sign of fraud. 

Of the three types of payment reversals, chargebacks are typically the most problematic and costly for merchants. Not only do they lead to lost revenue, but merchants also get hit with additional chargeback fees. 

Plus, too many chargebacks can lead to account terminations, which is why it’s so important to prevent illegitimate chargebacks from occurring. 

What Causes Payment Reversals?

Patent reversals can happen for a wide range of reasons—some understandable and legitimate, while others are less friendly. Here’s a closer look at different causes of payment reversals:

Customer Issues

• Accidental duplicate purchase
• Unauthorized purchase by someone else (like a family member)
• Legitimate merchandise return
• Cancelation of service
• Dissatisfied with product or service 

Merchant Errors

• Technical glitches during checkout
• Inaccurate product or service descriptions
• Delayed shipping or fulfillment
• Accepting payment for an item out-of-stock
• Failed recurring subscription payments

Billing Descriptor Problems

• Unclear or unrecognized billing descriptor on statement
• Corporate card policies that block certain types of descriptors

Fraud

• Stolen payment credentials were used for a purchase
• Customer falsely claims that an item was not received
• “Friendly fraud” by a customer that intentionally disputes a valid charge

The cause ultimately determines if the reversal happens as an authorization reversal, refund, or chargeback. For example, merchant errors and customer issues often lead to refunds, while fraud cases typically result in cardholder-initiated chargebacks. 

Identifying the root cause behind your reversals is critical for implementing prevention measures. Keeping your reversal reasons top of mind can also help you spot potential trends before they spiral out of control.

Why Should Merchants Care About Payment Reversals?

While payment reversals may seem like a minor inconvenience, they should be taken seriously by merchants for several important reasons:

• Lost Revenue — Each reversal leads to lost revenue and profit for your business. Refunds directly reduce total sales, while chargebacks mean you lose both the merchandise and the payment. These types of losses can add up quickly and eat into a company’s cash flow. 
• Extra Fees — Beyond the lost revenue, chargebacks also incur extra fees from processors and banks. Chargeback fees often range from $20 to $100 per incident. 
• Administrative Costs — Handling payment reversals, especially at scale, requires significant time and resources. There are labor and resource costs associated with the time spent issuing refunds, challenging chargebacks, providing documentation to banks, and more.
• Processor Penalties — Excessive chargebacks can lead to account holds, terminated merchant accounts, being labeled as a high-risk merchant, increased processing fees, or getting added to the TMF/MATCH list.
• Damaged Reputation — Payment reversals can damage your reputation with banks, processors, and consumers alike. Too many chargebacks can raise red flags about your business practices, especially if you’re processing lots of fraudulent transactions. 

Payment reversals are more than just a “cost of doing business” that you can ignore. They can become a significant challenge if you’re not monitoring them closely and ultimately drain your profitability and growth potential.

9 Ways to Prevent Payment Reversals

While some payment reversals are unavoidable, there are many best practices merchants can follow to significantly reduce their risk and impact:

1. Use Clear Billing Descriptors

Ensure your business name and descriptor on customer statements are clear, recognizable, and consistent. Vague or unrecognized descriptors are a major source of avoidable chargebacks.

2. Don’t Delay Transaction Submissions

Submit settlement batches and complete transactions as quickly as possible after authorization. Delaying increases the odds of expiring authorizations and reversals.

3. Use Incremental or Estimated Authorizations If Necessary

For services with ongoing or estimated fees, get fresh authorizations periodically rather than relying on a single dated authorization.

4. Make Sure the Payment Data is Complete

Double check all entered payment data like billing addresses, card numbers, and more. Inaccurate details can quickly lead to declined transactions and reversals.

5. Use a Transaction Identifier to Link Authorization Requests

Implement a consistent transaction ID that links authorizations, captures, and settlements for easy tracking and prevention of duplicate transactions.

6. Notify Customers About the Projected Clearing Data

Send payment confirmation details so customers know what descriptor and amount to expect on their statements. Surprises often fuel disputes.

7. Review Previous Reversal Trends

Identify recurring issues and take corrective action on common problems leading to reversals in your business. You can look for ongoing patterns to fix root causes.

8. Take Extra Steps to Ensure Payments Are Secure

Use fraud detection tools, verified billing, AVS, and other security measures to validate transactions and minimize fraud chargebacks.

9. Process Reversal as Quickly as Possible

When legitimate reversal situations arise, don’t delay in processing refunds. Quick action is one of the best ways to reduce customer frustration.

Final Thoughts on Payment Reversals

Payment reversals come with the territory for any merchant that accepts card payments. While they can never be eliminated entirely, you can definitely take steps to prevent them from occurring in the first place—or at least reverse payments on your own accord (instead of being forced into them). 

If your processor is increasing your rates because of your reversal history, reach out to our team here at MCC. We can audit your statements to see if those increases are legitimate, and negotiate on your behalf to help lower your rates.