What is Payment Reversal? Definition, Types and Meaning

Payment reversal can be a nightmare for merchants, resulting in considerable delays in operations and time, as well as an overall monetary loss. It is the act of giving money back to your customers, and alongside the loss of money it can be frustrating because it costs you hours of effort and time. Sometimes a payment reversal may have to be done to retain customer loyalty, satisfy legal obligations, or keep a business reputation alive. Knowing the different types of reversal can help management costs and trust of the client, as they are different in each case.
The following sections will explain the meaning of payment reversal, their types, common causes, potential impacts, and practical tips to avoid them.
 

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Meaning of Payment Reversal

Let’s begin with what a payment reversal is. It is a transaction in which the merchant returns the payment amount to the buyer for various reasons. Any party, including the buyer, seller, card network, acquiring bank, or issuing bank, can initiate a reversal.

Types of Payment Reversal

Now that we have discussed the meaning of a reversal transaction, let’s discuss the three types: 

1. Authorisation Reversal:  An authorization reversal is when the merchant cancels a transaction before settling it; it is a way to void the sale and prevent the transaction from taking place. It is the simplest type of reversal because, as the provider has not provided any goods or services yet, it is the least costly loss to the merchant because he is cancelling the transaction from going forward. 
2. Refund Reversal:  A refund is a credit transaction whereby the merchant gives money back to the customer; this can be costly to the merchant as their revenue loss is compounded with a range of costs such as, return shipping, interchange fees etc. A refund happens after the transaction where a financial loss occurs for the merchant as he loses the transaction fee and operational cost of providing the goods or services. 
3. Chargeback Reversal:  A chargeback is a forced reversal imposed by the issuing bank as a result of disputes or claims of fraud about a transaction. Financial loss by chargebacks will include: chargeback fees for the merchant, threats to long term sustainability, and potential reputational damage.

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How Long Does it Take for Payment Reversals?

The time it takes for a payment reversal will depend on the kind of reversal being done. An authorisation reversal is instant. A refund reversal can take anywhere from 1-5 business days depending on how the refund has been processed. A chargeback reversal can take longer especially if the merchant disagrees with the chargeback. A chargeback reversal can take weeks or even months to resolve.

Some Common Causes of Payment Reversal

The following may be some reasons for reversal of payments: 

• The stock is no longer available
• The consumer changed their purchase mind
• The consumer received the product but was not satisfied with it
• There was an incorrect amount deducted from the consumer's account
• There was a duplicate transaction
• Fraudulent claim from the consumer.

How to Avoid Payment Reversals?

Excessive payment reversals indicate operational problems, inferior products or inadequate fraud protection. Besides just the revenue loss, payment reversals also include customer trust loss, additional anti-fraud controls added and a damaged business reputation. Therefore, the business needs to minimise payment reversals to protect both revenue and brand image and reputation. Here are a few tips that can help to avoid payment reversals:

• Enhance payment security
• Populate the billing information correctly
• Avoid errors while charging customers
• Submit prompt transactional data
• Track and confirm projected clearing dates
• Implement transaction identifiers
• Describe bills clearly
• Use authorisations when relevant
• Analyse reversal trends
• Process authorisation reversals immediately
• Maintain accurate inventory
• Implement clear refund and return policies
• Offer excellent customer service

What is the Difference Between a Refund and a Payment Reversal?

Let’s look at the difference between a refund and a payment reversal:

Impact of Payment Reversals on Businesses

Here’s how payment reversals impact a business:

• Financial Loss: A payment reversal results in a direct reduction of revenue for the business, impacting financial planning and compliance budgets. Additionally, a payment reversal could lead to secondary fees. Payment reversals can also lead to lost merchant fees, possibly extra processing fees, as well as operational disruptions.
• Customer Relations: Properly managing payment reversals will enhance customer loyalty and trust, and improve the merchant's reputation. On the other hand, failing to manage reversals successfully will result in bad publicity and unhappy customers.
• Operational Disruptions: When a payment has been reversed, the merchant's focus is now on managing that reversal, and modifying their accounts. Ultimately, this alters normal operations for the day.
• Increased fees: There are a number of fees related to payment reversals; i.e., return shipping costs, interchange fees, chargeback fees, etc. In addition to damaging the merchant's reputation, these fees improve the cost of the merchant's financial loss.
• Reputational Damage: Having too many payment reversals indicates that customers are unhappy with receiving the wrong product or receiving a compromising quality product. This can result in irreparable damage to the merchant's reputational damage in the market, resulting in lost business.
• Compliance Costs: Because of the reversal, there are administrative and compliance costs for the process of returning items, restocking items, and accounting for inventory.
• Impact on Revenue: Besides lost sales, reversals to payments impact a business's revenue in several ways, such as increasing expenses. Reputational damage has an impact on sales, and, ultimately, business revenue.
• Impact on Business Resources: Reversals of payments create additional labour costs and can consume a merchant's resources away from sales, marketing, customer acquisition and other productive activities.

How Payment Reversal Affects Your Personal Loan Eligibility?

If you're seeking a Personal Loan and you have had payment reversals, here's how they may impact your eligibility for a loan: 

• Lower loan amount
• Higher interest rates
• Shorter repayment periods
• High processing fees
• Higher monthly EMI's

How to Prevent Payment Reversals During the Personal Loan Application Process?

It’s very important that, when applying for a Personal Loan, you make sure your financial activities are open and transparent.  Below is a little advice to help you assess the chances of payment reversals that could affect your loan application:

• Use Clear Billing Descriptions: Clearly describe the charges on your statements to minimize disputes.
• Maintain Accurate Financial Records: Keep records of transactions including reversals to provide a history of your finances.
• Discuss with Lenders: Talk to your lender about your previous reversals and if they need any information from you.
• Monitor for Financial Activity: Monitor the transactions in your accounts to identify and address errors.
• Address Concerns Promptly: Resolve mistakes quickly to minimise future payment reversals.

Conclusion

Payment reversals are a part of business. However, when you better understand what payment reversals mean and what factors are involved, it helps merchants deal with them effectively. While the payment reversals are inevitable, being alert and following the best practices will lower the risk of the reversal and for smoother transactions for business owners and customers.

A Personal Loan helps cover various personal and professional expenses. However, payment reversals may disrupt your financial planning, which you can prevent using the above steps. Consider getting a Personal Loan of up to Rs 5 Lakh from Hero FinCorp for your financial needs.

Frequently Asked Questions (FAQs)

1. Is reverse payment a refund?

A merchant applies a refund, while any entity involved in a payment, including the payee, payor, card network, acquiring bank or issuing bank, can initiate a payment reversal.

2. What is a DD reversal?

A DD reversal is a Direct Debit reversal and can occur for many reasons including a mistake made in payment, an incorrect amount or date of payment, fraudulent payments or an incorrect payee.

3. Can a wrong payment be reversed?

You can reverse a wrong payment. However, the completion of the final transaction will be dependent on the payment type and reciprocal cooperation of the recipient.

4. How many days it takes for reverse payment?

The time taken for the completion of the reversal will depend on the type of reversal being processed. An authorisation reversal is instant; a refund or chargeback will take longer.

5. Will a payment reversal affect my loan account?

A payment reversal will impact your loan account heavily. If you make a repayment of an EMI, and this does not reach the creditor's account, you continue to have an unpaid EMI on your credit record and accrue no-payment charges, which will directly impact your credit score.

6. Can I reverse a loan payment if I accidentally overpaid?

Depending on the lender's procedure, either you will get the additional payment deposited back to your account, or you will get that adjusted in your EMI for the following month. You can also negotiate with your loan provider based on your need.

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